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(excerpted

from The Series LLC: The Ultimate in Business Structure Flexibility, available at www.USTaxAid.com)

5 Series LLC Strategies

In 1996 a new kind of LLC was introduced in Delaware. Called a Series LLC, this new entity offered the same benefits as a regular LLC, with one, HUGE difference. A Series LLC was permitted to create an unlimited number of completely self-contained subsidiaries. Under Delaware law, each subsidiary was given the full legal rights available to any other formal business structure. Each subsidiary could have separate owners, separate management, hold title to assets, and operate completely independently from the others. More importantly, each subsidiary was granted full legal protection from the acts and debts of the other subsidiaries. Under Delaware law, a properly structured subsidiary was legally protected from other subsidiaries. If one subsidiary became the target of litigation, the others could not be named in the lawsuit as well, and the assets of one subsidiary could not be targeted by creditors of another.

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This material is informational only. It is not meant, directly or indirectly, to provide formal legal and/or tax advice. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation. We take reasonable precautions in the preparation of all material presented and believe it is accurate as of the date it was written. However, we assume no responsibility for any errors or omissions, and we specifically disclaim any liability resulting from the use or application of the information contained herein.

Series LLCs also received the same creditor protections that regular LLCs (and corporations) enjoy. A Series LLC is legally considered to stand apart from you as the owner, as a separate and distinct legal entity. That means you wont necessarily be held responsible for paying the debts of the Series LLC or any of its subsidiaries, unless you have signed a personal guarantee. Your financial liability is limited to whatever assets or cash youve invested into the entity. The reverse is also true. A Series LLC is generally safe from your personal creditors. Someone suing you personally wont necessarily be able to reach inside your Series LLC and liquidate business or investment assets. At the time it was created, the Series LLC was designed for real estate investors and other asset-rich clients. It provided a way to divide up asset portfolios safely, and without creating numerous companies. Not only that, owners stood to save money; in some cases thousands of dollars per year. Rather than paying multiple set up fees, annual report fees and resident agent fees each year, a Series LLC owner could look forward to just one annual report fee and one resident agent charge. In states with expensive annual filing requirements (in Massachusetts, for example, the current annual report fee is $500 per business structure), Series LLC owners can save thousands. Since its introduction seven more states have enacted Series LLC legislation. Most states follow the Delaware legislation, although the Illinois legislation is arguably more complete and deals with more of the practicalities of running this kind of multi-subsidiary structure. Still other states are considering changing their own laws to allow Series LLCs.

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States that Have Series LLC Legislation


The states that have enacted Series LLC legislation are: Delaware, Illinois, Iowa, Oklahoma, Nevada, Tennessee, Texas and Utah. That doesnt mean you cant use a Series LLC in another state, but there are some additional things to consider before you proceed. The idea of the Series LLC was intriguing for many, but the legal world moves slowly. (Remember, regular LLCs only came into being in the United States in 1970). Attorneys, financial planners and tax professionals were concerned, not so much by what the Delaware law did say, as by what it didnt say. Could a Series LLC operate in a state that had not yet enacted Series LLC legislation? Would the inter-cell liability protections hold up in Court? And, more importantly, how did the IRS view this structure? A lot of our existing law is based on what has happened before. But caselaw takes years to develop, and while thats happening there is no firm guarantee that a Court will always act a certain way. Few professionals wanted to put their clients into untested structures, and noone wanted their client to become that test case. So, the Series LLC remained on the fringes of asset protection for several years. But then something interesting happened. Early adopters of the Series LLC began to explore the possibilities of using the Series LLC for other things. They began to ask the IRS to clarify how a Series LLC should be taxed, and more importantly, how the subsidiaries were to be taxed. A generally accepted standard began to emerge. In 2008 the IRS issued a Private Letter Ruling (PLR) that stated each subsidiary was permitted to adopt its own tax classification and this would be upheld as long as that subsidiary operated independently, and kept separate records.
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Plus, in 2010, we finally got formal draft IRS Regulations on how the Series LLC will be treated for tax purposes. This is a significant development, and a major improvement over to the PLR, as formal regulations would be binding on the IRS, in a way that a PLR isnt. While things are still developing (and will continue to develop for years to come), Series LLCs are becoming a safer and more acceptable business structure across the country. Is it right for you? The answer depends on your unique circumstances, but in many instances, you will find that yes, the Series LLC will work, and will save you some money along the way.

