The trendy Series LLC: three legal considerations

In the dark ages, companies with diverse business interests had to establish multiple LLCs to limit their liability.

However, in 2006, the legislature authorized LLCs to establish "Series LLCs" which allow owners to accomplish the same thing, but more affordably and without the administrative burden of multiple LLCs. The series LLC, or what I like to call the LLC 2.0, has gained popularity among Illinois business owners across every industry.

The Series LLC allows the formation of unlimited entities (or members) under a master LLC. Every series operates independently as a separate entity. Each manages its own financial responsibilities and is shielded from the risk of liability from the other entities. It can be likened to a corporation with several subsidiaries, but it has several advantages over a C- or S-Corporation.

For example, the Series offers pass through taxation and lower administrative fees over the long-term. The original filing fee for a Series LLC is more than a standard LLC. However, the cost savings of the Series LLC becomes apparent as more series are added, since the annual fee for each series is $50 as opposed to $300/year per independent LLC.

Because the Series LLC is relatively new in the business landscape, there are questions surrounding how it will be handled by three entities in particular: bankruptcy court, IRS and other states. Three questions are on the minds of business owners with Series LLCs.

Will the bankruptcy laws respect the separateness of LLC Series?

There is virtually no legal precedence in federal bankruptcy court to answer the question. One theory is that a "substantive consolidation doctrine" might apply. In the case of Series LLC bankruptcies, a substantive consolidation doctrine is the assertion that despite the "separateness" of each entity, they are one unit and the master LLC would ultimately be held responsible to creditors.

Will the IRS respect the separateness of LLC Series?

Information from IRS private letter rulings, which are responses to questions from individual parties, show that the agency would likely treat Series LLCs as separate entities for federal tax purposes. Since the IRS is a federal agency, this may bode well for predicting rulings in federal bankruptcy court.

However, these IRS opinions are non-binding and have no precedential value. They do, however, provide valuable insight into how a federal regime might treat a Series LLC.

How will other states treat the Illinois Series LLC?

Illinois is one of only eight states to offer the Series LLC, along with Delaware, Iowa, Nevada, Oklahoma, Tennessee, Texas and Utah. So if an Illinois series is sued by a person in a state that does not recognize Series LLCs, will the courts respect the separateness of the structure? Article 4 of our Constitution provides that states must give "full faith and credit" to the state laws of another state. However, a state is not required to substitute the statute of another state for its own.

Thus, until a federal law is created that would preempt state law, the question of whether a non-series state will recognize Illinois series LLC law will be subject to the court of the non-series state.

While the courts do not yet quite have all the answers to the legal questions surrounding Series LLCs, it is still a worthwhile corporate structure for any business to consider.

As business owners in Illinois become more familiar with the benefits of structuring their ventures using Series LLCs, the popularity of this business entity will only continue to gain popularity. It is a distinct advantage to doing business in Illinois.

• Isaac Franco, an attorney with Gardi & Law Ltd. in Schaumburg, focuses on corporate and real estate law.