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THREE WAYS TO AUDIT-PROOF YOUR SERIES LLC IN ILLINOIS

By Paul Koontz

The Series LLC in Illinois is a relatively new organizational entity that allows business owners to establish companies as a “series” under the limited liability Master company (LLCs). As Illinois is one of about 15 states that now offer the Series LLC, business owners are increasingly pursuing this option as they establish their business.

Like a traditional Limited Liability Company (LLC), the Series LLC can provide its owners (members) with protection from personal liability for the LLC’s obligations, including creditor debt and lawsuit judgments. The Series is similar to the corporation with subsidiaries. Under one “master LLC” company, there are different member organizations known as “series.”

While the Series LLC serves any industry, it is a favorite entity among property managers who own several properties. The Series LLC allows the parent to share profit and loss but hold each parcel in a separate series within the master LLC.

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The series structure is flexible and allows each series to have separate assets, business objectives, managers and members. Plus, at tax time in Illinois, the Series LLC reduces the burden of annual state filing fees by requiring a single return for the Series. In Illinois, the Series is typically taxed like a partnership, depending upon the number of members in series. Income or loss from the LLC “passes through” from the LLC to the members, eliminating the “double taxation” which is common in C-Corporation structures. Tax forms necessary may differ from state to state.

Because the Series LLC is so new (created within the past 20 years) there is scant case law available, nor new tax laws concerning it. The biggest advantage remains liability protection within the Series and protection between the Series organizations from creditors and legal action.

However, there are some measures you should take to make sure that your Series LLC remains off the IRS audit list:

Have Your Organizational Paperwork in Order. Every Series LLC in Illinois should have:

1. Articles of Incorporation filed with the State of Illinois. This is a legal requirement of all Series LLCs.
2. A Series LLC in Illinois Operating Agreement which addresses the governing rules of the LLC, transferability of rights, distribution of profit, etc. The operating agreement also establishes the Master LLC’s intent to establish Series, identifies the members and managers of each series if different from the Master, and establishes the separateness of each series.
3. Certification of good standing. Every series must be a valid operation that appears on web searches and other places that would warrant it an actual operating business. If this is not verifiable, it can jeopardize your relationship with the IRS.

Have Your Banking in Order.  It is important that every organization in the series has:

1. Their own FEIN. (Federal Employee Identification Number)This is a federal requirement and demonstrates that each Series is separate.
2. Their own bookkeeping. Separate bookkeeping for each Series is required and streamlines financial reporting.
3. Different bank accounts. The bank accounts of the Series can all reside at the same bank but must be separate accounts with different numbers. This ensures that any money passing through the Series remains separate among the organizations.

Take Care with Distributions. The money flowing in and out of the Series LLC must be kept in the separate accounts of each member series. Any funds from purchases or sale, for example, of one of the series, must not be deposited into a personal account but should remain within the series as directed by the Series LLC in the Illinois operating agreement. Depositing sales or profit from the series into a personal account is a red flag for the IRS!

There are many advantages of the Series LLC including substantial savings in Series LLC in Illinois formation costs, and options on how to set up the Series LLC in Illinois itself. At Gardi, Haught, Fischer & Bhosale LTD, we help businesses of all sizes establish and modify their corporate structure. If we can be of assistance to you in your business, please do not hesitate to request a free consultation below.

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