Perhaps you’re an entrepreneur with a bunch of business ideas, and the energy and the focus to see them all to execution. Unless all the ideas are closely related to one another, you will likely want to create a business entity around each idea. Of course, having to manage multiple corporations, partnerships, or LLCs can be time consuming and burdensome, particularly when it comes time to file tax returns for all of the businesses.
Enter the Series LLC, also known as a “cell” LLC. The Series LLC is structured similar to a conglomorate corporation having multiple subsidiary corporations — a “master” LLC entity is formed as an aggregation of a collection of “cell” LLCs. Each cell is legally separate from the other cells, being able to have different sets of members, and to conduct business and acquire assets and liabilities in its own name.
The primary benefit of the Series LLC is the ease of administration, particularly when it comes to filing tax returns. As long as the all the members of every cell are founding members of the Series LLC as a whole, the Series LLC is required under state law to file only one tax return for all the cells (if a cell has non-founding members, it must file a separate partnership or corporate tax return). Furthermore, cells can be added or deleted simply by amending the master certificate of organization.
Unfortunately, the Series LLC is a recent creation, and has only been recognized by a handful of states — Delaware (the first state to recognize Series LLCs), Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah, and Wisconsin. Furthermore, because the Series LLC is a recent creation, its effectiveness in other jurisdictions has yet to be fully tested. For example, the Internal Revenue Services has determined that each cell of a Series LLC will have its tax status determined independently, negating some of the administrative benefits of the form, and California has ruled that each cell of a Series LLC operating in California must be taxed separately.
Due to the novelty of the form, Series LLC members must be extremely careful in segregating each of the cells from one another, ensuring that each cell keeps its own business records, has its own financial accounts, has all of its assets titled in the name of the cell (and not in the name of the Series LLC as a whole), and does not engage in co-mingling of funds with other cells (any transfers of money between cells must be classified and treated as loans and must be stringently documented as such).
Although there is nothing preventing a business from organizing a Series LLC in a state that authorizes it and then conducting business in another jurisdiction, Series LLC members should be aware that the domesticating state may choose to recognize the Series LLC as fully independent, unconnected LLCs or as one giant, undifferentiated LLC, which might have legal or tax consequences back in the state of organization if the Series LLC is operated improperly while doing business in another state.
Entrepreneurs looking to form a Series LLC should take great care to ensure the business is formed and operates properly and seek the advice of legal professionals, especially if they intend to domesticate the Series LLC in another state that does not recognize the form. However, if formed and operated within certain parameters, Series LLCs can be a useful tool for entrepreneurs seeking to operate diverse business interests but wanting to ease some of the burden of administration.
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UPDATE: After some input from fellow attorneys, I would like to reinforce the point that the Series LLC is a relatively recent business form and is untested in many ways, and should be used with caution, only when the benefits of the form outweigh the uncertainties.