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Editorial 9 MIN READ

The series LLC, revisited: eight months later

Illinois cut its fees, Treasury left the regs proposed, and TCJA gave every series its own 199A question to answer

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 7 sections
  1. Illinois cut the price of entry
  2. The 2010 regulations are, still, proposed
  3. TCJA made every series a 199A question
  4. The state map, as of this month
  5. Bankruptcy: still the unanswered question
  6. Who this form is still for in March 2018
  7. Sources

he series LLC in March 2018 is a form the states keep adopting, the Treasury keeps not finalizing, and the bankruptcy courts keep not deciding. In the eight months since we last looked at this structure, the single useful development is that Illinois made its version markedly cheaper. The structural questions around it have not moved at all.

This is a revisit, not a replacement. For the longer argument about what a series LLC is and why its twenty-year statutory history has not produced doctrinal certainty, see the series LLC, a decade in. The question here is what has changed between July 2017 and this filing season, and the honest answer is: the fees, the tax overlay, and nothing else.

Illinois cut the price of entry

The single biggest operational change in the series LLC world over the last eight months happened in Springfield. Public Act 100-0571, signed by Governor Rauner on December 20, 2017 and effective immediately, rewrote the fee schedule in 805 ILCS 180. The articles of organization fee fell from $500 to $150 for an ordinary Illinois LLC. The annual report fee fell from $250 to $75. The articles of organization fee for a series LLC fell from $750 to $400. Each certificate of designation filed under 805 ILCS 180/37-40 remains $50, and the annual report adds $50 for each series in effect on the last day of the third month preceding the anniversary month.

For the investor who holds ten rental properties as separate Illinois series, the pre-reduction entry cost was $750 for the parent plus $500 in certificates of designation, and the annual bill was $250 plus $500. The same structure under the current schedule costs $400 up front plus $500 in certificates, with an annual bill of $75 plus $500. Two bills that used to run close to a thousand dollars each have been cut to the high hundreds, and Illinois is no longer in the running for the highest-fee state in the country.

This matters for two reasons. First, Illinois had been the second-most adopted series jurisdiction after Delaware, and the price differential was the only reason a cost-sensitive filer would prefer Delaware for a domestic Illinois real-estate portfolio. That pressure is now gone. Second, the 2011 Illinois amendments had already made the state's series LLC the best-documented of any adopter, with a separate certificate of designation for each series that creates something very close to a public filing for each cell. Combined with the new price, an Illinois series is now the jurisdiction with the most defensible segregation at the lowest all-in cost for a domestic operator.

The 2010 regulations are, still, proposed

Treasury and the IRS released REG-119921-09 on September 14, 2010, proposing that each series of a domestic series LLC be treated as a separate entity for federal tax purposes. Seven and a half years later, those regulations remain proposed. They were carried on the Priority Guidance Plan through the 2016-2017 cycle and are not a named project on the 2017-2018 plan released in October, which was the first plan issued under the administration's regulatory review posture and Executive Order 13789. The practical effect is that series LLCs remain in the same in-between posture they have occupied since the proposal: taxpayers may rely on the proposed rules, most do, and there is no finalized regulatory text to cite against an auditor who decides to disagree.

For a sophisticated planner this is an old problem. For a client forming this quarter it is worth naming. If your series LLC's federal tax position depends on the proposed regulations treating each series as its own taxpayer, the Treasury has been silent on that position since the Obama administration, and no one is predicting finalization in the current calendar year.

TCJA made every series a 199A question

The Tax Cuts and Jobs Act, signed December 22, 2017, added new Section 199A, which allows a deduction of up to 20 percent of qualified business income from a pass-through trade or business for tax years beginning after December 31, 2017. Section 199A sunsets at the end of 2025. For a pass-through owner in the 37 percent bracket, the deduction reduces the effective top rate on qualifying income to 29.6 percent.

For a series LLC that has been relying on the 2010 proposed regulations to treat each series as a separate entity, 199A puts pressure on a structural question that used to be academic. If each series is its own pass-through for federal tax purposes, then each series has its own qualified business income, its own specified-service-trade-or- business classification, and its own wage-and-capital limitation under the threshold phase-in. A real-estate series LLC with fifteen rental cells has fifteen 199A calculations to run, and the aggregation rules, which Treasury has signaled it will address in forthcoming guidance but has not yet issued, will matter to how the deduction actually lands. The statutory text at Section 199A(d)(2) defines qualified trade or business by exclusion rather than definition, and the specified-service-trade-or-business carve-out above the $157,500 single and $315,000 joint thresholds is the tripwire for professional practitioners who had considered putting each line of service in its own series.

