A DECADE OF DOUBT: REVISITING THE TENNESSEE SERIES LLC

61

A DECADE OF DOUBT: REVISITING THE

TENNESSEE SERIES LLC

LINDSAY M. JOHNSON



& WILLIAM N. LAY



INTRODUCTION

On June 1, 2005, Tennessee became the seventh state to adopt a

new, innovative type of business entity, the Series Limited Liability

Company ( “SLLC”).

1

The SLLC is one of the latest developments in a

now burgeoning class of unincorporated business forms recognized in

Tennessee, reflecting a nationwide trend of innovation and creativity in

modern business law as a growing number of states

2

depart from the

traditional four-entity system of business organizations.

3

While the

SLLC has existed in Tennessee for almost a decade, questions remain as

to the desirability and efficacy of the SLLC as a practical alternative to

more traditional business forms. A SLLC allows its members to



Candidate for Doctor of Jurisprudence, University of Tennessee College of Law,

Concentration in Business Transactions, May 2016; Acquisitions Editor, Tennessee Law

Review; Senior Staff, Transactions: The Tennessee Journal of Business Law; B.S. Business

Administration, University of South Carolina; Master of Accountancy, University of

South Carolina.



Candidate for Doctor of Jurisprudence, University of Tennessee College of Law,

Concentration in Business Transactions, May 2016; Research Editor, Tennessee Law

Review; Executive Editor, Transactions: The Tennessee Journal of Business Law; Executive

Editor, The Tennessee Journal of Law & Policy; B.A. Political Science, Rhodes College. The

authors would like to express their sincere appreciation to Professors Joan MacLeod

Heminway and Robert M. Lloyd for their gracious feedback and guidance and to

Professor Brian K. Krumm for encouraging us to write this article.

1

2005 Tenn. Pub. Acts 286. It is notable that Tennessee has two extant LLC acts.

However, only the modern statute contains SLLC provisions.

2

As discussed infra Part I, twelve states, as well as the District of Columbia and Puerto

Rico, have enacted SLLC statutes as of February 25, 2015.

3

Carol R. Goforth, The Series LLC, and a Series of Difficult Questions, 60 ARK. L. REV. 385,

385 (2007) (explaining that “[m]ost states have gone from a statutory regime in which

there were four prevalent business models (the sole proprietorship, the general

partnership, the limited partnership, and the corporation), to one in which there are at

least two additional statutory options and as many as five new choices in some

jurisdictions.”); Michael E. Fink, The Series LLC: Suggestions for Surviving Some Serious

Uncertainties, 72 U. PITT. L. REV. 597, 597 (2011) (suggesting that there has been a recent

“explosion in business forms, particularly unincorporated entities.”).

62 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

segregate assets in a way that provides clear and comprehensive liability

protection under certain circumstances.

4

However, the potential for high

costs

5

and uncertainty surrounding other important state and federal

issues, such as piercing the corporate veil, foreign actions, bankruptcy,

and taxation, threaten its viability.

6

This Article examines whether the Tennessee SLLC is a viable

alternative to traditional business entities. This analysis is of rising

importance, since several hundred SLLCs now exist in Tennessee,

demonstrating the entity’s growing acceptance in the business

community.

7

Part I of this Article will provide an introduction to the

SLLC, describing the SLLC’s general characteristics and development as

an entity. Part II will explain how the particular features of Tennessee’s

SLLC statute enhance or detract from the SLLC’s usefulness as a

business form, including an evaluation of the SLLC’s “internal” liability

shields. Part III will assess uncertainties in the treatment of SLLCs

concerning piercing the veil, bankruptcy, and foreign actions. Part IV

will explore ambiguities in the tax treatment of SLLCs, including federal

and state income taxation issues. Finally, the Article will conclude that

Tennessee SLLCs represent a practicable alternative to more traditional

business entities under certain circumstances.

4

Goforth, supra note 3, at 393 (stating that “the primary justification for the series LLC

is to allow owners of an LLC to segregate activities or assets for liability purposes.”).

5

Id. at 395 (“[I]n a jurisdiction that requires specific and distinct filings for each series

in an LLC, such as Illinois, the filing fees associated with forming the LLC and each

series, and then amendments each time the management of a series changes, plus

annual filings, might be as expensive or even more so than those associated with

multiples LLCs.”). Tennessee requires the maintenance of separate and distinct records

for each series. TENN. CODE ANN. § 48-249-309(b)(1)(B) (2012).

6

Goforth, supra note 3, at 398 (“[T]here are other major uncertainties associated with

utilizing series LLCs rather than multiple business forms.”); Daniel S. Kleinberger, Series

of Unincorporated Business Entities: the Mobius Strip and Klein Bottle of Business Entity Law,

BUS. L. TODAY, Feb. 2015, at 2 (commenting that “no one knows whether the internal

shields will work in bankruptcy” and “the series as non-entity, non-person may be so

counter-intuitive to judges as to encourage piercing [the corporate veil] . . . .”).

7

See J. Leigh Griffith & James E. Long Jr., Series LLCs - December 2013 Update on Recent

State Legislative and Taxation Developments, 55 TAX MGMT. MEM. (BNA) 83, 88 (Mar. 24,

2014).

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REVISITING THE TENNESSEE SERIES LLC

I. SERIES LLCS GENERALLY

SLLC provisions in limited liability company (“LLC”) statutes

permit the formation of one or more internal, independent series

8

within

an LLC.

9

The result is a SLLC, a state law business structure

10

in which

each series may have its own specific associated members, managers,

assets, liabilities, and business purpose or investment objectives.

11

Some

states further enhance the independent integrity, or “separateness,” of

the series concept by allowing each series limited liability in and of itself,

specifically providing that the debts, liabilities, and obligations of one

8

Series may also be referred to as internal funds, portfolios, cells, or divisions. ALLAN

G. DONN, BRUCE P. ELY, ROBERT R. KEATINGE & BAHAR A. SCHIPPEL, LIMITED

LIABILITY ENTITIES 2015 UPDATE – SERIES LLCS, § 1 (2015), Westlaw VCWA0326

ALI-CLE 391 [hereinafter A.L.I Series LLC CLE]. (“‘Series LLC’ is the term used to

describe a form of entity with internal funds, portfolios, cells, or divisions . . .”).

9

See, e.g., TENN. CODE ANN. § 48-249-309 (2012) (Tennessee’s SLLC enabling statute is

a single provision housed within the state’s LLC Act, codified at TENN. CODE ANN. §

48-249-309). See Goforth, supra note 3, at 387 n.8 (“[A]s with the LLP and LLLP, the

series LLC is not described in a free-standing statute, but rather has been authorized by

including special provisions in the basic statute . . . . [S]tates that have enacted series

LLC provisions have done so by amending their general LLC statutes.”).

10

The series concept is not limited to LLCs. Delaware, the first state to enact series

LLC legislation, has also imported the series concept to statutory trusts and limited

partnerships. A.L.I. Series LLC CLE, supra note 8, at § IV.A.

11

Despite these entity-like attributes, series are generally not recognized as separate

entities under state law. Id. (“A series is not designated as a separate legal entity, but is

given entity characteristics. What it lacks is independent continuity of existence after the

termination of the LLC.”). Illinois and Iowa, however, treat a series “as a separate entity

to the extent set forth in the articles of organization.” Supplementary information, 75

Fed. Reg. 55,699, 55,703 (Sept. 14, 2010). But see SERIES OF UNINCORPORATED BUS.

