For the past years we have heard three refrains: (1) series limited
liability companies, or SLLCs, may be good for some purposes but there was uncertainty over (2) how
jurisdictions that did not independently recognize SLLCs would honor their asset segregation and (3)
how the IRS would handle series filings. As we continue to monitor reactions to the IRS temporary
regulations for SLLCs we may be able to rewrite the script and drop the refrains of
Businesses have long used internal portfolios and divisions to effectively manage
their assets and activities and SLLCs bring legal recognition and insulation of this technique.
Nevada’s SLLC structure provides for the creation of what are effectively sub-entities where
the debts and liabilities of each so-called series are enforceable against the assets of only that
The September 2010 proposed regulations are expected to be revised
and implemented in June but their existence is a valuable indicator. The proposed Treasury Regulation § 301.7701-1(a)(5) will almost
certainly provide that each series will be treated, for tax purposes as a separate entity. As
a series . . . organized or established under the laws
of the United States or of any State, whether or not a juridical person for local law purposes, is
treated as an entity formed under local law.
This proposed regulation together with outside commentary
(e.g. The NY Bar's response, American Bar Association comment) indicate that the refrain of
uncertainty should be put to rest—even without waiting for the final text. Observers should be
struck with the lack of debate on this core determination. As the IRS reasons in the explanatory
material preceding the proposed text, the analogies that commentators and regulators have been
making to series trusts and affiliated entity structures are exactly the reasoning the IRS is
prepared to follow. Thus, if a series has multiple members, it will be treated as a partnership by
default. Likewise if it has a single member, by default it will be disregarded for tax purposes. The
proposed regulation also clarifies that the filing status of the series does not determine the
filing character for the state law entity itself (the “series organization”).
The text of the IRS’ analysis is unsurprising and but we
expect its effect to spill outside of the tax arena and cause a reduction in the perceived
uncertainty in other jurisdictions. This expectation comes from observing effect of a similar action
by California’s tax authority. The FTB has an incentive to treat series as separate entities because it
can thereby collect $800 each year the series is doing business in California (regardless of whether
the series generated that much income). On one hand, this decision has had a chilling effect on
SLLCs in California among those for whom fee avoidance was motivating the use of the SLLC structure.
For those with deeper business reasons for SLLCs on the other hand, the declaration served as
legitimization. Rather than guessing at how SLLCs would be treated, they can now rely on a
government declaration that “California recognizes series LLCs formed in other states if the
laws of their formation state provide for the designation of multiple series of interests in the LLC
. . . .”
see the same confidence result from the publication of the IRS’ proposed treatment and from
the lack of controversy that has attended it. Courts, advocates, and the business community are
dropping the refrain of uncertainty and are taking confidence in the analogies to existing
jurisprudence: the answers were here all along.
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