The last time financial advisors had to bone up on their knowledge of new business organizations was in the early 1990s, when LLCs were taking the American business scene by storm.

It's not hard to see why. Here was a vehicle that could protect its owners from personal liability, as in a corporation, but with a partnership's freedom from onerous regulatory requirements. Still, traditional LLCs have a significant drawback: inside liability. If a single LLC holds all of a business's assets and conducts all of its operations, then the business and all of its assets generally will be exposed to creditors wherever any of its elements operate. So for many years, savvy executives often have created numerous separate LLCs to hold different company assets and conduct various business operations. This is all well and good for large firms that have sophisticated accounting departments to handle the regulatory filings for each separate LLC and that have the revenue to pay all of the extra franchise taxes and fees. But, of course, smaller businesses (some of which might be your clients) don't enjoy these advantages. For these smaller firms, dealing with the filings and fees of many separate LLCs can be a hefty burden. This is especially the case for businesses such as real estate holding companies that need to establish many traditional LLCs to achieve effective liability protection.

So during the last few years, a potential successor to the traditional LLC has emerged: the series LLC. First pioneered in Delaware in 1996, where they were created partly at the behest of mutual fund managers, these structures have now been adopted in other states such as Iowa,
Nevada, Oklahoma, Tennessee, Illinois and Utah, and wherever they're found, they work in substantially the same way.

In a series LLC, a "master" LLC effectively clones itself to create numerous different "cells" or "series." Each of these is explicitly the same entity as the master, with the ability to hold assets, sue and be sued, and otherwise conduct business as a separate entity for most purposes.

However, when operating in-state, only the master needs to file state tax returns, pay franchise taxes or comply with most regulatory filing requirements. Meanwhile, the assets within each separate series are protected from creditors and can have different slates of managers as well. They can be easily created and abolished without affecting the status of the other series or the master.

At the same time, series LLCs retain all of the special structural advantages enjoyed by traditional LLCs. For instance, under the IRS' "check the box" classification scheme, they can choose to be taxed as corporations (either "C" or "S"), sole proprietorships, or partnerships. As long as they don't elect to be taxed as a "C" corporation, they aren't subject to the double taxation, that is to say, the payment of income taxes on profits that are ultimately distributed to owners as taxable dividends. Investors can also benefit directly. "As long as the LLC is taxed as a partnership or as a sole proprietorship, the offsetting of gains and losses is not an issue-at least for federal tax purposes," explains Robert Geurden, a partner with the Needham, Mass., tax firm Brier & Geurden LLP.

It doesn't take much to realize these benefits. All accounting departments need to do is keep separate records and make sure each series's assets are held and accounted for separately from those of its siblings.

The result has many tax experts intrigued. "You put the price tag on how much time and effort you save," says Domingo Such, a partner in the Chicago office of McDermott, Will & Emery LLP. "But whatever the number, the administrative costs of maintaining, say, ten to 20 traditional LLCs, which is a number we're often talking about, must be much less than the costs of maintaining one master LLC with ten to 20 series."

Others are not so sure. "People look at series LLCs as some kind of panacea because they don't like filing fees for multiple LLCs," says Ameek Ashok Ponda, a tax partner in the Boston office of law firm Sullivan & Worcester LLP. "But for the vast majority of companies, certainty and clarity are much more important than the limited savings."

Unquestionably, because series LLCs are so new, many uncertainties remain about how they will work in practice.
For instance, it wasn't until early this year that the IRS suggested it would treat each series of an LLC as a separate taxable entity, even where state law designates the master as the only one. And it is not entirely clear that the series LLC's liability shield will be respected by the bankruptcy courts, where these business structures remain largely untested.