Will a Series LLC Structure Work for YOU?


If youve got multiple business operations, then theres a good chance that a Series LLC can work for you. This is especially true if you live in one of the 8 states that recognize the structure. You may also be able to use the structure successfully even if you live in another state, with some careful planning. Here are some of the ways weve seen a Series LLC successfully used: Real Estate Portfolio: If you have multiple real estate properties, especially where youve got lots of equity, different types of properties, or properties spread across multiple states, a Series LLC can be a great way to protect your portfolio, without setting up multiple LLCs. You can separate out your real estate holdings in whatever way works best for you. As long as youre following the corporate formalities associated with Series LLCs (separate recordkeeping, banking, etc.) state laws will uphold the liability protection between the Cells.
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Multiple Businesses: When business opportunities come our way and you need to move fast, a Series LLC lets you do so. Because you create subsidiary Cells internally (in most states) you dont need to wait for Articles to be filed. You can establish the paperwork, file for a Federal Tax ID number and get your bank account opened, all in the same day, with a minimum of time and little to no expense. This is one way we personally take advantage of the Series LLC. New Business Relationship/Joint Venture: Sometimes you need to spend some time working with another company or individual first, on a trial basis, before you enter into long-term arrangements. Creating a new Cell to hold your ownership in a joint venture or trial arrangement lets you work with someone, without risking any of your personal assets or other business operations. If the relationship doesnt pan out, the only thing at risk is the Cell you created. Multi-Partner Deals: In this instance weve got several people working together, but who are not all in the same position from a tax perspective. We see this often when professionals get together to offer a service under one common umbrella. Having each professional holding his or her ownership through a Cell allows each professional to make the tax election that suits him or her best, while allowing the group to present one united face to the world.

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Estate Planning: You can use a Series LLC in the same way you would divide up assets in a Trust. Divide up your assets into different Cells, and pass ownership in each Cell through the trust, to the beneficiary of your choice. Now youve got additional asset protection that a revocable trust alone may not provide. Essentially, if youve got more than one business theres a good chance that a Series LLC can work for you.

Series LLC Vocabulary: Members, Managers and Subsidiary Cells


Members The owners of a Series LLC are called Members. Like a regular LLC, a Series LLC may be owned by individuals or other business entities. There is no geographical distinction on ownership; owners may be located anywhere in the world, as long as they comply with the entitys tax classification. Managers The Managers are elected by the Members. They can be people, or they can be other business structures in turn (again, depending on the tax classification). Managers are tasked with running the LLC. They control the business operations; writing the checks, hiring and firing employees, entering into business deals, signing contracts, and all of the other activities that make up the daily running of a business. This style of management is more like
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the classic corporation management. In fact, if the LLC was a corporation the Managers would have titles youre familiar with, like President, Secretary-Treasurer, Vice-President, General Manager, and so on. Another example would be a case where youve got a silent partner, who wants to participate in the profit, and has invested money or assets into LLC, but doesnt want to be bothered with the rest of it. By creating a Manager-managed LLC, with you as the Manager (and a Member) and your silent partner as just a Member, you have accomplished just that. (Theres also a really neat tax advantage that well share a little later on). In a Series LLC, you always operate in the two-tiered, Managermanaged structure. The complex, layered nature of the structure means youve got to have a centralized point of control, and theres no better way to do that in an LLC. This follows through to the subsidiaries, too. Each subsidiary is also created as a Manager-managed entity. Subsidiaries (Cells) The ability to have subsidiaries is perhaps the biggest difference between a regular LLC and a Series LLC. In the states where the Series LLC is legally recognized, the ability to create an unlimited number of subsidiaries is set out in the statutes. Each subsidiary (also called Cells) can also choose to operate entirely independently of the Series LLC. They can have different owners, and different Managers. Each Series Cell is considered a separate and unique LLC. There is no legal difference between a Cell and a regular LLC.
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Case Study How about taking a look at a Series LLC in action. Youll find a diagram on the next page. It shows you how a Series LLC with both passive and active business operations could be set up. We used two couples here, John and Sue, and Jane and Dave.

