Ask HN: Series LLC vs individual LLCs?
5 comments
<Anecdotally> I've formed three series LLCs (one in IL and two in DE.) The first two times, they were basically used to register investment fund families so that each individual fund didn't have to be registered. We saved a significant amount of time and money in the long run, but we used legal and tax professionals that have expertise in using series LLCs for EXACTLY that purpose. The team had securities attorneys and compliance officers triple-checking our work and we were using it for much more than just saving on basic filing fees, etc. I would estimate we saved in the hundreds of thousands of dollars. But it was a very specific use case, and there have been many mutual fund/investment companies that have went before us and tested the boundaries.
The last time I formed a series LLC it was for almost exactly what you are proposing - a consulting firm/startup incubation company. I just went with my gut feeling based on what I had read on the internet and my prior experience with the fund companies. I had the series LLC formed by an attorney with series LLC experience in DE. I think I paid under $700 for the formation. Overall, it has been a HUGE mistake. The costs and hassles of keeping up the separation of the series (separate bank accounts, separate accounting systems, etc.) has been a pain and has far outweighed any of the benefits gained. In fact, it has been a pain just trying to do simple things like open a bank account for series companies here in IL. Bank officers are not familiar with series LLCs and their systems aren't set up for that, so I was issued company credit cards that have the wrong name on them, checks with the wrong name on them, etc. Branding is a nightmare if you comply with the letter of the law in some states. I just really didn't know what I was getting myself into for this usage scenario. I will most likely have to restructure the companies in the near future for various reasons...probably at significant expense.
As others have said, the series LLC form is not as well-known by the public or as legally tested as other entities. You really should have a great reason for choosing a series structure before you do so, and you should definitely speak with a tax attorney or accountant that has experience in this area. Some of the pros and cons are very easy to misunderstand. If I were doing it again, I would personally NOT use a series LLC for an incubator/consulting arrangement.
The last time I formed a series LLC it was for almost exactly what you are proposing - a consulting firm/startup incubation company. I just went with my gut feeling based on what I had read on the internet and my prior experience with the fund companies. I had the series LLC formed by an attorney with series LLC experience in DE. I think I paid under $700 for the formation. Overall, it has been a HUGE mistake. The costs and hassles of keeping up the separation of the series (separate bank accounts, separate accounting systems, etc.) has been a pain and has far outweighed any of the benefits gained. In fact, it has been a pain just trying to do simple things like open a bank account for series companies here in IL. Bank officers are not familiar with series LLCs and their systems aren't set up for that, so I was issued company credit cards that have the wrong name on them, checks with the wrong name on them, etc. Branding is a nightmare if you comply with the letter of the law in some states. I just really didn't know what I was getting myself into for this usage scenario. I will most likely have to restructure the companies in the near future for various reasons...probably at significant expense.
As others have said, the series LLC form is not as well-known by the public or as legally tested as other entities. You really should have a great reason for choosing a series structure before you do so, and you should definitely speak with a tax attorney or accountant that has experience in this area. Some of the pros and cons are very easy to misunderstand. If I were doing it again, I would personally NOT use a series LLC for an incubator/consulting arrangement.
I'm a tax accountant and I can give you some insight into the tax aspect of the equation.
1. I don't think that an LLC is the correct legal entity you should be considering for your consulting arm because of self-employment tax. Many people forget that self employment tax is an expensive cost that could be avoided. You should be incorporating an S Corp to plan around the 15.3% tax. You're getting all the same benefits effectively except you'll pay less taxes.
2. I question the value of a series llc because it is a new tax entity and unproven in a number of courts. When selecting a legal entity, you don't want the new and sexy because you want security and predictability.
Having standard llcs would allow you to be sure of the legal ramifications because it is an entity that every state generally recognizes as opposed to the series llc. Also, a lot of the tax circumstances are going to be questionable because we can't be sure of their consequences.
If you're worried about filing taxes and the paper work then you could simply create a tax structure that avoids these additional returns. LLCs allow you to check the box and select passthrough tax treatment for partnerships or corporate taxes to be levied against the entity's income. Also, single member llcs are disregarded for tax purposes but retain their legal status so you could potentially avoid a number of returns.
I hope that this helps.