ENTITIES ACT § 102(18)(C) n.30 (Draft July 2015), available at

http://www.uniformlaws.org/shared/docs/series%20of%20unincorporated%20busine

ss%20entities/2015AM_SeriesBusinessEntities_Draft.pdf (defining a protected series

as a person but not an entity but noting the accompanying conceptual complexity of

such a definition); SERIES OF UNINCORPORATED BUS. ENTITIES ACT § 102(a)(14) n.11

(Draft Nov. 2015), available at

http://www.uniformlaws.org/shared/docs/series%20of%20unincorporated%20busine

ss%20entities/2015nov_SUBEA_Mtg%20Draft.pdf (noting drafters’ concerns “that

the current definition [of ‘person’ as used in the draft uniform law] is problematic with

regard to some types of unincorporated business organizations.”).

64 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

series may not be enforced against another series or the SLLC itself.

12

This “protected series”

13

concept is significant because it allows an entity

to create an internal liability minimizing organizational structure

comprised of distinct liability shields housed within a single parent or

master entity.

14

Previously, an organizational structure comprised of

several distinct entities was necessary to achieve a similar degree of

limited liability with respect to creditors’ access to assets.

15

This internal

liability shield is the fundamental distinguishing characteristic of the

SLLC

16

and has been described as “one of the most significant

developments in the law of business organizations since the advent of

the limited liability company.”

17

As of February 2015, twelve states, the District of Columbia, and

Puerto Rico have enacted SLLC statutes providing internal liability

shields within a LLC.

18

Additional states have enacted statues

12

75 Fed. Reg. at 55,699 (“If the conditions enumerated in the relevant statue are

satisfied, the debts, liabilities, and obligations of one series generally are enforceable

only against the assets of that series and not against assets of other series or of the

series LLC.”).

13

The National Conference of Commissioners on Uniform Laws uses “protected

series” as a term of art to describe a series that is insulated “from the judgment

creditors of the series organization and of any other protected series of the series

organization[]” by a statutorily granted internal liability shield. SERIES OF

UNINCORPORATED BUS. ENTITIES ACT prefatory note—preliminary (Draft July 2015).

14

Thus, the series concept “establishes a new type of liability shield – rather than

protecting the owners of an organization from vicarious liability for the organization’s

debts, . . . the ‘internal shields’ of a series protect the assets of one protected series from

the judgment creditors of the series organization and any other protected series of the

series organization.” Id. “As a general rule the Series LLC itself does not engage in

business but is merely the ‘wrapper’ and often the ‘parent’ of the various series within

the LLC that are the entities engaging in business, holding assets or making

investments.” J. Leigh Griffith, The LLC is the Entity of Choice for Tennesseans, 57 TENN.

CPA J. 3, 23 n.3 (2012).

15

See REVISED UNIF. LTD. LIAB. CO. ACT prefatory note (2006), available at

http://www.uniformlaws.org/shared/docs/limited%20liability%20company/ullca_fina

l_06rev.pdf.

16

See Griffıth & Long, supra note 7, at 84; see also A.L.I. Series LLC CLE, supra note 8.

17

SERIES OF UNINCORPORATED BUS. ENTITIES ACT prefatory note—preliminary

(Draft Mar. 2015), available at

http://www.uniformlaws.org/shared/docs/series%20of%20unincorporated%20busine

ss%20entities/2015mar_SUBEA_Mtg%20Draft.pdf.

18

These states are: Alabama, Delaware, Illinois, Iowa, Kansas, Missouri, Montana,

Nevada, Oklahoma, Tennessee, Texas, and Utah. ALA. CODE §§ 10A-5A-11.01 to -.16

(Supp. 2015); DEL. CODE ANN. tit. 6, § 18-215 (2013); D.C. CODE § 29-802.06 (2013);

2015] A DECADE OF DOUBT: 65

REVISITING THE TENNESSEE SERIES LLC

authorizing series ownership, but prohibiting internal liability shields,

19

thus rejecting the notion of a “protected series.” As a result, two levels

of divergent legislative treatment have emerged among the states. First,

there is a division between states that have and have not statutorily

addressed SLLCs. Second, with respect to states that have enacted SLLC

statutes, a division exists between states that bless the internal series with

limited liability and those that do not.

Not long after Tennessee enacted its SLLC statute, the Revised

Uniform Limited Liability Company Act (“RULLCA”),

20

disclaimed the

SLLC concept.

21

The RULLCA is a product of the National Conference

of Commissioners on Uniform State Laws (“NCCUSL”), an

organization focused on developing model statutes on which states may

base their legislation, with an objective to create consistent rules and

procedures among states and to “keep state law up-to-date by addressing

important and timely legal issues.”

22

The NCCUSL determined that the

805 ILL. COMP. STAT. ANN. 180/37-40 (West 2014); IOWA CODE ANN. §§ 489.1201-

1206 (West 2009);KAN. STAT. ANN. § 17-76,143 (Supp. 2014); MO. ANN. STAT. §

347.186 (West 2014); MONT. CODE ANN. § 35-8-304 (2013); NEV. REV. STAT. § 86.296

(2013); OKLA. STAT. tit. 18, § 2005.B, 2054.4 (2012); TENN. CODE ANN. § 48-249-309

(2012); TEX. BUS. ORGS. CODE ANN. § 101.601-622 (West 2013 & Supp. 2015); UTAH

CODE ANN. § 48-3a-1201 to -1209 (Supp. 2015); SERIES OF UNINCORPORATED BUS.

ENTITIES ACT prefatory note—preliminary n.2 (Draft July 2015). Most states,

including Tennessee, are modeled after Delaware’s Series LLC statute. Michael W.

McLoughlin & Bruce P. Ely, The Series LLC Raises Serious State Tax Questions but Few

Answers Are Yet Available, J. MULTISTATE TAX'N & INCENTIVES, Jan. 2007, at 6, 15

(Tennessee has “enacted provisions that are substantially similar to the Delaware statute

and do not contain the specific separate-entity provisions found in the Illinois law.”).

19

For example Minnesota, North Dakota, and Wisconsin “provide for a ‘series’ of

ownership interests but do not provide the limited liability shield….” A.L.I. Series LLC

CLE, supra note 8, at § IV.B; see MINN. STAT. ANN. § 322 B.03 subd. 44 (West 2011);

N.D. Cent. Code § 10-32.1-02(48) (Supp. 2015); WIS. STAT. ANN. § 183.0504 (West

2014). Although the California statute does not use the term “series,” its treatment of

the Series LLC concept is in line with these states. A.L.I. Series LLC CLE, supra note 8,

at § IV.B; see CAL. CORP. CODE § 17712.01 (West 2014). Other states have considered

the Series LLC concept but rejected it for various reasons. These states include Maine

and North Carolina. A.L.I. Series LLC CLE, supra note 8, at § IV.B.

20

REVISED UNIF. LTD. LIAB. CO. ACT (2006).

21

Id. prefatory note (“The new Act also has a very noteworthy omission; it does not

authorize ‘series LLCs.’”).

22

Id. about NCCUSL.

66 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

time was not yet ripe to consider the series concept for adoption in the

uniform LLC act because of the attendant risks and complexities of the

SLLC

23

and “the availability of well-established alternate structures.”

24

Much has changed since the adoption of the RULLCA in 2006,

however.

