Series LLC Musings (by guest blogger, Megan Hughes, of Business First Formations, Inc.)

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Hi … my name is Megan and I’m guest blogging for Diane this week. She’ll be back around September 16th. I’m the owner of Business First Formations, Inc., a company that helps people set up and maintain legal business structures in all 50 states.

I had a client call me today and during our discussion we got to talking about Series LLCs.

A Series LLC is a way of taking a single LLC business structure and sub-dividing it into multiple separate structures. Each one is a separate and distinct being for legal purposes, and can have different owners. For tax purposes, though, the entire structure is treated as one unit – so only one tax return at the end of the year. There is also a potential savings in that each separate Series doesn’t need to be registered with the state, so just one resident agent fee, just one renewal fee, and so on. Right now you can form Series LLCs in the states of Delaware and Nevada, and you can do business using a Series LLC in all states.

I’m not an expert on Series LLCs, by any stretch, nor am I an attorney. If you want to know more about the ins and outs of Series LLC operations, and the legal intricacies, then I’d recommend Michael Schinner, of The Schinner Law Group, who’s one of the (if not the) most knowledgeable person that I’m aware of in this area. But I do have an opinion, and that is: whether or not a Series LLC is right for you … depends. (Diane will LOVE this).

Here’s the thing. First of all, a Series LLC is designed to file a single tax return. So if you’ve got multiple sub-series doing different activities, there is a potential for a tax problem if you’re mixing up active and passive income. So while I think a Series LLC would be a great way for a real estate investor to hold several different properties within a single state, I don’t know if mixing in a restaurant or MLM business would work.

I’m also concerned that in order to keep the legal protections strong you’ll need to keep separate business and accounting records for each sub-series. To me, this means you’ll be doing the same amount of recordkeeping as if you had set up completely separate structures … so no time savings there.

Finally, I saw that the California Franchise Tax Board now has an “official” position with respect to Series LLCs, and whether each sub-series is subject to the $800/year minimum franchise tax fee. When the Series LLC was first introduced into California it was seen as (hopefully) a way to run several businesses under the one umbrella and pay a single $800/year fee. But the FTB has said, in no uncertain terms, no way. According to the FBT web site, each sub-Series is obliged to prepare and file a separate LLC report and pay a separate $800 fee. Interestingly enough the FTB doesn’t address the question of whether or not a Series LLC aggregates its earnings for the purpose of determining the additional LLC gross earnings tax that I talked about yesterday.

I’m not saying that a Series LLC is a bad thing — again, if you want concrete answers, Michael Schinner is the place (and person) to go to. But I am saying that you need to investigate that product carefully before you decide to use it in your business.

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