Discussion:Single member LLC owning a SMLLC
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Discussion Forum Index --> Tax Questions --> Single member LLC owning a SMLLC
| 3 May 2007 | |
| At the end of the day, if an individual creates a sole member LLC which in turn creates one or more single member LLC's its my understanding the SMLLC can treat the sub LLC's as disregarded entities, but can the individual also treat the one SMLLC they are the member of as a disregarded entity? and would it matter what state the LLC's were formed in? i thought i recalled DE having some additional provisions for such a structure. | |
| 3 May 2007 | |
| If any or all of the SMLLC's want to be disregarded entities they can...it would be taxed as a sole proprietorship for any/all of them. Form the LLC in the state in which you reside or do business. Too much hoopla is over DE being the place to form business entities. If the person resides in CA and does business in CA, then they are still going to be taxed on CA income no matter where they are organized. | |
| 3 May 2007 | |
| Delaware and a handful of other states allow the formation of "series" LLCs, whereby a single LLC can isolate certain assets in lower-tier series LLCs. That's probably what Jalm remembers. A series LLC is a single LLC that has separate allocations of assets, each within its own series. So, in order to isolate certain properties or activities from claims by creditors of other properties or activities within the LLC, each property or activity is placed in a separate series, like a subsidiary. Thus Master LLC may have three series; Series A holds Property X, Series B holds Property Y, and Series C holds Property Z. Let's say Bewitched, Bothered and Bemildred (the three little bats from Walt Kelly's Pogo, if anybody remembers <G>) are members of the Master LLC. Bewitched owns a 100% interest in Series A, Bothered owns a 100% interest in Series B, and Bemildred owns 100% interest in Series C.
So, is this one LLC or three--or four? The California Franchise Tax Board has stated that it will treat each series as a separate business entity, subject to its own minimum tax and fee, if (1) the holders of interest in each series are limited to the assets of that series upon liquidation, redemption or termination, and may share in the income of only that series; and (2) under state law, the payment of the expenses, charges and liabilities of each series is limited to the assets of that series. Unless both of these requirements are met, the series will be treated as a single LLC for California tax purposes. See http://www.ftb.ca.gov/forms/misc/3556.pdf Presumably, if only Property X is located in California, only Bewitched would have California source income arising from the series. If all of the interest in all of the series is held by a single individual, it seems unlikely that the requirements would be met to treat each series as a separate LLC for tax purposes. As a result, probably the Master LLC would be treated as a single LLC and if any of the series is doing business in California, the Master LLC would be subject to the minimum tax and fee. The income of the series would be reported on the single member's 1040, on Schedule C (or E if it is rental properties, or F if farm operations). On the other hand, if the activity is structured as Jalm describes it, with a SMLLC owning several subsidiary SMLLCs, each of those SMLLCs would be treated as a separate entity subject to its own minimum tax and LLC fee (assuming each of the SMLLCs was doing business in California). It is not clear, as far as I know, how these series LLCs are going to be treated for federal income tax purposes. The FTB's approach has been to clarify the circumstances under which each series will be treated separately for state minimum tax and fee purposes. Of course Sandy is correct in saying that the states where the properties or activities are located will tax the income, regardless of the state in which the LLCs are organized. However, if you are doing business in California or other states that impose minimum fees or taxes on LLCs, organizing a series LLC in Delaware may save you money if it can be treated as a single entity. | |
| 3 May 2007 | |
| Wow, thanks for the great info on series LLCs Katie! I enjoy reading your posts...always so much useful material especially on state/local taxation! (Not sure who Walt Kelly is though...) | |
| 3 May 2007 | |
| Pogo was an Opossum from the Okefenokie swamp. His famous quote is something like "We have met the enemy, and the enemy is US." | |
| 3 May 2007 | |
| Hmm...never seen the Pogo comic strip until now but the style reminds me a lot of Calvin & Hobbes (which is great). | |
| 4 May 2007 | |
| KatieJ and sandysea thank you both for the information. it was the series LLCs that i was thinking about, but not exactly what i was looking for (subsidiary treatment rather then just asset allocation) and as you seem to have mentioned, if the master is a single member LLC then there doesn't appear to be any advantage in a series LLC. Thanks again. | |
| 6 May 2007 | |
| Commodore Perry: "We have met the enemy, and he is ours."
Pogo: "We have met the enemy, and he is us." Pogo's version wears well. Just think of global warming. Jalm, just be careful with the state tax treatment of your SMLCCs. Multiple SMLLCs would certainly be a problem in California, because if all of them were doing business in California, each would be subject to its own $800 minimum tax, whereas a series would probably pay it only once. I think, but I'm not sure, that CA is the only state where you would have that kind of problem. Just be sure to check. | |
