Utah Series LLCs: What You Need to Know
A series LLC is a relatively new form of LLC. A series LLC is composed of a master LLC that houses a series of LLCs. However, the master LLC does not own the series of LLCs. Each series within the series LLC typically has separate owners, assets, and liabilities. Similar to a corporate/subsidiaries business model, series LLCs may potentially offer asset-protection benefits, but they avoid the complexities of corporate taxes, structure, and other required formalities.
Similar to chess where simple moves allow a player to make great attacks and protect pieces, this type of entity allows a business owner the ability to move forward in business while separating liabilities. Series LLCs are well suited for certain businesses that may benefit from its relative simplicity, reduced costs, and increased asset protection. But especially because of its newness, there are also some uncertainties associated with the series LLC.
Potential Benefits of the Series LLC:
Simplicity Through Reduced Administration
Although each series must be administered separately, series LLCs have the potential to save time and administration costs by allowing for the master LLC to conduct administration.
Reduced Costs- One Registration
Each of the individual series is formed and governed by the master LLC’s operating agreement. In Utah, only the master LLC must be registered with the state, which means reduced fees.
The Utah series LLC statute states that each series is protected from judgments against assets in other series under the master LLC. But it’s not clear that this protection will be respected in bankruptcy proceedings or in other states that don’t recognize series LLCs.
Tax Planning and Savings
The IRS has proposed regulations that would allow for series LLCs to have separate and distinct tax classifications (see 75 FR 55699 and REG-119921-09). This taxation framework would allow for setting up series either sole proprietor, partnership, or some form of corporation classification.
Potential Downsides of the Series LLC:
Some Additional Costs- Registered Agent
Many states require a separate registered agent for each series in the series LLC, which may mean additional expenses.
Governance Issues- Overlap Jeopardy
The operations may not be as streamlined as anticipated. The records of each series must be maintained separately, and each series must have its own separate bank accounts. Can administrative functions among the series overlap without jeopardizing the limited liability? Can the ownership or management overlap? Does inadequate capitalization of one series impact the other series in the series LLC? At this point, these types of questions remain unanswered.
Federal bankruptcy laws do not yet address series LLC issues. Can an individual series within a series LLC file for bankruptcy? Are the assets of the non-filing series and the master LLC protected from the filing series? At this time, there are no clear answers to these and other bankruptcy-related questions.
If a series LLC gets sued by a third party in a state that doesn’t authorize series LLCs, the assets of each series and the master LLC may be at risk. For LLCs that operate in states with and without series LLC statutes, this may make a series LLCs much less attractive.
The series LLC potentially has vast potential and is worth considering as an investment and business entity. If your business is particularly well suited to this compartmentalized approach and you live Utah that currently authorizes series LLCs, you may want to talk with your business planning team about this type of business entity.
Summa Business Law works with business owners to ensure they’re up to date with the latest business planning and operations strategies. Contact Summa Business Law today so we can evaluate your current and future business asset protection needs.