Ward on Iowa Limited Liability Company Law

IRS Issues Proposed Regulations on Series LLCs

This morning the IRS issued proposed regulations providing that for "Federal tax purposes...a series organized under the laws of the United States or any other State, whether or not a juridical person for local law purposes, is treated as an entity formed under local law."  Since Iowa is one of a handful of states that permit Series LLCs, I'll have more to say on this subject once I digest the 34 pages of explanation of this seemingly simple statement.

-Marc Ward

Series LLCs, Better than Parent-Subsidiary?

There is a line of thought circulating among LLC commentators suggesting that Series LLC formed under the Delaware LLC Act not only creates a liability shield for the LLC against claims against a series (like a traditional parent-subsidiary corporate/LLC format) but also shields each series against claims against the LLC (not available to parent-subsidiary).

Take a look at Delaware LLC Act Section 18-215(b) and see what the fuss is about:

"...none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series."

Fortunately or unfortunately, Iowa's new LLC Act does not have this language.  And of course, there is no case law on the subject.

-Marc Ward 

Another Roadblock for Series LLCs

For me Series LLCs are an enigma.  It is not clear to me why one would take on the uncertainty that Series LLCs face when you can accomplish just about the same thing with multiple LLCs owned by a holding LLC.

In this regard the SEC released on September 1, 2009 a staff opinion shooting down the use of a Series LLC with respect to a broker-dealer arrangement in which the Master Series LLC would have no assets but would create two series, one for retail operations and the other for institutional customers.

The Financial Industry Regulatory Authority (FINRA) asked the SEC to bless such an arrangement.  Because the structure would run afoul of capital requirements and several financial disclosure regulations, the SEC rejected the idea.  Rather than go into the details I'll attach the relatively brief letter here in a little while.

-Marc Ward

Series LLC Article

An excellent article about Series LLCs entitled "Series LLCs Let's Give the Frog a Little Love" written by Dominick T. Gattuso can be found in the July/August 2008 Business Law Today.

-Marc Ward

IRS Determines that each Series of an LLC is a Separate Entity

In Private Letter Ruling 200803004 the IRS ruled for the first time on the tax status of Series LLCs (Iowa is one of seven states to permit Series LLCs).  The IRS concluded under the facts presented that each series of an LLC is a separate entity for tax purposes and each series could elect its own tax status (assuming it met the conditions required for the chosen tax status).  In this ruling there were one or more series disregarded for tax purposes (meaning it had just one member), taxed as a partnership, and taxed as a C corporation.

Although other taxpayers cannot rely on this PLR, taxpayers can take comfort in the position the IRS took with respect to this Delaware Series LLC.  Iowa Series LLCs can also take comfort in the fact that the new Iowa LLC law mirrors almost word for word the statutory provisions of the Delaware LLC statute.

For an historical perspective, take a look at the National Securities case found at 13 TC 884 (1949) (treating each series of a series trust as a separate entity).  And for an excellent analysis of PLR 200803004, read the article by Steven E. Grob and Norman J. Hannawa in the March/April 2008, Business Entities (WG&L).

-Marc Ward

Series LLCs under the New Iowa LLC Law

Series LLCs are not new under the new Iowa LLC Act, but they are improved.  One of the biggest current concerns is what happens to a Series if the LLC from which it was created dissolves.  Iowa Code 489.1205(1) settles the issue, declaring that a series “is not terminated and its affairs shall continue despite the dissolution of the limited liability company…."

A Series is a separate and distinct part of the LLC.  It has separate members, managers, rights, powers and duties with respect to its own property or obligations as well as its own profits, losses and distributions associated with such property or obligations.  A Series can have a separate business purpose or investment objective than the LLC or another Series.  Its distributions are dependent exclusively on the operations of the Series.  It can be terminated without affecting the LLC or other Series within the LLC.

It is important to know that the debts, liabilities and obligations of a Series "shall be enforceable against the assets of that series only and not against the assets of the limited liability company generally...."  Iowa Code 489.1201(2).  Compare this language with 489.304(1) ("The debts, obligations, or other liabilities of a limited liability company...do not become the debts, obligations or other liabilities of a member or manager solely by reason of the member acting as a members or a manager acting as a manager.")

To establish a Series (a) the operating agreement must create the Series, (b) separate and distinct records must be maintained for the Series and its assets must be accounted separately from the assets of the LLC, (c) the operating agreement must provide for the limitation on liabilities described in 1201(2), and (d) a notice of the creation of the Series must be set forth in the certificate of organization.

Why create a Series?  One reason is to coordinate discrete but related business ventures.  For example each of a score of nursing homes may be owned by a different mix of investors but with a common manager.  A real good reason to create a Series is to protect the core business from a risky venture.  If your core business is selling widgets and you decide to dabble in real estate development, doing so within the same traditional LLC structure exposes your core widget business to the real estate division's creditors.  Simply forming a separate LLC may not be enough because of the threat that the LLC veil will be pierced.  A Series may protect you from veil piercing.

A careful reading of the Series provisions of the new Act (modeled after the Delaware statute) suggests that a Series may provide greater protection from veil piercing than forming a separate LLC, although it is untested in court.  Go back and read 1201(1) and 304(1), above, to see what I mean.

-Marc Ward

(I wondered while writing this post whether an LLC can own an interest in its own Series?  Interesting....)