For the rental-property use case, which is the cleanest series LLC application, the 199A question is whether a triple-net rental qualifies as a trade or business at all under Section 162 case law, which is a question the regulations may or may not resolve and which existed before TCJA. The new deduction raises the stakes of the question without answering it. For a series fund running active operations through each cell, 199A is a meaningful planning benefit if each series is respected as its own pass-through. For a holding series whose sole activity is collecting rent on a single property, the trade-or-business test applies to each series individually, and one series may qualify while another does not.

A planner advising on a new series formation this filing season is budgeting for rulemaking that has not issued. The safest assumption is that each series will be tested on its own facts, which is consistent with the 2010 proposed regulations, and that the aggregation rules when they come will look a great deal like the aggregation rules Treasury has applied to commonly controlled businesses elsewhere in the Code. That is a defensible position to take now. It is not the same as authority.

The state map, as of this month

Eighteen jurisdictions in the United States now have some form of series LLC statute on the books. The core group from last summer, Delaware (6 Del. C. § 18-215), Illinois (805 ILCS 180/37-40), Iowa, Kansas, Missouri, Montana, Nevada, Oklahoma, Tennessee (Tenn. Code Ann. § 48-249-309), Texas (Tex. Bus. Orgs. Code § 101.601), Utah, and Wisconsin, is unchanged in its mechanics. The District of Columbia's 2011 statute remains in force. Alabama's series provisions, which were part of the 2014 rewrite of Title 10A of the Alabama Business and Nonprofit Entities Code at Chapter 5A, Article 11, are now fully bedded in. Indiana added its statute in 2016. Puerto Rico enacted a series provision in its 2017 General Corporations Act revisions, which took effect this year.

The continuing problem is that no two of these statutes are identical. Delaware remains the terse version that leaves almost everything to the operating agreement. Illinois is the public-filing version that treats each series as something much closer to a separately chartered entity. Texas splits the difference. Alabama's Article 11 approach, modeled on the ULLCA series draft circulating when the 2014 code was written, requires a public statement of limitation on liabilities of a series but not a separate certificate for each series. A practitioner competent in one of these regimes is not automatically competent in any other, and a multi-state operator whose series hold property in a non-series state is, as before, in the territory where full-faith-and-credit arguments run into state sovereignty over real property.

Bankruptcy: still the unanswered question

The bankruptcy posture of series LLCs has not meaningfully moved since the last piece. The most-cited reference case remains In re Dominion Ventures, LLC, 1:11-bk-12282 (Bankr. D. Del.), where the management LLC filed for Chapter 11 and creditors of individual series argued that the debtor's sale proposals violated the operating agreements that defined the series structure. The case is seven years old and it is still the leading data point, which itself says something. No circuit-level opinion has addressed whether a series can be a debtor in its own right under Section 101(41) of the Bankruptcy Code, whether a parent filing sweeps the series into the estate under Section 541, or whether the internal liability shield survives substantive consolidation.

The secondary literature has kept advancing the argument in both directions. The Emory Bankruptcy Developments Journal and the American Bar Association Business Law Today piece by Michelle Harner remain the fullest statements of the skeptical case, and no published opinion has come along to overturn them. What has come along is a general deepening of the Third Circuit's substantive consolidation doctrine in cases like In re Owens Corning, 419 F.3d 195 (3d Cir. 2005), which remains the governing framework, and a bankruptcy bar that has gotten more comfortable structuring around the series question by simply not using the form when the deal involves institutional debt. Loan documents continue to prefer standalone single-purpose entities. Title insurance underwriters continue to ask for parent-level guarantees that collapse the shield in practice. None of this is new. All of it continues.

Who this form is still for in March 2018

Nothing in the last eight months changes the core conclusion from last summer. The series LLC is a useful tool for a domestic real-estate operator holding multiple properties within a series-recognizing state, and a speculative choice for anyone whose risks are large enough to end up in a bankruptcy court or a non-recognizing forum. What has changed is the arithmetic for one state and the federal tax overlay for everyone.

For an Illinois operator forming this quarter, the lower fee schedule plus the better-documented segregation makes the Illinois series a sharper option than it was in December. For a Delaware operator, the old calculus still applies, with the added twist that 199A planning depends on proposed regulations the Treasury has not finalized in seven and a half years and a statutory deduction the IRS has not yet written rules for. For an operator in any non-series state that holds property in a non-series forum, the foreign-state question remains the one that decides the case, and that question is not closer to an answer than it was last summer.

If you formed a series LLC between July 2017 and today and your CPA has not yet walked through the 199A interaction with you, that is the first call to make this week. If you are forming this quarter, the Illinois arithmetic is now better than the Delaware arithmetic for a domestic in-state portfolio, and that is a sentence that was not true ninety days ago.

Sources

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