Potential Pitfalls of Series LLCs

Tax Professionals' Resource
September 12, 2012 — 1,652 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

There are many different kinds of limited liability companies (LLCs), and an expert tax attorney or business professional will be able to recognize the advantages and disadvantages a Series LLC has over other company structures.

Essentially, a Series LLC provides protection from "series," which are generally defined as liabilities that stem from other liabilities. Thus, a Series LLC secures assets across an entire industry spectrum, from tax liability to profit margins.

However, there are some common pitfalls associated with Series LLCs. Take a look at some of the following problems that these companies may experience.

Spread too thin

Business owners with a large amount of separate assets choose Series LLCs because sound investment practice dictates not to have all your eggs in one basket. For example, if you own a casino and real estate empire like Donald Trump, you would not want one side to be affected if the other was sued. In a Series LLC, one asset cannot be affected by liability stemming from an outside source.

However, this can cause unprepared businessmen and women to become unorganized, and it is easy to lose track of multiple tax returns, filing documents and expense reports. From a legal standpoint, this could be extraordinarily irresponsible should any civil suit be levied against your company. Also, you might have to hire a separate professional or company to keep your profit margins in line - and this service will not come cheap.

Geographic limitations

Currently, only eight states have Series LLC legislation. Therefore, if you live in one of the 42 states besides Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah, Wisconsin and Kansas, you cannot engage in Series LLC practices. Companies in major economic centers like Los Angeles and New York City are up the creek without a paddle.

Filing issues

Unfortunately, some circumstances require businesses and individuals to file for bankruptcy. That said, a Series LLC case has never been brought before the U.S. Bankruptcy Court, which raises an infinite amount of questions about what will happen when a case inevitably occurs.

Also, from a federal tax standpoint, each separate entity under a Series LLC is subject to full taxation. This creates numerous problems when filing for income taxes because some critical components may be overlooked.

Though a Series LLC has numerous advantages, until it is universally adopted across the United States, a business owner might want to think twice about embarking on such a strategy.

Tax Professionals' Resource