The main areas of legal uncertainty involve taxation, bankruptcy, and doing business in multiple states. Due to their relative infancy, not much case law exists regarding Series LLCs in general and Texas Series LLCs in particular, so hard and fast answers will be hard to come by until issues arise and are litigated. This is not a structure for a company looking for definite answers on taxation, liability, or asset protection issues.

Tax Uncertainties

Ask your CPA, many tax questions with regard to series LLCs remain unanswered. So far, the IRS has only issued one Private Letter Ruling in 2008 that clarified that each series’ federal tax characterization is determined independently. Many other state and federal tax questions remain unanswered.

Bankruptcy Uncertainties

It is unclear whether an LLC series will be treated as a debtor in federal bankruptcy court, or whether the bankruptcy court will ignore the series and only consider the entire LLC. The result may depend on whether the relevant state law will treat the series as a separate entity with its own liability shield, but at this point nobody knows.

Uncertainties About Doing Business in Other States

Including Texas there are now only 8 states with LLC acts that authorize Series LLCs, leaving 42 states without Series LLC provisions on their books. It is uncertain how the courts in a non-series state would react to a claim by a local creditor against an out-of-state series LLC. Will the non-series state honor the series structure and respect the series liability shield? Will a non-series state even allow an out-of-state series LLC to register as a foreign entity?

Not Endorsed by the ABA

The American Bar Association’s (ABA) National Conference of Commissioners on Uniform State Laws spent three years examining proposed changes regarding Series LLCs. During these studies they noted that the Series LLC originated in Delaware for use in mutual fund and structured finance transactions, which prompted them to publicly state:

“What’s good for Delaware and highly sophisticated deals is not necessarily good for the LLC law of other states. A philosophy that works wonders for ‘high end’ transactions may be bad medicine for the thousands of more prosaic but nonetheless important closely held businesses that choose to house themselves within the LLCs.”