1. I don't think that an LLC is the correct legal entity you should be considering for your consulting arm because of self-employment tax. Many people forget that self employment tax is an expensive cost that could be avoided. You should be incorporating an S Corp to plan around the 15.3% tax. You're getting all the same benefits effectively except you'll pay less taxes.
2. I question the value of a series llc because it is a new tax entity and unproven in a number of courts. When selecting a legal entity, you don't want the new and sexy because you want security and predictability.
Having standard llcs would allow you to be sure of the legal ramifications because it is an entity that every state generally recognizes as opposed to the series llc. Also, a lot of the tax circumstances are going to be questionable because we can't be sure of their consequences.
If you're worried about filing taxes and the paper work then you could simply create a tax structure that avoids these additional returns. LLCs allow you to check the box and select passthrough tax treatment for partnerships or corporate taxes to be levied against the entity's income. Also, single member llcs are disregarded for tax purposes but retain their legal status so you could potentially avoid a number of returns.
I hope that this helps.
1. Not entirely correct. In most states, S Corporations pay more taxes on their income than do LLCs. Also, you don't avoid paying the self-employment tax; you just pay it in a different way, as payroll and other taxes through the S Corporation. In many states, taxes incidental to the employee relationship will end up exceeding the self-employment tax. Moreover, wages paid through an S Corporation cannot be characterized as capital gain (15% rate vs. higher), whereas income earned from an LLC can be capital gain.
Also, the S Corporation has significant restrictions. The most important is that only US citizens/legal residents can be investors. If any of the restrictions is not met, the S Corporation will be taxed as a C Corporation, resulting in double taxation of income.
2. I agree; the only benefit of a series LLC is avoiding the administrative costs of forming multiple LLCs. Unfortunately, the accounting costs and hassles for a series LLC will more than swallow up the (relatively small) administrative savings. Also, the series LLC is not a new form; it's just an extension of the sub-partnership concept and will be taxed the same way. (If the corporate tax structure is selected, it each new LLC in the series will be treated as a subsidiary.)
If you're worried about filing taxes, just choose the simplest form. The tax code is very simple as long as you don't try to play games with it.
2. I agree; the only benefit of a series LLC is avoiding the administrative costs of forming multiple LLCs. Unfortunately, the accounting costs and hassles for a series LLC will more than swallow up the (relatively small) administrative savings. Also, the series LLC is not a new form; it's just an extension of the sub-partnership concept and will be taxed the same way. (If the corporate tax structure is selected, it each new LLC in the series will be treated as a subsidiary.)
If you're worried about filing taxes, just choose the simplest form. The tax code is very simple as long as you don't try to play games with it.
I think I'm having a difficult time understanding your logic. An S-Corporation is a passthrough tax entity that doesn't pay tax on a corporate level. The income is paid on the 1040 tax return with a K1. Thus, I don't see how the S-Corp would lead to a tax that is any different than a LLC. Its effectively the same tax treatment in this case except that there is the ability to lower SE Tax.
By paying a reasonable wage to the owner, the net income would be distributed as a dividend which is not self-employment income and thus would be exempt from SE Tax.
Also, wages paid to an owner/employee of an S-Corporation is not required to pay FUTA (unemployment) and etc, thus the only tax that you'd be required to pay is FICA and Medicare just like everyone else.
Clearly, the S Corp has a number of restrictions which ties in well with the fact that an S Corp is a "small corporation" But, for small or new companies that aren't getting major funding, this is a great option.
By paying a reasonable wage to the owner, the net income would be distributed as a dividend which is not self-employment income and thus would be exempt from SE Tax.
Also, wages paid to an owner/employee of an S-Corporation is not required to pay FUTA (unemployment) and etc, thus the only tax that you'd be required to pay is FICA and Medicare just like everyone else.
Clearly, the S Corp has a number of restrictions which ties in well with the fact that an S Corp is a "small corporation" But, for small or new companies that aren't getting major funding, this is a great option.
IANAL nor an Accountant, but if my understanding is correct the administrative burden can be lower, costs can be much lower, and there may be some tax benefits.
Ultimately, it's going to depend on the state's laws where you're filing for the Series LLC. My state (CT), for example, does not recognize or allow for the formation of these types of LLCs.
Here is a blog post published by a law group that specifically focuses on the Series LLC in your state, Illinois. (That is, assuming your Twitter location is current.)
http://www.acumenlawgroup.com/publication-categories/busines...
