There are a number of benefits to choosing a series LLC as your business structure. You get necessary liability protection, plus business flexibility. But what many business owners don’t think about before choosing to designate their business a Series LLC is the tax ramifications. Let’s dive in to find out everything you need to know about series LLC tax treatment.
Series LLC 101
Before we dive into taxes, here’s a quick refresher on what a series LLC is. A series LLC is a form of Limited Liability Company or LLC. A series LLC is unique in that it has a main or master LLC and a series of independent LLCs beneath it (in some ways, like a holding company). A series LLC can be made up of as many independent LLCs as you need.
Each entity in a series LLC has its own liability protection, name, financial records and managers and can enter into contracts without consulting the other LLCs. But, the governing documents of the main LLC apply to all LLCs within the series. Assets owned by one LLC are shielded from the risks of other series. This allows business owners to segregate risk without the cost of setting up totally new entities.
Forming a series LLC follows the same process as a typical LLC. The main difference is that the Articles of Organization must state that the LLC is authorized to form a series. The most common use of the series LLC business designation is for real estate businesses that hold a number of different properties.
Does the IRS Recognize Series LLC?
As we'll go into more detail below, there is no specific tax status for a series LLC. In 2010, the IRS determined that series LLCs would simply be treated as separate entities for federal income tax purposes, regardless of any state recognition.
Series LLC Tax Treatment
Series LLC tax reporting is similar to a traditional LLC. While each LLC within the series acts as a separate entity for governing and liability, when it comes to taxes, the series LLC is treated as a single entity and therefore submits just one tax return.
A series LLC, like an LLC, is considered a pass-through entity, so the earnings and losses of the series pass through to the main LLC. While each series can have a separate bank account, it’s not necessary. Every LLC in the series can share one bank account. Mixing funds for all businesses together may be a headache at tax time, though, so opening separate accounts may be the better choice.
As a pass-through entity, a series LLC owner can choose how they want to be taxed at the federal level, just like an LLC. This means choosing between tax designations such as partnership, corporation or disregarded entity, where the taxes will be on the owner's personal tax return.
While some information is known about how series LLCs are taxed, not everything has been litigated in a court of law and is therefore unknown or uncertain. Since a series LLC is a state and not a federal designation, it’s important to break down taxes based on the state and federal levels.
State Taxes as a Series LLC
Since the series LLC is a state designation and not federal, the tax regulations for series LLCs vary from state to state. As well, tax regulations around series LLCs are changing as the entity is being used more.
For example, a series LLC that operates in California may be required to pay the LLC annual tax and file a tax return for each LLC in the series. In comparison, a series LLC in Texas is considered a single entity for franchise tax purposes.
As these laws fluctuate, your series LLC business may benefit from the help of a knowledgeable small business accountant.
Federal Taxes as a Series LLC
Since a series LLC is a pass-through entity and isn’t a federally recognized business designation, it is treated as a traditional LLC. Currently, the IRS taxes a series LLC as a single entity that files one tax return.
Just like a traditional LLC, which is also a pass-through entity, a series LLC has tax advantages that can save you money on your taxes. Filing as an LLC can save you from corporate taxes that you would pay under a different business entity, like a C Corp. In some instances, a series LLC can lower the taxes you pay as compared to a sole proprietorship.
A series LLC owner will file federal taxes in the same way that an LLC does. The series LLC will file a single tax return as the main LLC. All income from the LLCs in the series will be included on the Schedule E portion of the owner’s personal tax return.
Series LLC Tax Reporting
When it comes to taxes, a series LLC is surprisingly simple at the federal level. A series LLC is taxed just like a traditional LLC, on a single federal tax return and as a pass-through entity. Because a series LLC is a state business designation, state taxes will vary from state to state. With the help of Incfile's Accounting and Bookkeeping service, navigating your series LLC taxes is simple.