Incorporator The Journal of U.S. Formation
Start Free Quiz
Editorial 11 MIN READ

The series LLC in mid-2021: two forms, one federal reporting problem

Delaware's registered series has been live for 22 months, and every cell now has a federal beneficial-owner question attached

The Editors
Staff, Incorporator.org
11 min read Updated
Contents 7 sections
  1. Where the Delaware statute sits now
  2. The Corporate Transparency Act attaches to every series
  3. The tax side is unchanged
  4. The state map and Virginia's UPSA year
  5. Who the registered series is still for, and who it is not
  6. The form at twenty-five
  7. Sources

he series LLC in June 2021 has two Delaware flavors, one federal reporting statute that probably treats every cell as a separate reporting company, and a set of proposed tax regulations that are eleven years old and still proposed. The last of those is familiar. The first two are the news.

Twenty months ago, Delaware's registered series under 6 Del. C. § 18-218 went into effect. The Corporate Transparency Act, signed into law on January 1, 2021 when Congress overrode the veto of the National Defense Authorization Act, is going to add a beneficial-ownership filing to each of those series as soon as FinCEN finishes writing the regulations. This is the first federal statute that treats a series as something the government wants a list of.

Where the Delaware statute sits now

Senate Bill 89 took effect August 1, 2019, and for the first time gave Delaware two kinds of series under the same master LLC. We walked through what SB 89 did when it was fresh. The protected series under 6 Del. C. § 18-215 remains the minimal form: authorized by notice in the master LLC's certificate of formation, created by operating-agreement provisions, with no separate state filing and no separate state record. The registered series under § 18-218 is the opposite: filed on a Certificate of Registered Series with the Division of Corporations, carried on the state's public roster, eligible for a certificate of good standing in its own name, able to merge or convert on its own filings under §§ 18-219 and 18-220.

The economics have not changed. A registered series costs $110 to form and pays $75 a year in Delaware franchise tax under § 18-1107(n), separate from the $300 owed by the master LLC under § 18-1107(b). A protected series costs nothing additional to form and pays no separate Delaware tax. A master with ten registered series writes Delaware a $1,050 check every year; a master with ten protected series writes $300.

What has changed is the volume. Delaware does not publish a running count of registered series, but Division of Corporations filings data indicate the registered-series form has been taken up first by the constituencies SB 89 was drafted for: secured-lending vehicles, real-estate holding structures where a title insurer is on the other side, and private-fund cells being sold as discrete assets. The long tail of internal-sub-accounting series (a rental-property LLC with one cell per building, operated by the same family for the same lender) has mostly stayed with the older protected-series form. The extra tax is the reason.

That split was the drafting committee's expectation. The Council of the Corporation Law Section's synopsis of SB 89 explicitly framed the registered series as an option for series that need to hold themselves out to third parties, not a replacement for the protected series. Two years in, that is how the market has used it.

The Corporate Transparency Act attaches to every series

The Corporate Transparency Act was enacted as Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116-283, on January 1, 2021. Section 6403 of the act, codified at 31 U.S.C. § 5336, requires every "reporting company" to file beneficial-ownership information with FinCEN. A reporting company is defined as a corporation, limited liability company, or "other similar entity" that is either created by filing a document with a secretary of state (or similar office) under the law of a state or Indian tribe, or registered to do business in the United States by similar filing.

The operative question for the series LLC is which series are "created by the filing of a document" with a state office. A Delaware registered series plainly is: § 18-218(c) requires the Certificate of Registered Series to be filed with the Division of Corporations, and the series becomes a registered series "upon the filing" of that certificate. A Delaware protected series plainly is not: its existence is constituted by operating-agreement provisions that the state never sees.

FinCEN published an Advance Notice of Proposed Rulemaking on April 5, 2021, at 86 Fed. Reg. 17557, asking for comments on how the reporting rules should treat, among many other things, "entity types whose formation may not require the filing of a document with a secretary of state." The ANPRM lists series LLCs among the specific categories on which it solicits comment. The proposed regulations have not been issued as of this writing; the statutory deadline for final regulations is January 1, 2022, one year after enactment.

The practical reading, which the Delaware bar has been circulating in client alerts since the spring, is that every Delaware registered series is going to be a separate reporting company under the CTA. The filing is analogous to what a separate LLC would file: the series' full legal name, any trade name, the street address of its principal place of business, the jurisdiction of formation, its taxpayer identification number, and, for each beneficial owner, four data elements (legal name, date of birth, current residential or business address, and an identifying number from an acceptable document). The registered series has a state filing. The registered series has an EIN, usually. The registered series has identifiable beneficial owners, almost always the same people as the master's.

The question for protected series is harder. A series whose only public footprint is its mention in a master LLC's operating agreement is not "created by the filing of a document" in the ordinary sense. The statute, however, does not contain an explicit carve-out for internal-only series, and the ANPRM explicitly flags series LLCs as an open question. Practitioners have been divided: some read the statute's "created by filing" language to exclude protected series entirely; others argue FinCEN will treat the master LLC's filing as the filing-of-record for all its protected series, making each one a separate reporting company anyway. Both positions were submitted in the ANPRM comment period, which closed May 5, 2021. FinCEN has not responded.

Until FinCEN's proposed regulations come out, the safe assumption for a new formation this quarter is that every registered series is a reporting company, and every protected series might be. A master LLC with twelve cells could end up filing thirteen separate BOI reports a year from now, or it could end up filing one. The practitioner's position, from the client's perspective, is to design the series structure so that the answer either way is operationally cheap.

