Many of you have asked me about Series LLCs, and how they work, or if they’re a good idea. Working through the Trust Sandwich gave me a huge “ah-ha” on how to help you save money using a Series LLC. Then, an IRS ruling came out that opened up the Series LLC to even more uses – especially for those of you who love to start new businesses but don’t love paying huge fees each time!
What is a Series LLC?
The Series LLC is essentially an LLC that is allowed to have subsidiaries. Each subsidiary is treated as a separate entity – it can have different owners and managers and can hold its own assets. In the 7 states that have specific law written to allow LLCs (Delaware, Iowa, Illinois, Oklahoma, Nevada, Tennessee and Utah), asset protection is specifically written into the entity. That means each cell is protected from the debts and liabilities of the other cells, even if the ownership happens to be the same.
However, even though the first Series LLC was created in Delaware in 1996 (12 years ago!), they haven’t been widely used. That’s mostly because of two reasons. First, there isn’t a lot of case law on the books to determine if inter-cell liability protection will hold up, and second, because the IRS hadn’t made any type of rulings on how they would be treated for tax purposes. There were a few cases that went through tax court which upheld the inter-cell division, but nothing definitive. And, where things aren’t definitive, attorneys and financial consultants get nervous. After all, who would want to sell you a plan they weren’t particularly comfortable with. And, more importantly, would you want to buy a plan someone wasn’t comfortable with?
This Year, Things Became Clear(er)
This year though, Series LLCs got a huge boost with the release of IRS Private Letter Ruling 200803004, which clearly (and finally) determined that Series LLCs are permitted to use the same “check the box” tax classification as all other entities. In simple terms, this means that you can elect a different tax classification for each of the cells in the Series LLC.
I think this is huge. It effectively means that, with a Series LLC, you can start a new business, with full personal liability protection, without having to file with a state, get a registered agent, wait a few days, etc. You can create a new cell simply by creating a new Schedule to the existing LLC’s Operating Agreement, applying to the IRS for a new Tax ID Number for the cell (which can be done online in about 5 minutes), and bang you’re in business!
Will the Series LLC work for you?
Whether or not a Series LLC is right for you will depend on your business and personal circumstances. Remember, outside of the 7 states that have specific Series LLC law, it’s not guaranteed that the inter-cell liability protection will be respected. It should be, but if you were a client, I’d prefer you not become a test case! Plus, there are states, like California trying to have their cake and eat it too. California hasn’t officially recognized the Series LLC from a legal perspective, but the Franchise Tax Board certainly has recognized them from a tax perspective, and has said it will tax each cell individually.
However there are some business models that I do believe will work with the Series LLC, even in California, without costing you all those extra fees. At the Tax Strategy Camp I outlined a strategy that showed how clients who were paying almost $3,000 pear year in entity fees could cut that to $350 per year using the Trust Sandwich/Series LLC combination. And with the new IRS ruling, I think there’s ways to use the Series LLC for other ventures as well, especially for those of you who are working via the Internet.
Want to Know More?
I’m going to be talking about the Series LLC more over the coming weeks, so stay tuned!