25

One such change is that a stand-alone

26

model uniform law,

the Series of Unincorporated Business Entities Act,

27

is currently in

development by the NCCUSL, although the Drafting Committee notes

that several key issues still surround SLLCs.

28

Additionally, in 2011 the

American Bar Association (“ABA”) released a Revised Prototype

Limited Liability Company Act (the “Revised Prototype Act”)

29

to

address emerging LLC issues, including SLLCs.

30

The Revised Prototype

Act recognizes the series concept and provides model series provisions

based on the Delaware and Texas statutes “in an effort to acknowledge a

number of jurisdictions that have added series to their statutes.”

31

23

In particular, the Drafting Committee was concerned about issues surrounding the

series conceptually, particularly with respect to bankruptcy, foreign actions, taxation,

and securities law. Id. prefatory note.

24

Id. Alternate structures include multiple single member LLCs and a limited liability

holding company parent with subsidiary entities. Id. Such structures achieve comparable

limited liability with the additional benefit of greater legal certainty.

25

See infra Part IV (discussing federal and state tax issues that arise after an LLC opts

into the series structure).

26

This is in contrast to the current state law status quo, where Series LLC legislation is

appended to the underlying LLC act. See supra note 9.

27

SERIES OF UNINCORPORATED BUS. ENTITIES ACT (Draft Nov. 2015). While earlier

drafts applied the series concept to unincorporated business entities generally, the

NCCUSL narrowed the scope of the November 2015 draft model act to address only

limited liability companies (i.e., SLLCs). This narrower draft is tentatively named the

Uniform Protected Series Act. Id. reporter’s introductory note.

28

SERIES OF UNINCORPORATED BUS. ENTITIES ACT reporter’s introductory note

(Draft Mar. 2015) (listing key issues and the Drafting Committee’s current approach to

those issues). Of particular significance is whether the internal liability shields will be

respected in states without protected series legislation. The Drafting Committee

provided a frank warning that “with regard to the internal shields, the only thing we

know for sure is that we know nothing for sure.” Id.

29

REVISED PROTOTYPE LTD. LIAB. CO. ACT (2011), available at

http://apps.americanbar.org/dch/thedl.cfm?filename=/CL590000/sitesofinterest_files

/201105_business_law_llcs_rpllca_may_2011.pdf.

30

Id. preface.

31

Id.

2015] A DECADE OF DOUBT: 67

REVISITING THE TENNESSEE SERIES LLC

Nevertheless, since Delaware passed the first SLLC statute nearly

twenty years ago,

32

states’ development of SLLC legislation has been

piecemeal resulting in a varied legislative landscape.

33

This incomplete

and disparate legal landscape raises serious issues for SLLCs conducting

business in multiple states, particularly with respect to recognition of the

internal liability shield. The central liability exposure, and thus a

significant risk, for SLLCs in this context is “whether a forum state

should defer to a foreign state’s rules on an entity’s ability to segregate its

assets and its creditors’ access to those assets.”

34

The potential

ramification of a SLLC operating in a non-recognition jurisdiction is that

the forum state’s courts may not defer to a foreign jurisdiction’s grant of

limited liability among series, resulting in a total elimination of structural

limited liability within the entity. Such disregard of the SLLC internal

liability shields would be devastating to the SLLC, allowing creditors to

reach assets beyond the strategically segregated assets of the implicated

series.

35

Commentators agree that the negation of a SLLC’s internal

liability shields is a serious risk for SLLCs doing business in jurisdictions

that do not recognize the SLLC as a state law entity or in jurisdictions

32

Delaware passed the first SLLC statute in 1996. DEL. CODE ANN. tit. 6, § 18-215

(2013).

33

While many states’ Series LLC statutes are similar in the “internal association of

assets to the series, the application of certain otherwise entity-applicable rules at the

series level, and the enumeration of the powers of a series as distinct form those of the

organization of which it is a component,” differing treatment exists “with respect to

numerous factors, including whether or not a particular series may be treated as an

entity, . . . the ability of a foreign series LLC to qualify to transact business, . . . and the

degree to which additional state filings (and fees) must be paid to the state . . . .”

Thomas E. Rutledge, Again for the Want of a Theory: The Challenge of the “Series” to Business

Organization Law, 46 AM. BUS. L.J. 311, 315-18 (2009) (footnotes omitted).

34

CARTER G. BISHOP & DANIEL S. KLEINBERGER, LIMITED LIABILITY COMPANIES:

TAX AND BUSINESS LAW ¶ 14.06[1][c], Westlaw (current through 2015). While states

generally defer to foreign law with respect to determining liability of members and the

foreign LLC itself, this is not the question implicated by Series LLCs operating in non-

recognition jurisdictions. Id. Indeed, state “[statutes] do not address the LLC’s liability

for its own debts and obligations and do not provide, inter alia, that by private ordering

a foreign LLC may ab initio and unilaterally determine that it is not wholly liable for the

debts and obligations of its constituent components.” Rutledge, supra note 33, at 331.

35

See BISHOP & KLEINBERGER, supra note 34.

68 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

that recognize the SLLC but do not allow limited liability among series

and the SLLC.

36

Indeed, the American Law Institute observed that, “[i]n

states without series enabling legislation, it would clearly be preferable to

use multiple legal entities notwithstanding the additional cost.”

37

The

current statutory environment, however, may not be determinative of the

ultimate viability of the SLLC, as illustrated by the adoption, evolution,

and ultimate ubiquity of the LLC despite a similarly uncertain

beginning.

38

Meaningful guidance and consistency among the states are

likely the cornerstones to a widespread adoption of the SLLC concept.

39

To date, the number of SLLCs formed in the United States is

relatively small but not insignificant.

40

A 2013 survey of states

recognizing SLLCs revealed that at least 36,000 SLLCs have been

formed nationwide, 362 of which were formed in Tennessee.

41

In 2012,

118 SLLCs were formed in Tennessee—nearly double the number of

Limited Liability Partnerships formed in Tennessee over the same

36

Griffıth & Long, supra note 7, at 86 (“Series LLCs formed in states that permit the

protected series should not do business in those states and anticipate that the internal

liability shields will be honored if there is a problem.”).

37

A.L.I. Series LLC CLE, supra note 8, at § VII.C.

38

“Although the question at one time had currency, today we do not question that an

LLC doing business in a foreign jurisdiction does so carrying with it the limited liability

afforded it by the jurisdiction of organization.” Rutledge, supra note 33, at 329

(footnotes omitted).

39

McLoughlin & Ely, supra note 18, at 14.

Similar to what occurred after the first LLC statutes were enacted, most

businesses have been reticent to embrace the series LLC concept because of

concerns regarding whether states without LLC statutes will respect the

limited liability of the series, and uncertainty over federal and state tax

treatment of the series. Once these issues have been settled, the series LLC

likely will become a popular vehicle for certain business activities because it

will allow businesses to achieve limited liability for separate activities without

going through the burden and expense of establishing and maintaining

multiple LLCs.

Id.

40

Griffith & Long, supra note 7 (“While there is[] a meaningful amount of activity . . . at

this point it does not appear to be a flood [of SLLC formations], but it is more than a

trickle.”).

41

Id. The Survey was conducted in November 2013 and included Delaware, the District

of Columbia, Illinois, Iowa, Kansas, Missouri, Montana, Nevada, Oklahoma, Puerto

Rico, Tennessee, Texas, and Utah. Id.