Multi-Use Series LLC with Multiple Owners


Main Series LLC Filed at the State level Must maintain a resident agent Files an Annual Report each year Files a Tax Return each year Main LLC filed with State of Illinois, i.e., Rainbow Ventures, LLC (Taxed as a Partnership) (Files Federal 1065 Return) (Has EIN for banking, etc.) Owned by John and Sue

Series Cell #1 Red Lane Series (owned by Rainbow Ventures, LLC) (Elects single-member disregarded entity status, and rolls into Main Series LLC on consolidated tax return)

Series Cell #2 White House Series (owned by John + Dave) (Elects S Corporation status. John and Dave take salaries, hire employees and sub-contractors. Files Form 1120S tax return)

Series Cell #3 Manager Blue Series (owned by Sue + Jane) (Elects C Corporation status. Sue and Jane take salaries. Establishes MERP to cover additional medical expenses for Sue and Jane (and by extension, John and Dave). Files separate Form 1120 tax return)

Holds an apartment building as a long-term rental, with about $500k in equity

Rehabs and resells distressed properties. Typically has 2-3 properties at any one time

Provides property management services to Red Lane Series and bookkeeping services to White House Series

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This structure gave our owners fantastic flexibility it gave our four owners. John and Sue are able to keep their apartment building in a safe, asset-protected structure. The income flows through to their personal tax return via a Form K-1, where they pay income tax, but no self-employment tax. John and Dave are able to operate their secondary business, rehabbing and selling distressed properties through a Cell that is taxed as an S Corporation. By using a Series LLC Cell, they also receive asset protection over the properties they own during the rehab process. In the event John or Dave is sued personally, the assets held in the White House are not attachable by a creditor. Likewise, if the White House Series is sued, perhaps by a sub-contractor or dismissed employee, all of John and Daves other assets are safe. The plaintiff cant reach across the line and try and attack Johns apartment building. The third Cell, Manager Blue Series, also performs an important function. It allows for Sue and Jane to pull income out of both the Red Lane Series and the White House Series, lowering the net taxable income in both structures. Plus, because Sue and Jane are operating the business as a C Corporation, they can take advantage of all the C Corporation fringe benefits, like a medical expense reimbursement plan to cover many qualified medical expenses that arent covered under their regular medical insurance. And, at the end of the day, our foursome save even more money. If they had gone to a local attorney or business formation service to establish these structures, they would have looked at 3x attorney fees, 3x state filing fees, 3x resident agent fees, and would pay 3x again each year.
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Operating in A Non-Series State


So, can you safely operate a Series LLC in a state that doesnt have Series LLC legislation? And, if you have a Series LLC set up in one state and want to register it to do business in another state, can you? The answer is definitely it depends. For example, registering a Series LLC as a foreign entity is allowed in all states. But because there isnt a way to register a Cell on its own, you will need to register the main Series LLC entity. This can cause a problem if youre dealing with a tax-aggressive state, like California, that wants to tax the income of every Cell and for you to pay the $800/year minimum franchise tax on each Cell, even if the Cells arent operating in California. But perhaps the biggest question surrounding Series LLCs is the issue of liability and the inter-Cell protection. For example, how will Idaho treat your Iowa Series LLC, if a lawsuit is launched in Idaho? Will it respect Iowa laws, and allow you to maintain the division between Cells? Or, will it look at your Series LLC as one big LLC, collapsing the Cells into the main structure and thus putting all of your assets at risk? And, what happens in the event of a bankruptcy? The answer you get is also going to depend on who you ask. Many attorneys feel that a state will apply its own laws first. So far, the issue hasnt been firmly decided by the Courts one way or another. We havent seen litigation on that specific issue. However, we have seen litigation and IRS rulings on other issues involving Series LLC in non-Series states. So, it stands to reason that state courts are aware of the existence of the
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Series LLC, and havent seen fit to send clear messages saying You arent welcome here. We also dont have any firm guidance from the bankruptcy courts on how a Series LLC will be treated. It seems logical that if the Cells are properly following corporate formalities, then they should be treated by the bankruptcy court as separate entities in the event of a bankruptcy. This is especially true if you live in a state that has enacted Series LLC legislation providing those rights under law. But theres no firm guarantee at this point whether that will happen, or whether the bankruptcy court will ignore the Cell and only consider the entire LLC. As always, you need to take a close look at your situation, consider both sides of the argument and make the choice that lets you sleep peacefully at night. To learn more about the Series LLC, including ideas for preparing the complex Operating Agreement, business naming conventions, banking issues and more, get your copy of our full product, The Series LLC: The Ultimate in Business Structure Flexibility. Youll get a full eBook plus several audio files going into more detail on this exciting new structure.

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