Part 2 of 2: Would a New Jersey Court Accept a “Series LLC?”
I went back to the drawing board later that night to find out how New Jersey is handling the situation. Would a New Jersey court accept a Series LLC? New Jersey has not adopted a series limited liability company statute, so the answer is not entirely clear, although it is not uncommon for New Jersey courts to apply Delaware’s state of formation law to corporate, partnership and limited liability company issues. I told my colleague this information the next day, and a little twinkle in his eye started to show. There was hope for his accounting nightmare yet.
There are other questions that can arise from the formation of a Series LLC. For example, could a series file for bankruptcy? It is arguable that a Series LLC is a separate person, and therefore can file for bankruptcy apart from another series. If the classification of a series is separate from another, some suggest that this distinction is enough to file. Currently, courts are ordering interest held by one debtor in a normal LLC to be used to satisfy a judgment. Would this be the same case for a Series LLC? This question proved a very difficult one, so I decided to send an email to my other colleague
, who is referred by everyone at the office as “the bankruptcy guru”. I will be sure to let everyone know what he finds out about this Series LLC issue.
When it comes down to the management of each separate series, there are no set answers. This allows a lot of flexibility for those who are using this method, but also poses some difficulties, distinguishing the number of issues to consider being among them. It makes sense to use a Series LLC structure when there are fewer interests or members to consider.
As far as the tax classification of the series, regulations do not rely on state law and make the determination on whether series are separate entities by using federal principles. Regulations require that underlying state statutes must give the members rights, powers or duties with respect to the series. The series must have separate rights, powers or duties, with respect to property or obligations. The assets and liabilities of a series must be separated from another series…
The conclusion seems to be that the IRS will treat a Series LLC as a separate legal entity as long as it does not lack a business purpose or activity, other than tax avoidance (naturally).