2015] A DECADE OF DOUBT: 69

REVISITING THE TENNESSEE SERIES LLC

period.

42

While this may suggest that SLLCs are gaining prominence as a

viable option for organizing business in Tennessee, it should be noted

that these entities represent only a small number of all new businesses

organized in the state each year.

43

Indeed, Tennessee SLLCs comprised

just 2.6% of Tennessee LLCs formed in 2012.

44

SLLCs may prove valuable for businesses that benefit from

compartmentalized activities.

45

As such, common uses include: real

estate, mutual funds, venture capital, captive insurance, oil and gas

ventures, franchises, and licensed businesses.

46

The primary advantage

cited by SLLC advocates is administrative efficiency.

47

Because the

liability shields allow internal structuring so that only one state law entity

is involved, cost savings may be created when an entity would otherwise

have to involve multiple entities in a parent/subsidiary or holding

company type structure – duplicating administrative time and expense

for each entity to achieve a similar limited liability outcome.

48

Specifically,

the SLLC may create efficiencies related to fees incurred when forming,

registering, promoting, and maintaining new entities and transferring

assets among entities.

49

These cost savings may be illusory, however. The SLLC

approach may not actually result in less administrative time and expense,

42

Id.

43

For example, in 2012 there were only 60 limited liability partnerships and 211 limited

partnerships formed in Tennessee while there were 4,847 for-profit corporations and

13,747 limited liability companies formed during the same period. TENN. SEC’Y OF

STATE, BUSINESS ENTITY STATISTICS (2015), available at

http://sos.tn.gov/products/business-services/business-entity-statistics-0.

44

See id.

45

Kleinberger, supra note 6, at 4 (“[A]n LLC with series can compartmentalize various

divisions of an operating company or function as a holding company.”).

46

See Griffith & Long, supra note 7, at 85; McLoughlin & Ely, supra note 18, at 9;

SERIES OF UNINCORPORATED BUS. ENTITIES ACT (Draft Mar. 2015).

47

See, e.g., Griffith & Long, supra note 7, at 85; A.L.I. Series LLC CLE, supra note 8, at §

VII.A; McLoughlin & Ely, supra note 18, at 8.

48

Griffith & Long, supra note 7, at 85.

49

Id.

70 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

especially in jurisdictions that require fees for each series.

50

Additionally,

SLLCs must meet statutory recordkeeping requirements for each series

to maintain the liability shield granted by the statute.

51

In light of this,

commentators “question what a [SLLC] can accomplish that a number

of traditional LLCs cannot accomplish.”

52

II. THE TENNESSEE SLLC

A. Formation and Establishment of Series

Like most states, Tennessee principally modeled its SLLC statute,

T.C.A. § 48-249-309, on Delaware’s SLLC statute.

53

To form a SLLC in

Tennessee, one must form a traditional LLC pursuant to T.C.A. § 48-

249-201 either concurrently or prior to the establishment of a series.

54

This traditional LLC functions as an “umbrella entity,”

55

which converts

to a SLLC once one or more series are established within it.

56

A series of

a SLLC in Tennessee may consist of “specified property or obligations

50

Illinois and California both take this approach. See Goforth, supra note 3, at 395-96.

51

See, e.g., TENN. CODE ANN. § 48-249-309(b)(1)(B) (2012) (Tennessee requires SLLCs

to maintain separate and distinct records to receive the benefit of the statutory internal

liability shield).

52

Griffith & Long, supra note 7, at 84.

53

Goforth, supra note 3, at 406 n.9 (“Of the six other states, which as of the date of this

article have adopted series LLC provisions, five clearly modeled their statutes on the

Delaware approach: Iowa, Nevada, Oklahoma, Tennessee, and Utah.”); Dominick T.

Gattuso, Series LLCs: Let's Give the Frog a Little Love, 17 BUS. L. TODAY, July/Aug. 2008,

33 (“Today, Illinois, Iowa, Nevada, Oklahoma, Puerto Rico, Tennessee, and Utah have

added provisions to their LLC statutes authorizing the Series LLC. With the exception

of Illinois, these states adopted provisions similar to Delaware's Series LLC

provision.”).

54

TENN. CODE ANN. § 48-249-309(a) (2012) (“The LLC documents may establish, or

provide for the establishment of [a series].”) (emphasis added). Since the LLC

documents must establish or provide for the establishment of a series, an LLC must be

formed either before the establishment of a series, or concurrently with the

establishment of a series.

55

Jennifer Avery et al., Series LLCs: Nuts and Bolts, Benefits and Risks, and the Uncertainties

That Remain, 45 TEX. J. BUS. L. 9, 10 (2012) (“A Series LLC begins with the formation

of an LLC, which, for the sake of clarity, will be referred to in this article as the

‘Umbrella LLC.’”).

56

Id. (“The Umbrella LLC may, provided it meets certain statutory requirements

discussed below, form one or more series within itself. . . .”); TENN. CODE ANN. § 48-

249-309(a) (2012).

2015] A DECADE OF DOUBT: 71

REVISITING THE TENNESSEE SERIES LLC

of the LLC, or profits and losses associated with specified property or

obligations [of the LLC].”

57

Tennessee law does not restrict or limit the

number of series a SLLC may create, nor does it establish a maximum or

minimum quantity of assets that any given series may hold.

58

This

enhances the desirability of SLLCs in Tennessee, since SLLCs are

relatively inexpensive to form and may contain any type or quantity of

property, assets, or obligations.

In addition, a Tennessee SLLC is not required to file a certificate

of designation or any form of separate document with the Tennessee

Secretary of State when a new series is formed, aside from the initial

notice of limitation of liability of a series included in the LLC

documents

59

when the first series is established.

60

All that is required in

Tennessee to establish a new series is the amendment of the LLC

documents.

61

This stands in stark contrast to SLLCs in Illinois, where a

SLLC is required by law to file a “certificate of designation for each

series which is to have limited liability . . . .”

62

Accordingly, Tennessee’s

SLLC statute makes it comparatively easy to add or remove additional

series. However, the practical effects of this advantage are limited, as

Tennessee requires a SLLC to maintain separate and distinct records and

57

Id.

58

Id. (noting that a LLC may establish “one (1) or more designated series.”). No

provision of the Tennessee SLLC statute limits this number or sets forth restrictions

concerning quantities of assets.

59

In Tennessee, “‘LLC documents’ means either, or both: (A) An LLC's articles; and

(B) If the LLC has an operating agreement, whether written or oral, its operating

agreement[.]” TENN. CODE ANN. § 48-249-102(16) (2012).

60

TENN. CODE ANN. § 48-249-309(b)(2) (2012) (“[T]here shall be no requirement that

any specific series of the LLC be referenced in such notice. The fact that articles that

contain the notice of the limitation on liabilities of a series is on file with the secretary

of state shall constitute notice of such limitation on liabilities of a series.”).

61

TENN. CODE ANN. § 48-249-309(a) (2012) (“The LLC documents may establish, or

provide for the establishment of, one (1) or more designated series. . . .”). This assumes

the notice of limitation of liability has already been filed and that the SLLC will

immediately begin to maintain separate records upon the establishment of a new series.

Since no particular series need be mentioned in notice of the limitation of liability, it

does not need to be amended when new series are created. TENN. CODE ANN. § 48-

249-309(b)(2) (2012).

62

805 ILL. COMP. STAT. ANN. 180/37-40(b) (2014).

72 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

accounting for the assets of each individual series, adding time and

expense to the process.