Ultimately, it's going to depend on the state's laws where you're filing for the Series LLC. My state (CT), for example, does not recognize or allow for the formation of these types of LLCs.
Here is a blog post published by a law group that specifically focuses on the Series LLC in your state, Illinois. (That is, assuming your Twitter location is current.)
http://www.acumenlawgroup.com/publication-categories/busines...
You may want to consider starting an S-corp (mainly for the self-employment tax savings) to be used as the management company.
You can then create individual LLCs as you see fit.
Your S-corp will invoice the LLC's for a management fee; and you pay yourself out of the S-corp. Be sure to recognize the tax benefits of distributions from your S-corp.
You can then create individual LLCs as you see fit.
Your S-corp will invoice the LLC's for a management fee; and you pay yourself out of the S-corp. Be sure to recognize the tax benefits of distributions from your S-corp.
There are horror stories about people who have tried to recategorize their income as distributions on top of nominal below-market salaries in order to avoid self-employment tax. It doesn't seem worth it.
This doesn't avoid the (federal) self-employment tax, since you still have LLCs in the mix and the owners would pay taxes on their LLC income. Also, you end up with worse taxation at the state level. (Why does everyone forget state taxation? Only a few states don't have income taxes.)
Also, assignment of income (by the LLCs to the S Corp) would not prevent the IRS from taxing the LLCs on the income. If it did, everyone would do this and this would be the recommended tax structure for every multiple-project business.
Finally, when dealing with related entities (businesses which have the same owners), the IRS has significant leeway under the law to disregard the form of transactions and tax based on the economic substance of what is really going on. Which means the IRS could disregard the S Corporation entirely.
Also, assignment of income (by the LLCs to the S Corp) would not prevent the IRS from taxing the LLCs on the income. If it did, everyone would do this and this would be the recommended tax structure for every multiple-project business.
Finally, when dealing with related entities (businesses which have the same owners), the IRS has significant leeway under the law to disregard the form of transactions and tax based on the economic substance of what is really going on. Which means the IRS could disregard the S Corporation entirely.
a tax accountant or lawyer for the USA will tell you that the IRS is cracking down on consultants in the programming area who do consulting work under corporations as they want to attempt to get full taxes..main reason why recruiting firms are so prevalent in the USA.
Check with your local accountant/lawyer as you may be in a state that has not been targeted by the IRS. IL is one that is targeted whereas IN currently is not targeted for example..
Check with your local accountant/lawyer as you may be in a state that has not been targeted by the IRS. IL is one that is targeted whereas IN currently is not targeted for example..
I don't understand this at all. Are you saying that consultancies cannot form an LLC or that consultancies that do are being scrutinised more by the IRS at this time?
He's saying that any consultancy, however structured, will be disregarded if its consultants perform too much of their work for a single client over the course of its tax year.
The IRS' reasoning is that the consultancy is just a way for the client to avoid paying payroll taxes and other taxes incident to the employee relationship.
The result to the client: a deficiency for not paying those taxes. The result to the consultancy: a deficiency for taking now-inapplicable deductions or for paying the wrong type of taxes. Yes, its silly, but that's the way the tax code works...
The IRS' reasoning is that the consultancy is just a way for the client to avoid paying payroll taxes and other taxes incident to the employee relationship.
The result to the client: a deficiency for not paying those taxes. The result to the consultancy: a deficiency for taking now-inapplicable deductions or for paying the wrong type of taxes. Yes, its silly, but that's the way the tax code works...
Our company will have a consulting/contracting arm and incubate + launch new products (websites/apps).
While the looseness of LLC operating agreements would allow everything to be bundled into one LLC (and profit share + ownership of individual products/projects be defined in the operating agreement via "special allocations"), I think it would be easier to break up certain operations/products/initiatives into separate LLCs.
Series LLC's seem perfect for what we are trying to do, but I'm unsure about what the advantages/disadvantages are of a Series LLC vs opening multiple individual LLCs.
Fees? Taxes? Ease of opening new LLC's? How does ownership of the parent LLC affect management/ownership of the child LLC's?
If anyone can refer/recommend a good lawyer/consultant, I'd love to speak to an expert.
http://en.wikipedia.org/wiki/Series_LLC
http://www.limitedliabilitycompanycenter.com/series_llc.html
http://www.mayer-riser.com/Articles/business/seriesllc.htm