Last week, I wrote an article about a rather obscure tax case that might have just turned Series LLC asset protection planning on its ear.
Wow! Did I get a deluge of mail! I heard from attorneys who said they never trusted the Series LLC and this case just strengthen their concerns. I heard from Cal State University who asked me to help out on a Master’s program regarding asset protection. I received two radio interview invitations. And I heard from an attorney who said the case was hogwash and Series LLCs were still awesome.
I did get one email that prompted me to write this blog today. He asked what a Series LLC was anyway? I realized that I needed to go back and start with some of the basics. I’ll do this in two blog posts because there is a lot of information to go through.
When it comes to business structures, there is the good, the bad and the ugly.
The bad is the Sole Proprietorship (or Schedule C). You’ll risk everything you own if something goes wrong in the business. You’ll pay extra tax (15.3%) on net income. You can’t build business credit. And, you have a much higher risk of IRS audit.
The ugly is the general partnership. In this case you have the higher tax and you risk everything you own if something goes wrong. Plus, you’ve got liability for anything stupid your partner might do.
The good business structures are limited partnerships, S Corporation and C Corporation. And, of course, the limited liability is often the best of all. It is a tax chameleon, allowing you to elect how you want to be taxed. The LLC also provides asset protection both ways. In other words, your personal assets are safe from any lawsuits that may come from the business. And, it will also protect the LLC units against a personal lawsuit. That means an LLC, electing S Corporation tax treatment, or an LLC-S provides better asset protection than just a straight S Corp.
The Series LLC is kind of a hybrid that grew out of the popularity of the LLC. In this case, there is a ‘mother ship’ or the actual Series LLC that is set up. There are then subsidiary cells that can be set up as part of the Series LLC. The only thing is, the cells are separate. Or, at least that’s what we thought. More on that later.
The beauty of the Series LLC, assuming it works like it is supposed to, is that you can set up unlimited subsidiary cells without having to register them, meaning a whole lot less cost. And, because you don’t need to publicly register them, there is ultimate privacy. You also can set up the cells yourself, without needing to pay professional fees. Unfortunately, the alternative for cost-conscious investors is to just put all their eggs in one basket and put all of their business assets at risk.
The IRS came out with tax rules on the cells a few years ago and that seemed to be the seal of approval for this new type of structure. The cells could elect how they were to be taxed, just like any other type of LLC.
There was still concern in some areas, though, because the Series LLC had not been proven in court. Would the cells hold up? That’s why the Alphonse case was so important. Based on that case, which allowed the plaintiff to go directly to the mother ship Series LLC, and not respect the distance of the subsidiary cell, there is some need for caution. Again, though, there is just not enough evidence to say what will happen in every case. Time will tell. I personally like to be cautious and for that reason, I’ll be very careful with how I use my own Series LLC.