63

B. Permitted Activities and Business of a SLLC

In Tennessee, T.C.A. § 48-249-309 makes it clear that each series

of a SLLC is to be managed as if it were a completely separate LLC.

64

However, Tennessee law is silent as to whether an individual series of a

SLLC may, in its own name: sue and be sued, contract with others, hold

title to assets, or grant security interests in its property. The lack of clear,

statutory language to this effect detracts from the desirability of SLLCs

in Tennessee as compared to other states like Illinois, whose SLLC

statutes expressly permit these kind of these activities.

65

Delaware’s

SLLC statute, like Tennessee’s, was once silent on this issue. However,

in 2007, Delaware’s SLLC statute was amended, and now explicitly

permits a series of a SLLC, in its own name, to “contract, hold title to

assets (including real, personal and intangible property), grant liens and

security interests, and sue and be sued.”

66

Unlike Delaware, Tennessee

has not yet amended its SLLC statute to explicitly allow a series to

contract, hold title, grand liens, and sue in its own name.

Even though Tennessee’s SLLC statute does not expressly allow

a series to contract, hold title to assets, sue and be sued or grant liens, the

statute does not, from a textual perspective, prohibit a SLLC from

participating in these types of activities. In fact, these types of activities

may be implicitly permitted by the law’s mandate that each series be

managed as if it were a separate LLC, since individual LLCs may

individually participate in all the aforementioned activities.

67

63

TENN. CODE ANN. § 48-249-309(b)(1)(B) (2012).

64

Wendell Gingerich, Series LLCs: The Problem of the Chicken and the Egg, 4

ENTREPRENEURIAL BUS. L.J. 185, 189 n.34 (2009) (“The Tennessee statute, like the

Illinois' statute, more explicitly treats each series as a separate LLC with regard to

management, voting rights, and termination of the series.”).

65

805 ILL. COMP. STAT. ANN. 180/37-40(b) (2014) (“Each series with limited liability

may, in its own name, contract, hold title to assets, grant security interests, sue and be

sued and otherwise conduct business and exercise the powers of a limited liability

company under this Act.”).

66

6 DEL. CODE ANN. § 18-215(c) (2015); compare 6 DEL. CODE ANN. § 18-215 (2004)

with 6 DEL. CODE ANN. § 18-215 (2007) (Note language added in 2007).

67

TENN. CODE ANN. § 48-249-309(f) (2012); TENN. CODE ANN. § 48-249-104 (2006)

(noting that LLCs in Tennessee have the power to: sue and be sued, contract, grant

security interests in its property, and hold property).

2015] A DECADE OF DOUBT: 73

REVISITING THE TENNESSEE SERIES LLC

Furthermore, T.C.A. § 48-249-309(b) contains a catch-all liability

provision, absolving any series of a SLLC from all liabilities, “contracted

for or otherwise,” of another series.

68

It would be illogical for the

legislature to absolve a series of any liability arising from the contracts of

another series, yet not permit a series of the SLLC to contract at all.

Therefore, the catch-all liability provision of Tennessee’s SLLC statute

strongly implies that a series may contract.

In addition, each series of an SLLC has “separate rights, powers

[and] duties,” which arguably includes the ability to contract, sue, grant

security interests, and other such concomitant activities.

69

Therefore,

while the language of Tennessee’s SLLC statute does not prohibit a

series from contracting, suing, and granting security interests in its

property, amending Tennessee’s SLLC statute to include more definite

language, as Delaware has done, could enhance the value of a Tennessee

SLLC as an entity by providing clarity. Such an amendment would also

add value by more closely aligning Tennessee’s SLLC statute with

Delaware’s and Illinois’ SLLC statutes, which, in turn, would make

authority from these jurisdictions more persuasive in Tennessee courts.

C. Liability Shields

In order for the liability shields created by the “separateness” of

the Tennessee SLLC statute to apply, a Tennessee SLLC must: (1)

provide for the establishment of one or more distinct series in the LLC

documents; (2) maintain separate and distinct records for any series,

along with the assets of each series; and (3) set forth, in the articles of the

LLC, a notice on the limitation of liabilities of a series.

70

A notice of

limitation of liability is required, and is deemed sufficient as long as it is

included in the articles of the LLC, which are filed with the Tennessee

Secretary of State.

71

In Tennessee, “the debts, liabilities, obligations and expenses

incurred . . . with respect to a particular series . . . shall be enforceable against

68

TENN. CODE ANN. § 48-249-309(b)(1) (2012).

69

TENN. CODE ANN. § 48-249-309(a) (2012).

70

TENN. CODE ANN. § 48-249-309(b)(1)(A)-(C) (2012).

71

TENN. CODE ANN. § 48-249-309(b)(2) (2012).

74 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

the assets of such series only, and not against the assets of the LLC generally,

or any other series of the LLC . . . .”

72

This language establishes the

“internal” liability shields of a SLLC. The “internal” liability shields

derive their power from the fact that the assets in one series of a SLLC

are shielded from the liabilities or obligations of another series.

73

Tennessee’s SLLC statute particularly emphasizes that each series of a

Tennessee SLLC is legally distinctive, or separate, from any other series

in the SLLC, as well as the SLLC generally, for purposes of third-party

liability.

74

In other words, the assets in one series of an SLLC cannot be

used to satisfy the obligations of another series or the SLLC generally.

75

In this aspect, Tennessee’s SLLC statute departs from Delaware’s SLLC

statute, which is silent on this subject, and more closely resembles

Illinois’ SLLC statute, which also emphasizes that each series is legally

distinct.

76

Furthermore, each established series of a Tennessee SLLC is

treated as a separate LLC in pertinence to each series’ voting rights,

77

management,

78

distributions,

79

and termination.

80

While this legal distinction or “separateness” of each series is

perhaps the most important feature of a SLLC

81

and endemic to every

SLLC statute, Tennessee’s SLLC statute goes beyond most in clarifying

72

TENN. CODE ANN. § 48-249-309(b)(1) (2012) (emphasis added).

73

Id. (noting that no legal liability, debt, or obligation of one series, shall be

“enforceable against . . . the assets of the LLC generally, or any other series of the

LLC”); Avery et al., supra note 55, at 10 (“[E]ach [series] within a Series LLC is shielded

from the liabilities of the other [series].”).

74

TENN. CODE ANN. § 48-249-309(b)(1) (2012).

75

TENN. CODE ANN. § 48-249-309(b)(1) (2012).

76

Gingerich, supra note 64, at 189 n.34. (“The Tennessee statute, like the Illinois'

statute, more explicitly treats each series as a separate LLC with regard to management,

voting rights, and termination of the series.”).

77

TENN. CODE ANN. § 48-249-309(d) (2012).

78

TENN. CODE ANN. § 48-249-309(f) (2012).

79

TENN. CODE ANN. § 48-249-309(e) (2012).

80

TENN. CODE ANN. § 48-249-309(g) (2012).

81

Avery et al., supra note 55, at 10. (noting that “[t]he liability limitation is the most

important feature of a Series LLC.”). This “liability limitation” comes from the

separateness of each series; the fact that the liabilities of one series cannot be enforced

against another. TENN. CODE ANN. § 48-249-309(b)(1) (noting that no legal liability,

debt, or obligation of one series, shall be “enforceable against…the assets of the LLC

generally, or any other series of the LLC”).

2015] A DECADE OF DOUBT: 75

REVISITING THE TENNESSEE SERIES LLC

the separateness of each series.

