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.  

But perhaps the greatest uncertainties occur at the state level. It's fairly easy for series LLCs organized in one state to operate in another state-it usually requires only an application to state regulators and a small filing fee. However, once a series begins to operate within a state, it generally becomes subject to that state's laws, which can pose significant problems in a state without a series LLC statute. Internal organization usually wouldn't be affected, which means disputes between members about how the LLC is owned or operated would still be decided according to the laws of the master's home state. But when the series LLC is in a dispute with creditors and third parties, only a few state courts have established definitively that the liability shield will work as advertised. And state regulatory authorities may not play ball either. Perhaps the biggest roadblock to the spread of series LLCs was thrown up in 2005 by California's Franchise Tax Board, which said it would force all the separate series under a master LLC to file separate tax returns and pay separate $800 franchise taxes, effectively nullifying the main advantage series LLCs had over their more traditional cousins. The franchise board has since tentatively backed off from its tough stance, indicating that it could impose taxes on  the master LLC only if its various series have the same members or business purposes.
Nevertheless, the scare has convinced some that these structures aren't worth the hassle.

"Ultimately, we're not talking about materially substantial savings for the vast majority of firms," says Sullivan & Worcester's Ponda, who is also an adjunct professor with Boston University Law School's Graduate Tax Program. "I think that explains, to a large extent, why series LLCs have spread so slowly. By contrast, when traditional LLCs first came out in the '90s, everyone knew they were going to create a sea change that would affect everybody."

Still, many tax planners remain convinced that series LLCs are on their way up. "It's just a question of how long they take to get going," says McDermott's Such. "The trend is definitely towards more states adopting them, and as time goes on, things will become more certain."

Whether series LLCs are the wave of the future or mostly hype, financial advisors can expect to field more questions about them in the coming years, especially in states with high minimum franchise taxes or complicated regulatory requirements. In the meantime, advisors believe they could offer more significant savings than traditional LLCs in these areas:

Mutual funds. Series LLCs were born in large part because of the needs of the mutual fund industry, and they are especially useful there. Companies can create numerous, sometimes dozens, of custom funds catering to a particular asset type (like blue chip stocks) or industry type (like commodities or energy). It wouldn't be practical to have one master company handling all of these separate funds by itself, so separate LLCs are often used to handle them.

Real estate. Real estate holding companies often have large numbers of relatively small rental properties. These can be quite valuable in the aggregate, but worth much less (maybe only a few hundred thousand dollars) individually. By holding each property in its own individual series LLC, the company substantially shields each property from the liability of another. A company could also use one series to hold the real estate in which it operates, while the master series actually conducts operations.

Mergers and joint ventures. As an alternative to a traditional merger, companies that want to collaborate closely might form a common master LLC, and then each company can form separate series. LLC agreements are flexible, and they can be drafted to say which rights and responsibilities belong to the common master and which to the separate series. Thus the companies could, in a practical sense, be both the same and different entities. Moreover, for businesses interested in a less tight-knit relationship (such as an independent research lab and a large pharmaceutical company), series LLCs could allow a joint venture without forcing either entity to divulge confidential financial information to the other.

Equity compensation. Companies have long motivated employees by awarding them an interest in the business. Series LLCs could allow them to take the idea to a new level: If the interest is only in the employee's own division, held within its own series LLC, the employee's personal performance will have a much larger impact on his or her own personal equity interest. 

Venture capital. Venture capital projects can be extremely lucrative, but risky. By creating series LLCs to carry out particularly risky ventures, parent companies could protect themselves from liability without the costs of a traditional LLC.          

Michael Brier graduated from Princeton University and currently is in his second year at Boston College Law School.