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10 Reasons Not to Use Series
Despite the apparent attractiveness of series organizations, on balance, there are usually more reasons to avoid them rather than to use them. Here are just a few:
1. Financing may be made more difficult due to lender unfamiliarity with series structures.
2. Licenses and permits issued by governmental authorities may be more difficult to obtain due to bureaucratic unfamiliarity with series structures.
3. Insurance coverage gaps may occur due to insufficient policy boilerplate and missteps in properly communicating insured parties.
Levenfeld Pearlstein, LLC March 26, 2015 2
10 Reasons Not to Use Series (cont’d)
4. Heightened risk of consolidation in a bankruptcy setting due to absence of case law
5. Possible lack of limited liability when doing business in jurisdictions that do not have series laws.
6. General unfamiliarity by transactional counterparties can result in increased transaction costs (e.g., when a series is selling real estate, having to negotiate demands for guarantees by other series, dealing with gaps in title, etc.).
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10 Reasons Not to Use Series (cont’d)
7. Employment and tort claims are more likely to “infect” affiliated series than separately organized affiliates due to a lack of case law and possible jury bias that a series may be just a dodge.
8. Lack of clarity in the tax treatment of certain series organizations. See flowchart on next slide for the numerous ways a series organization can be viewed for tax purposes.
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10 Reasons Not to Use Series (cont’d)
9. Difficulty of documentation. While forming a series organization is not difficult, drafting proper operating agreements for a series organization or individual series can be more complex and costly, with greater risk of defects in buy-sell and governance arrangements.
10. And most of all, the client who is motivated to use series mainly to save annual filing fees is the client most likely to shortcut formalities, resulting in increased vulnerability to “piercing of the corporate veil” or confusion in identifying the correct parties. - The client who searches hard to save the last dollar is often the client
most likely to parcel out blame for the consequences.
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10 Reasons Not to Use Series (cont’d)
For these and other reasons, and despite having been an early
user of series organizations, we tend to reject them more than we
use them.
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Where to use ?
• In the middle market, series organizations are used to achieve greater flexibility in the migration of assets to different series or to simplify the implementation of complex tax planning structures
• We also like to use a series within the context of family limited liability companies, as estate planning can be done on a series by series basis.- For example, if a family limited liability company has exchange traded equities,
bonds and real estate within one family LLC platform, we may want to do gifting with the equities and real estate (which have more potential for appreciation) and not with the bonds (which may not be as likely to appreciate meaningfully).
• Series organizations have also been used in segments of the financial services industry and by insurance companies
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Tax Treatment of Series
• In Fall of 2010, the Internal Revenue Service issued proposed regulations on series organizations
• Although the proposed regulations do not answer all questions, they provide a sensible framework for analyzing whether the series organization or a particular series is a separate tax partnership or a disregarded entity.
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What do Series LLCs Look Like?
• While the proposed regulations provide useful tax guidance, one should not think that all is now clear in the world of series organizations
• Before coming to a tax issue, consider all the types of ownership structures one can have with a series organization
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Refer back to this chart that displays several iterations of series organizations with different tax results.
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Too Much of a Good Thing
• In terms of external commercial dealings, there continues to be considerable confusion about series organizations.
• An example is financing. In an already tight financing market, the ability to finance individual properties in separate series can be more difficult.- A sophisticated lender with sophisticated counsel can get to the right
place, whereas a less sophisticated lender with counsel who is not familiar with series organizations may overreach and demand other properties in the series organization as additional collateral.
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Too Much of a Good Thing (cont’d)
• One of the more common reasons given for using the series organization is that it saves costs of forming separate LLCs.
• That is partly true:- Illinois filing fees for an LLC that is authorized to create series is
somewhat higher than the filing fees for an ordinary LLC.- Each series that is formed involves a separate filing fee.
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Too Much of a Good Thing (cont’d)
• One must be realistic in assessing whether the apparent savings in filing fees are outweighed by the additional time and costs of setting up a proper series operating agreement, dealing with the attendant tax issues and the various commercial challenges that those series will face in the marketplace.
• The client who insists upon series organizations just to save on filing fees is often being penny wise and pound foolish.
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