82

T.C.A. § 48-249-309’s exacting

emphasis on the separateness of each series increases the likelihood that

a court will honor the limited liability of a series in Tennessee, since the

plain language of the statute clearly and unambiguously protects the

assets of one series from being used to satisfy the debts, obligations, and

liabilities of another series.

83

In this situation, “[w]here the language

contained within the four corners of a statute is plain, clear, and

unambiguous, the duty of the courts is simple and obvious, ‘to say sic lex

scripta, and obey it.’”

84

Therefore, while questions remain about the

enforceability of a SLLC’s liability shield in general, the nature and clarity

of the language in the Tennessee SLLC statute increases the likelihood

that a court will give effect to the limited liability of series in Tennessee,

as compared to other states.

D. Conclusion

Overall, while Tennessee’s SLLC statute contains a few hybrid

features, T.C.A. § 48-249-309’s close resemblance to Delaware’s SLLC

statute enhances the utility of a SLLC as an entity, as Tennessee can look

to Delaware, where SLLCs were first adopted, for guidance and

precedent when issues arise.

85

While Tennessee would be well-served by

82

Tennessee’s statute goes further than most, as most states who have adopted SLLC

statutes have modeled their statute on Delaware’s statute, which is silent as to when a

series of a SLLC is to be treated as a separate LLC, while Tennessee, in this particular

area, follows the Illinois approach, which vehemently states that each series is to be

treated as a separate LLC. See Gingerich, supra note 64, at 189 n.34 (“The Tennessee

statute, like the Illinois' statute, more explicitly treats each series as a separate LLC with

regard to management, voting rights, and termination of the series.”); Gattuso, supra

note 53 (“Today, Illinois, Iowa, Nevada, Oklahoma, Puerto Rico, Tennessee, and Utah

have added provisions to their LLC statutes authorizing the Series LLC. With the

exception of Illinois, these states adopted provisions similar to Delaware's Series

LLC provision.”) (emphasis added).

83

TENN. CODE ANN. § 48-249-309(b) (2012).

84

Schering-Plough Healthcare Products, Inc. v. State Bd. of Equalization, 999 S.W.2d

773, 776 (Tenn. 1999) (quoting Miller v. Childress, 21 Tenn. 319, 321–22 (1841)). The

phrase “sic lex scripta” is translated as “so is the law written.” Fed. Express Corp. v.

Woods, 569 S.W.2d 408, 411 (Tenn. 1978).

85

Gingerich, supra note 64, at 185 ("Delaware introduced the series LLC to the rest of

the country. . . .").

76 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

amending its SLLC statute to expressly allow a SLLC to partake in “any

lawful business, purpose or activity,” as Delaware has done, the efficacy

of SLLCs formed under T.C.A. § 48-249-309 is enhanced by the

particular language of Tennessee’s SLLC statute pertaining to formation,

the addition of series, and liability shields, as discussed supra.

86

While questions concerning the treatment of SLLCs in piercing

the corporate veil, bankruptcy, and foreign actions raise doubts about the

usefulness of SLLCs for their intended purposes; T.C.A. § 48-249-309

provides clear protection from liability for a series in regular civil actions

against either another series or the SLLC generally. This benefit alone,

when combined with the advantages and popularity of traditional LLCs,

arguably establishes the Tennessee SLLC as a worthwhile, valuable

entity, particularly in matters such as estate planning where there is little

risk of bankruptcy, piercing the corporate veil, or out-of-state operations.

III. RESPECTING ENTITY SEPARATENESS: PIERCING THE VEIL,

BANKRUPTCY, AND FOREIGN ACTIONS

The principle problem with SLLCs, aside from federal and state

income taxation issues, derives from the fact that SLLCs are relatively

untested in courts of law, both in Tennessee and abroad.

87

In particular,

there is little to no precedent in Tennessee to provide guidance

concerning how Tennessee courts would treat SLLCs in cases involving

piercing the veil, foreign actions, or bankruptcy. The question, currently,

is whether this ambiguity is so significant as to deter potential SLLC

members from using SLLCs as a business form in Tennessee.

A. Piercing the Veil

In Tennessee, the doctrine of piercing the veil applies to limited

liability companies as well as corporations.

88

The same basic tests that

are utilized in Tennessee when piercing the veil of limited liability of a

corporation apply to a creditor who is attempting to pierce the veil of

86

6 DEL. CODE ANN. § 18-215(c) (2012).

87

See Gingerich, supra note 64, at 185 (“[T]he series LLC has not seen a dramatic

increase in popularity, largely because of the glaring lack of case law interpreting the

series LLC statutes . . . .”); see also Goforth, supra note 3, at 399 (“The biggest problem

now is that there are no reported decisions dealing with this question.”).

88

See Edmunds v. Delta Partners, L.L.C., 403 S.W.3d 812, 828 (Tenn. Ct. App. 2012)

(“The doctrine of piercing the corporate veil applies equally to cases in which a party

seeks to pierce the veil of a limited liability company . . . .”).

2015] A DECADE OF DOUBT: 77

REVISITING THE TENNESSEE SERIES LLC

limited liability of a LLC.

89

These tests and conditions may vary

according to the circumstances of an individual case, and the matter is

particularly within the province of the trial court.

90

However, studies suggest that the veil is pierced less often in the

LLC context than with closely held corporations.

91

In addition, several

scholars have commented that SLLCs may be more susceptible to

piercing than regular LLCs.

92

As a general rule, absent a reason to pierce

the veil, the members, owners, employees, or other agents of a

Tennessee limited liability company have no personal liability for the

debts or obligations of the company.

93

Tennessee precedent states that the separate identity of a

corporation may be disregarded upon a showing that the corporation is a

sham, or dummy, where necessary to accomplish justice

94

or where the

corporation is the “alter ego” of the shareholders.

95

While these tests

appear to be broad, Tennessee courts have applied the principle of

piercing the corporate veil with great caution, and each entity is given the

89

Id. at 829 (quoting In re Steffner, 479 B.R. 746, 755 (Bankr. E.D. Tenn. 2012)

(“Despite the inapplicability of the remedy's name, the ‘corporate veil’ of a Tennessee

limited liability company may also be pierced, utilizing the same standards.”)).

90

See Muroll Gesellschaft M.B.H. v. Tenn. Tape, Inc., 908 S.W.2d 211, 213 (Tenn. Ct.

App. 1995) (citing Elec. Power Bd. of Chattanooga v. St. Joseph Valley Structural Steel

Corp., 691 S.W.2d 522 (Tenn. 1985)).

91

See Geoffrey C. Rapp, Preserving LLC Veil Piercing: A Response to Bainbridge, 31 J. CORP.

L. 1063, 1071 (2006) (noting that a “study produced slightly fewer than 1600 corporate

veil piercing cases based on a time frame that spanned many decades; in less than one

decade, there were 61 LLC veil piercing cases.”).

92

See Goforth, supra note 3, at 398 (“Series LLCs might also be more prone to

piercing.”); see also Avery et al., supra note 55, at 15 (“Series LLCs also may be more

susceptible to courts piercing the corporate veil.”).

93

See TENN. CODE ANN. § 48–217–101(a)(1) (1995); TENN. CODE ANN. § 48–249-

114(a)(1)(B) (2006).

94

See Muroll Gesellschaft, 908 S.W.2d at 213.

