Delaware Series LLC

[Snaggletooth]

A few years ago, Delaware passed the creation of a so-called "Delaware Series" where several LLCs could be grouped together to file a consolidated return, but each LLC would have liability limited to its own assets. This would be ideal for a commercial owner of several buildings, where each building could be its own LLC, but have liability limited to the building only without a suer having access to the entire collection of buildings.

There have been several states follow the lead for the Delaware pattern. I believe Illinois is one. Nevada is another. But at this point I believe the states subscribing to this idea are still in the minority.

Since each entity is an LLC, it is not required that any of the LLCs have a capital structure such as capital stock with a corporation. And this would be true even if the LLCs choose to file as a corporation. Not having a capital structure does not, however, mean that each LLC fails to have ownership percentages as well as percentages for income and loss.

In order to qualify as a "Delaware Series" of LLCs, I do believe there must be at least 50% common ownership, meaning the door is open for minority interests. This affects the question at hand, which I will ask at this point.

If a Delaware Series consolidated return is filed for several LLCs, how is the percentage of income to be allocated? Each LLC may have its own stated ownership split, but when combined, how are K-1s issued when each LLC has its own unique arrangement? Would it be a weighted average based on total assets of each LLC? Total Equity? Does the consolidated return get to define its own formula? (That would be a hoot...)

[I don't expect many folks to respond to this, but anxious to hear from those of you who will]

[DaveinTexas]

Texas Series LLC

I can tell you from my limited experience with a Series LLC (in Texas) that the features/aspects you describe regarding Delaware Series LLC are similar to the Texas version. I don't know of any legal differences between the 2 states.

I've researched this topic quite a bit because I recently networked with an attorney that recommends these "creatures". I wanted to understand them a bit better before recommending them to clients. I can tell you they work really well with clients that want to expand their businesses or have different activities within one similarly grouped business as well as someone who owns multiple rental properties or even just a guy that owns a welding shop and a building where he operates the business (house the building in one Series and the welding business in another Series).

The only disadvantage is you are required, in Texas, to report the income from each Series on one Franchise Report. Franchise Tax kicks in after about $1.1MM in Gross Sales, depending on the situation. This can add up fairly quickly with multiple businesses, but we also have common ownership (grouping) rules that would have the same effect even if there were separate LLCs or Corps created.

For Delaware, all that I can find on this subject, apparently there is just one annual report for all of the Series a $300 fee! I'm moving!

[Snaggletooth]

Thanks for response

David, thanks. Looks like Texas is another such state that allows the series treatment. I talked directly to the Sec of State here in Tennessee, who said they are considering it but not allowing it for the time being. The apparent issue is protection for wealthy owners versus interests of aggressive attorneys who make their living bringing lawsuits.

I have a customer who is considering multiple companies in Nevada, so I may need to prepare myself for questions.

I still don't know how profits are allocated to the owner(s), especially minority interest owners, as all owners will need to receive a K-1 from the consolidated entity.

In absence of any other arrangements, I suppose the profits from each LLC could be allocated to the respective owners, and the summation of income in the aggregate would work.

[DaveinTexas]

Reg-119921-09

David, thanks. Looks like Texas is another such state that allows the series treatment. I talked directly to the Sec of State here in Tennessee, who said they are considering it but not allowing it for the time being. The apparent issue is protection for wealthy owners versus interests of aggressive attorneys who make their living bringing lawsuits.

I have a customer who is considering multiple companies in Nevada, so I may need to prepare myself for questions.

I still don't know how profits are allocated to the owner(s), especially minority interest owners, as all owners will need to receive a K-1 from the consolidated entity.

In absence of any other arrangements, I suppose the profits from each LLC could be allocated to the respective owners, and the summation of income in the aggregate would work.

Check out REG-119921-09 for IRS guidance on the Series LLC, it's a hefty read but a lot of your questions should be answered there.

Specifically, and from what I have read, each Series can be a stand alone entity, apart from the other Series, with its own set of books, assets and liabilities. So, each Series has its own return to prepare. Series A can be taxed as an S Corp (each shareholder recieves a K1) and Series B can be taxed as a Partnership (each partner receives a K1) and Series C can be taxed as a Disregarded Entity, and so on. Only on the State Report (Franchise Report, Annual Report) will you combine income and expenses. For the Federal Return, you have a separate tax entity and, therefore a separate tax return (1120S, 1065, 1040 Schedule C, etc) for every Series. That is the point of the Series, for each Series to have its own set of books, assets, liabilities, shareholders, members, partners, etc.

BUT, the confusion arises when you go to apply for an EIN for each Series. Let's say, for example, the Master/Parent Series is called Candy Series LLC; it operates a Candy company. The intent is to create 2 additional Series, one Series to hold the real estate (building) the candy company uses to operate its business and another Series (holding company) to hold the equipment the candy company uses to create its products.

The Master/Parent that operates the candy company is called Candy Series LLC. The real estate Series must include the name of the Master in the EIN application, so it could be titled as such, "Candy Real Estate, A Series of Candy Series LLC". Notice the name is NOT "Candy Real Estate LLC", but it does mention it is a Series of the Master/Parent Series LLC. When I applied for an EIN for my client's Series, I made the mistake of calling the child/cell/subsidiary company, XYZ Series LLC. The name will not have the "LLC" in it, but will mention that XYZ is a Series of Master Series LLC. So, I had to write a letter to the IRS indicating the correct name is "XYZ, A Series of Master Series LLC". This becomes REALLY important when the real estate is titled.

The consensus is to first apply for the DBA (Assumed Name Certificate) with the County and State for each Cell/Child/Subsidiary/Series. This, in effect, creates the new Series. So, in the case above, the client would apply for a DBA for Candy Real Estate, A Series of Candy Series LLC. Then, once the name is established, apply for the EIN using the same name on the DBA application.

Not trying to confuse you, just trying to give some advice because the "brilliant" attorneys that setup these crazy things WILL NOT apply for the EIN. They say, "ask your tax guy to do this for you."

Clear as mud right??

[Snaggletooth]

Somewhat Clear

Clear as mud right??

Dave, thanks very much for this, and it is more clear than you give yourself credit.

The most important thing I understand from your message is that the state can only consent to LLC-series consolidated return on state tax returns. Federal does not allow a consolidated return unless they otherwise can qualify.

Is this correct?

Interesting discussion about how to apply on the SS-4s as well.

[DaveinTexas]

Bingo

Dave, thanks very much for this, and it is more clear than you give yourself credit.

The most important thing I understand from your message is that the state can only consent to LLC-series consolidated return on state tax returns. Federal does not allow a consolidated return unless they otherwise can qualify.

Is this correct?

Interesting discussion about how to apply on the SS-4s as well.

The IRS is working on a fix to include Series LLC for the EIN application process but I haven't seen it yet.

As for the consolidated return, yes, the State Return (Franchise/Annual Report) is the only return that will report the group's combined income. For the Federal Return, the client must decide how each Series will be treated. They could have 100 Series but every one of them be treated as a Disregarded Entity; as in the case of someone who owns many rental properties. You won't combine the income on the Federal Returns unless they qualify as say, a Tiered Partnership, QSub, etc.