Only a minority of states (including Delaware and Illinois) currently authorize the formation of series limited liability companies, series partnerships or cell companies (“Series Organizations”). Consequently, the popularity of Series Organizations is currently limited.

The IRS recently proposed regulations governing the tax classification of a series or cell (a “Series”) of a domestic Series Organization, or a foreign Series that conducts an insurance business. Once the proposed regulations are published in final form, each domestic Series generally will be treated as an entity for federal income tax purposes, and consequently, will be classified as a corporation, partnership or disregarded entity according to the rules which currently govern the tax classification of separate entities formed under local law. Additionally, once the proposed regulations are published in final form, every foreign Series that conducts an insurance business generally will be classified as a corporation for Federal income tax purposes.

The proposed regulations do not answer every question about the tax treatment of Series, but the clarification provided by those regulations is likely to prompt many more states to enact statutes authorizing the formation of Series Organizations. When that occurs, Series Organizations — particularly series LLCs and series partnerships — are certain to become more popular.