95

See Eric Fox, Piercing the Veil of Limited Liability Companies, 62 GEO. WASH. L. REV.

1143, 1169 (1994) ("The factors typically mentioned in the corporate veil-piercing

context include . . . operation of the corporation as an alter ego for the shareholders.").

See generally George W. Kuney, Don't Mistake the Proxy for the Rule: Alter Ego Liability in

Tennessee, 11 TENN. J. BUS. L. 131 (2010) (explaining Tennessee “alter ego” liability).

78 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

presumption of corporate regularity.

96

The plaintiff bears the “burden of

proving facts sufficient to justify piercing the corporate veil.”

97

As of the date of this Article, no directly relevant case law exists

concerning piercing the veil in the SLLC context.

98

Courts in bankruptcy

or other actions may hesitate to treat an individual series of a SLLC as a

separate legal person because of concerns about equities.

99

Furthermore,

Tennessee courts may be more likely to take this approach with LLCs, as

Tennessee decisional law supports piercing in the corporate form where

an unfair device is used to achieve an inequitable result.

100

In particular,

under Tennessee law, “a court may disregard the corporate entity in

order to impose liability against a related entity, such as a parent

corporation or a controlling shareholder, where the two entities are in

fact identical or indistinguishable and where necessary to accomplish

justice.”

101

As mentioned supra, a court may perceive any inequities created

by the liability shields of a SLLC as a justification for piercing. For

example, a SLLC may move a particularly risky asset into one series and

several very profitable assets into another. Were the risky asset to create

a significant liability, one unsatisfied by the assets of that particular series,

a creditor may argue that it is unfair to let the SLLC escape liability

96

See Edmunds v. Delta Partners, L.L.C., 403 S.W.3d 812, 828 (Tenn. Ct. App. 2012)

(quoting Schlater v. Haynie, 833 S.W.2d 919, 925 (Tenn. Ct. App. 1991) (“The principle

of piercing the fiction of the corporate veil is to be applied with great caution and not

precipitately, since there is a presumption of corporate regularity.”).

97

Schlater, 833 S.W.2d at 925.

98

See, e.g., Goforth, supra note 3, at 399-400 (“The biggest problem now is that there are

no reported decisions dealing with this question. We simply do not know whether

courts will be more or less inclined to pierce the veil for series LLCs, and this very

uncertainty itself is grounds for concern.”). Further searches in 2015 by the authors

looking for precedent have been unsuccessful.

99

See Kleinberger, supra note 6, at 2 (noting that “[interpreting] the series as non-entity,

non-person may be so counter-intuitive to judges as to encourage piercing . . . .”).

100

See, e.g., Schlater, 833 S.W.2d at 925 (“Even though corporate formalities have been

observed, one may still challenge the corporate entity by showing that he has been the

victim of some basically unfair device by which the corporate form of business

organization has been used to achieve an inequitable result.”) (emphasis added).

101

Edmunds, 403 S.W.3d at 828 (citing Mfrs. Consol. Serv., Inc. v. Rodell, 42 S.W.3d

846, 866 (Tenn. Ct. App. 2000)). Other jurisdictions have also addressed sister

subsidiary veil piercing. See generally Robert B. Thompson, Piercing the Corporate Veil: An

Empirical Study, 76 CORNELL L. REV. 1036 (1991) (outlining piercing actions and

precedent in other jurisdictions).

2015] A DECADE OF DOUBT: 79

REVISITING THE TENNESSEE SERIES LLC

simply by putting the risky asset into its own series, particularly if the

SLLC was aware that the asset would create a liability when it moved the

asset. This essentially externalizes the risk of loss from the Tennessee

SLLC members to its creditors.

102

However, this inequity is the product

of a clear, unambiguous reading of Tennessee law, and courts should be

diligent when considering “unfairness” as a factor in the piercing analysis

of a SLLC, as the inequity may occur regardless of whether piercing is

actually warranted.

Despite its relative clarity and lack of ambiguity, the language of

Tennessee’s SLLC statute may render Tennessee’s SLLCs particularly

susceptible to piercing. Since the failure to follow corporate formalities

is one of the oft-cited factors in cases where the veil is pierced

successfully, any failure by the SLLC to maintain separate records and

accounting for the assets of each series, as required by T.C.A. § 48-249-

309(b)(1)(B), may provide a court with a justification for piercing.

103

Therefore, members or managers of a Tennessee SLLC must be

meticulous in recordkeeping and observe LLC formalities to the greatest

extent possible if piercing is to be prevented. Due to the possibility that

SLLCs may result in unfairness claims in the tort arena and the high

likelihood that some SLLCs may fail to keep proper records as required

by law,

104

piercing is a real and significant problem for Tennessee SLLCs,

which detracts from the utility and desirability of SLLCs as a choice of

entity under Tennessee law.

B. Bankruptcy

There is, as of the date of this Article, no directly relevant case

law concerning whether the internal shields of an individual series will

102

See Marie T. Reilly, Making Sense of Successor Liability, 31 HOFSTRA L. REV. 745, 752

(2003) (“When insiders manipulate assets in a way that makes them better off but

increases creditors’ risk of loss without creditors’ assent, they ‘externalize’ loss to

creditors.”).

103

See also Fox, supra note 95, at 1169 (“The factors typically mentioned in the corporate

veil-piercing context include . . . failure to observe corporate formalities . . . .”).

104

There is an additional risk that a Tennessee SLLC will fail to keep proper records

due to Tennessee’s requirement that distinct and individual records be kept for each

series.

80 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

hold up in a bankruptcy action.

105

Simply put, there is no precedent

concerning how a bankruptcy court will treat a SLLC when one series, or

the SLLC generally, becomes involved in a bankruptcy proceeding.

106

The National Conference of Commissioners on Uniform State Laws has

acknowledged that this is a problem and has taken the position that “[a]

protected series is a person distinct from the series organization, other

series of the organization, and the owners of the organization.”

107

This

approach has been validated by other legal commentators, who suggest

that characterizing each protected series as a separate legal entity in

bankruptcy proceedings would be the “safest approach.”

108

Despite this,

until precedent emerges, “the only thing we know for sure is that we

know nothing for sure.”

109

Interpreting each individual series as an independent person,

distinct from other series and the SLLC generally (as the National

Conference of Commissioners on Uniform State Laws suggests), would

allow the SLLC’s liability shield to withstand scrutiny in bankruptcy

actions.

110

This would mean the assets of the SLLC generally, as well as

the assets of other series, would not be consolidated with those of a

series if that series were to be involved in a bankruptcy proceeding.

111

However, despite the apparent clarity of its statutory law in other

contexts, Tennessee’s SLLC statute does not expressly dictate that a

105

SERIES OF UNINCORPORATED BUS. ENTITIES ACT reporter’s introductory note

(Draft Mar. 2015) (“As for the internal shields under bankruptcy law, no directly

relevant case law exists.”) available at

http://www.uniformlaws.org/shared/docs/series%20of%20unincorporated%20busine

ss%20entities/2015mar_SUBEA_Mtg%20Draft.pdf; see also Goforth, supra note 3, at

398 (“[T]o date, there are no reported decisions addressing the status of series LLCs in

bankruptcy.”).

106

See Goforth, supra note 3, at 399.

107

SERIES OF UNINCORPORATED BUS. ENTITIES ACT reporter’s introductory note

(Draft Mar. 2015) available at

http://www.uniformlaws.org/shared/docs/series%20of%20unincorporated%20busine

ss%20entities/2015mar_SUBEA_Mtg%20Draft.pdf.

