Segregating assets within a company is one way of shielding a relatively stable and profitable asset from the liability that may result from a risky asset. Corporations can do this through the use of divisions that comply with complex IRS rules. In a few states, LLCs, or limited liability companies, are permitted to do the same through the use of what is known as a “series LLC.”
A series LLC is a specialized from of LLC that segregates its assets by forming multiple series, sometimes called "cells," within the same LLC. The unique aspect of a series LLC is that each series is permitted to have its own assets, as well as its own members and managers. A series LLC may be useful in managing multiple assets that are similar in type, but distinct in terms of potential liability, such as rental properties; that is, instead of forming an LLC for each property, one series LLC can be formed that uses a separate series for each individual rental property so that liabilities from one property will not affect the profitability of another property.
State LLC Laws
Delaware was the first state to allow the formation of a series LLC in 1996. As of December 2010, seven other states amended their LLC laws to allow a series LLC: Illinois, Iowa, Nevada, Oklahoma, Tennessee, Utah and Texas. Although California does not yet allow the formation of a series LLC, it does permit a series LLC formed in other states to transact business in California after registering with the secretary of state.
Series LLC Characteristics
A properly formed series LLC should specify in its formation document -- usually called the articles of organization -- that it intends to operate as a series LLC. This is a public document that provides notice of the members' intention regarding the LLC. Although not required under all state LLC laws, the members may also prepare an LLC operating agreement that includes provisions providing for the creation of series within the LLC. In addition to the credence that these documents can give to a series LLC, the members should also consistently act in a way the respects the separateness of each series in the LLC, such as using separate bank accounts for each series and ensuring that each series is properly capitalized.
Because of the relative newness of a series LLC, there is some legal uncertainty as to the necessary characteristics that these business entities must have in order to receive the tax and liability treatment that its members expect. There are few court rulings interpreting statutes permitting series LLC that can help guide LLC members and their professional advisers. The IRS published proposed rules for the federal tax treatment of series LLCs in September 2010, and are in a period of accepting public comment on the proposed rules (see Resources). Once final rules are adopted by the IRS, they will provide a measure of legal certainty at least in regards to the federal tax treatment for series LLCs.