The tax side is unchanged

Proposed Treasury regulations under 26 CFR § 301.7701-1, published at REG-119921-09, 75 Fed. Reg. 55699 (September 14, 2010), would treat each cell of a domestic series LLC as a separate entity for federal tax purposes. Nearly eleven years later those regulations remain proposed. They are not on the IRS Priority Guidance Plan for 2020-2021, and they were not on the 2019-2020 plan either. The plan for 2021-2022 will be issued in the fall; they were absent from the plan as recently as last year.

What practitioners do in the meantime is what they have done for a decade. File separately at the series level on the theory the proposed regs articulate. Treat each series as its own entity for federal purposes: its own EIN, its own classification election on Form 8832 or default rules, its own return. The IRS has accepted those filings without issue, and the proposed regs, though unfinalized, are the only federal tax guidance directly on point.

Section 199A, which was front-of-mind in our March 2018 revisit as the new post-TCJA overlay, has settled. Treasury's final regulations at T.D. 9847, issued January 22, 2019, and the Rev. Proc. 2019-38 safe harbor for rental real estate of September 24, 2019 answered the immediate questions. A series LLC holding rental properties can rely on the 250-hour-per-enterprise safe harbor so long as separate books and records are kept for each enterprise, which a well-run series already does. Section 199A sunsets at the end of 2025 under the TCJA.

The American Rescue Plan Act of 2021, signed March 11, extended the employee retention credit through December 31, 2021 and touched several other small-business provisions, but did not modify Section 199A or the entity-classification rules. The series LLC's federal tax posture in June 2021 is the one it has had since early 2019: proposed regs still proposed, § 199A settled, separate filing as the practical default.

The state map and Virginia's UPSA year

Virginia's Uniform Protected Series Act went into effect July 1, 2020 under Va. Code § 13.1-1088 et seq. It is now nearly a year old. It is the only state to have enacted the Uniform Law Commission's 2017 UPSA as such. The UPSA's design sits between the Delaware protected series (no state filing, all documentation internal) and the Delaware registered series (separate state filing with its own record). A Virginia protected series requires a "protected series designation" filed with the State Corporation Commission under Va. Code § 13.1-1098, which makes it more like a registered series in evidentiary posture while retaining the "protected series" nomenclature and the internal shield of the Virginia LLC Act.

Iowa adopted a series statute effective July 1, 2020 under Senate File 2319, adding series provisions to Chapter 489 of the Iowa Code. That brought the count of series-authorizing U.S. jurisdictions to twenty. Nebraska enacted a series statute in 2021 that takes effect January 1, 2022. The trend is still toward more states, not fewer, but the pace has slowed, and no state has followed Delaware's two-track model by adopting separate protected and registered forms.

Illinois remains the cheap domestic option. The articles-of-organization fee for an Illinois series LLC under 805 ILCS 180 is $400, each certificate of designation under 805 ILCS 180/37-40 is $50, and the annual report is $75 plus $50 per series in effect on the last day of the third month preceding the anniversary month. An Illinois operator with ten rental properties held as separate series pays $400 to form, $500 in certificates of designation up front, and $575 per year thereafter. Delaware with ten registered series is $1,100 up front for the series filings and $1,050 per year. Delaware with ten protected series is $0 additional at formation and $300 per year.

Under the CTA, Illinois's certificates of designation are filed with the Illinois Secretary of State, which makes each Illinois series a strong candidate for reporting-company status. An Illinois operator with ten series is probably looking at eleven BOI filings a year from now. The cost advantage Illinois has had in state fees does not translate into a CTA advantage, because the CTA is structured around the filing-of- record, and Illinois series have one.

Who the registered series is still for, and who it is not

The two-year-old registered series is for cells that deal with outsiders. The original pitch was institutional lenders, title companies, and merger counterparties who wanted a state-issued certificate of good standing for a single cell. Twenty-two months in, that is exactly who has taken it up. Private-fund managers doing one-cell-per-strategy or one-cell-per-investor structures, real-estate funds doing one-cell-per-property where the property will be individually financed, and secured-lending vehicles where the collateral is carved up by series.

The registered series is not for a family holding five rental houses in one Delaware master. The internal shield of § 18-215 has been unchanged by SB 89 and is the same shield it has been since 1996. The $75 annual tax per cell is not a large number against the rent roll, but it is a larger number than zero, and for a small domestic portfolio that will never see an institutional lender or a title company the question is whether to pay $750 extra a year for a feature that will never be used.

The CTA adds a second question to that calculus. If FinCEN's final regulations treat registered series as reporting companies and protected series as not, the registered series becomes meaningfully more expensive in compliance overhead, not just state tax. A portfolio of ten cells facing eleven BOI filings plus ten $75 annual taxes is a different administrative animal than a portfolio of ten protected series facing one BOI filing and one $300 annual tax. The FinCEN regulations will decide where that line is, and they are due by the end of the year.

The form at twenty-five

The series LLC turns twenty-five years old in August. The statute that created it, Delaware's 1996 amendment adding § 18-215, was drafted for the mutual fund industry and extended by accident into every other context where an operator wanted internal liability partitions without the cost of separate LLCs. Twenty-five years in, the form has produced exactly one published bankruptcy decision (and that one in 2013), no federal tax regulation, one new Delaware form, one Uniform Act, and twenty state adoptions. It is also about to acquire its first federal reporting regime, and that regime is likely to be the most operationally consequential federal touchpoint the form has ever had.

The next twelve months will answer the CTA question. The proposed 7701 regs will probably not be finalized; they have outlasted three administrations by not being finalized, and the fourth is not signaling a change. What the series LLC looks like in June 2022 is going to be determined less by the IRS and more by FinCEN.

Sources

Keep reading

More from the journal.