At first glance, the series limited liability company (SLLC) appears to be a better version of a limited liability company (LLC). With a SLLC, an individual can enjoy the advantages of multiple LLCs wrapped up in one SLLC; an individual files one document to create an SLLC and then can designate sub-LLCs, otherwise known as “series” or “cells”, as needed, each with its own distinct assets, rights, powers and duties. The assets of each series are shielded from the liabilities of other series and of the umbrella LLC. The advantages seem obvious – reduced costs and administrative burdens, and each series is afforded protection from the debts and liabilities of the other series and umbrella LLC – what’s not to love?

While the advantages of a SLLC are appealing, it is not without potential pitfalls. Numerous unresolved issues involving nearly every facet of SLLCs, from foreign jurisdiction recognition to taxation to bankruptcy, plague the SLLC and could potentially diminish the advantages. Consider foreign jurisdiction and the implications on liability protection. The majority of states have not adopted SLLC statutes and the efficacy of SLLCs in those states has not been widely tested – not to mention, courts in jurisdictions with SLLC statutes, have yet provided any case law interpreting the SLLC statutes. This is cause for concern particularly with regard to whether the SLLC internal liability shield will be upheld both within and outside of the jurisdiction of formation.

Another area of ambiguity is how a SLLC will be treated in bankruptcy. Bankruptcy courts have yet to weigh in on pertinent issues such as the effect on the other series and the umbrella LLC if just one series or just the umbrella LLC files for bankruptcy protection.

Taxation, at both the state and federal level, is yet another unsettled aspect of SLLCs. The IRS provided some insight in the September 2010, proposed Treasury Regulations, which state that each series will be treated, for federal tax purposes, as a separate entity regardless of whether the series is considered legally distinct under local law. However, to date, these proposed regulations have not been finalized. Other unresolved taxation issues range from availability of offsets between series to how to handle tax returns.

In light of the numerous unresolved issues regarding SLLCs, the true potential of the SLLC remains to be seen. Business owners and business practitioners should carefully consider the potential risks and pitfalls inherent to SLLCs in determining whether to proceed with the use of a SLLC, especially if the intent is for the SLLC to do business in states without SLLC statutes. Further, until taxation issues are settled and the SLLC statutes have been tested in federal and state courts, business owners and practitioners choosing to use a SLLC should proceed with caution.