Series LLCs have been authorized by eight states, the most recent being Texas in 2009. An impediment to wider adoption has been uncertainty over how the IRS will treat them. On October 13, 2010 the IRS issued proposed regulations that if adopted will remove much of the uncertainty over the tax treatment of series LLCs.
A series LLC is an LLC that is split into separate cells, each of which is called a “series.” Each series can have designated members and managers, can own its own assets separately from the assets of the LLC or any other series, and can incur obligations enforceable only against its own assets. This segregation of each series’ assets and liabilities can avoid inefficiencies and costs associated with the customary alternative of using multiple LLCs.
In 1996 Delaware became the first state to authorize series LLCs. Del. Code tit. 6, § 18-215. Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, and Utah have enacted statutes similar to Delaware’s, albeit with some differences. I previously wrote about series LLCs when Texas passed its series LLC law, here.
Series LLCs are relatively new and many legal uncertainties attend them. For example, I have located only one reported opinion dealing with series LLCs, GxG Management LLC v. Young Brothers & Co., No. 05-162-B-K, 2007 U.S. Dist. LEXIS 12337 (D. Me. Feb. 21, 2007). Series LLCs raise major, unresolved questions about taxation, bankruptcy, and doing business in multiple states.
The crux of the proposed regulations is that, whether or not an LLC series is treated as a legal entity for state law purposes, it will be treated for federal income tax purposes as an entity formed under state law. In other words, each series will be a separate taxpayer with its own taxpayer identification number. Whether the series will be classified for federal tax purposes as a partnership or as a corporation will be determined under the generally applicable entity classification rules, i.e., the “check-the-box” rules.
The proposed regulations do not answer all federal tax questions about series LLCs. For example, they do not address how an LLC series should be treated for federal employment tax purposes. Nonetheless, the proposed regulations will be a big step forward when adopted. The proposed regulations should accelerate passage by the states of series LLC legislation.
The IRS has solicited comments, which may be submitted at www.regulations.gov.