Series LLC - Prop. Reg. 301.7701-1(a)(5)
September 20, 2010Administrative Actions
Series LLC, a relatively new structure, is available to U.S. funds who are seeking flexibility. This form was first introduced in Delaware and later was adopted by several other states including Illinois. The key highlight of the structure is that for state law purposes the LLC is a single entity, while for federal income tax law, each series of the LLC, purportedly, is treated as a separate entity. The apparent advantage of this set up is flexibility and reduction of organization and administrative cost. Separate series could be established for each portfolio company or each class of portfolio company (e.g. domestic, flow-through etc). Thus, investors can choose relatively easily what project to participate in. For example, instead of insisting on protective covenants or the formation of SPV below-the fund blocker companies, a foreign investor that is concerned with U.S. trade or business exposure, can simply choose to participate in those series that do not engage in the undesirable type of business. Since each series would likely be treated as a separate entity for U.S. tax law purposes, conceivably, the activities of that series would not spill over to the other series and expose the investors to income they did not like exposure to.
The most poignant issue until now has been the lack of clear-cut guidance. The U.S. Treasury Department is trying to resolve this the best it can. On September 14, 2010, it issued Prop. Reg. 301.7701-1(a)(5) (REG-119921-09). The regulation generally provides that Series LLC will be treated as an entity formed under local law. This was an attempt to clarify when a separate series in the LLC will be viewed as a separate entity for federal income tax purposes. Yet, this appears to be done in somewhat of a cryptic way. Treasury points out, "[t]he proposed regulations do not address the entity status or filing requirements of series organizations for Federal tax purposes. A series organization generally is an entity for local law purposes. An organization that is an entity for local law purposes generally is treated as an entity for Federal tax purposes." It remains to be seen in what form this regulation will be adopted, if any. Treasury expects comments.