108

See Kleinberger, supra note 6, at 2 (“The safest approach would be to characterize the

protected series as a separate entity and provide the series the full spectrum of entity

powers.”).

109

Id. at 3.

110

See Goforth, supra note 3, at 398 (“Unless and until bankruptcy law recognizes series

as separate legal entities, bankruptcy of a single series might well jeopardize assets of

the LLC and the other series as well.”).

111

See id.

2015] A DECADE OF DOUBT: 81

REVISITING THE TENNESSEE SERIES LLC

series is to be treated as a separate entity in bankruptcy, and there is no

case law to support an argument for legal separateness in this context.

Tennessee’s legislature, like legislatures in most other states, has declined

to directly address the bankruptcy characterization issue.

112

Amending

Tennessee’s SLLC statute to clarify that each series is a person distinct

from the series organization, other series of the organization, and the

owners of the organization in bankruptcy would provide a legislative

resolution of this issue.

A bankruptcy court cannot consolidate the assets of multiple

LLCs.

113

Accordingly, one could argue that T.C.A. § 48-249-309’s

language requiring each series of a SLLC to be treated as a separate LLC

in regard to classification of interests, voting rights, management,

distributions, and termination also requires a bankruptcy court to treat

each series as a separate LLC in bankruptcy actions.

114

Each series must

maintain and account for its assets separately from other series, which

further strengthens this argument.

115

It would be unreasonable, and a

particularly harsh trap for Tennessee SLLC members, to treat a series as

a separate entity for all purposes other than bankruptcy. While a legal

rule providing for separateness in bankruptcy may at times produce

inequitable results for creditors, if the law were clear on the point,

voluntary creditors and unwitting tort victims doing business with a

series of a SLLC would be able to identify this risk ex ante and, if

necessary or desired, secure a guarantee from either another series or the

SLLC in order to protect their interests. In the end, however, there is

still no direct precedent concerning whether a bankruptcy court will treat

a series of an SLLC as an independent entity, which weakens the

112

See id.

113

See also id. (“This is a risk that could be avoided with a group of properly formed and

operated LLCs . . . .”).

114

Gingerich, supra note 64, at 189 n.34 (“The Tennessee statute, like the Illinois'

statute, more explicitly treats each series as a separate LLC with regard to

management, voting rights, and termination of the series.”) (emphasis added).

115

See TENN. CODE ANN. § 48-249-309(b)(1)(B) (2012). The argument here is that if a

series looks like a separate LLC, functions like a separate LLC, and keeps records like a

separate LLC, then it should be treated as a separate LLC for the purposes of

aggregating assets in a bankruptcy proceeding.

82 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

attractiveness of the SLLC as an entity, particularly for more risk-prone

business models.

C. Foreign Actions

A third troubling uncertainty for Tennessee SLLCs is whether

the entity’s liability shields will be effective outside the borders of its

state of formation. As mentioned supra in Part II, questions remain as to

whether a forum state’s courts will defer to a foreign jurisdiction’s grant

of limited liability to SLLC series. In most states, the law of the state of

formation controls the liability of a foreign LLC under the internal

affairs doctrine.

116

However, it is uncertain whether this general principle

applies to SLLCs and, as of this time, there is no court precedent to

provide guidance on this issue. These uncertainties are complicated by

the fact that some states, such as California, have SLLC statutes that

explicitly prohibit limited liability for series.

117

Therefore, as a general

matter, venturers who plan on conducting business through the LLC

form in states that (1) do not have a SLLC statute or (2) have a SLLC

statute that does not provide limited liability for series, may be better

served by forming separate LLCs rather than a SLLC.

118

However, this is an uncertainty that may soon be resolved. At

the time of this writing, the majority of states have yet to adopt a SLLC

statute.

119

Nevertheless, the National Conference of Commissioners on

Uniform State Laws is drafting a model act for SLLCs: the Series of

Unincorporated Business Entities Act.

120

With the release of this model

act, it is hopeful that more states will turn to uniform law when drafting

or remodeling SLLC statutes. This would possibly cause the utility and

116

See Goforth, supra note 3, at 397-98 (“The majority of LLC statutes provide that the

law of the state of formation controls the liability of members of a foreign LLC.”).

117

CAL. CORP. CODE § 17712.01 (2013).

118

See also Griffith & Long, supra note 7, at 86 (“Series LLCs formed in states that

permit the protected series should not do business in those states and anticipate that

the internal liability shields will be honored if there is a problem.”).

119

See Avery et al., supra note 55, at 15 (“Another hazard of Series LLCs is the fact that

they are still relatively new and are only recognized in a minority of states.”); see also

Goforth, supra note 3, at 398 (“The most obvious problem at this point in time is the

fact that so few states have adopted series LLC legislation.”).

120

See generally SERIES OF UNINCORPORATED BUS. ENTITIES ACT reporter’s

introductory note (Draft Mar. 2015), available at

http://www.uniformlaws.org/shared/docs/series%20of%20unincorporated%20busine

ss%20entities/2015mar_SUBEA_Mtg%20Draft.pdf.

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prevalence of SLLCs to increase, as members will be able to ascertain

whether the liability benefits afforded to SLLCs in their state of

formation will be effective in other states.

In Tennessee, a foreign SLLC must identify itself as a SLLC in

either the foreign SLLC's application for a certificate of authority to

transact business in Tennessee, or an amendment of a pre-existing

certificate of authority.

121

The SLLC must also state in the application or

amendment whether the SLLC has “internal” liability shields.

122

The

“internal” liability shields of foreign SLLCs are effective in Tennessee,

unless otherwise provided in the application or amendment.

123

In

conclusion, until more states pass SLLC statutes like Tennessee’s, which

allow the “internal” liability shields of a foreign SLLC to be effective

within their borders, Tennessee SLLCs should be cautious when

operating outside of Tennessee.

IV. FEDERAL AND STATE TAX ISSUES

A. Business Tax Landscape

When a LLC opts into the series structure under an enabling

statute, the fundamental federal and state income tax treatment generally

remains constant. As such, the basic income tax environment in which

SLLCs exist is equivalent to its derivative LLC form.

124

Complications

121

TENN. CODE ANN. § 48-249-309(i) (2012).

122

Id. (“In addition, the foreign LLC shall state in such application or amendment, as

applicable, whether the debts, liabilities, obligations and expenses incurred, contracted

for or otherwise existing with respect to a particular series, if any, shall be enforceable

against the assets of such series only, and not against the assets of the foreign LLC

generally or any other series of the foreign LLC.”). The entity must state if it has

internal liability shields, since while it makes little sense to form a SLLC without the

shields, it is technically possible.

123

Id. (“[U]nless otherwise provided in such application or amendment, none of the

debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing

with respect to the foreign LLC generally, or any other series of the foreign LLC, shall

be enforceable against the assets of such series.”).

124

This treatment, like the series opt-in procedure discussed supra Part I, is analogous a

partnership electing to become a limited liability partnership. The electing partnership

and LLC each continue to operate under the general tax scheme that existed at the time

of election.

84 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

arise, however, when the income tax treatment accorded to the LLC

becomes muddled with the series’ inherent separate/singular dichotomy

as well as incomplete federal and state income tax guidance regarding

such issues.

Unlike corporations and partnerships,

LLCs do not have an

independent income tax regime codified in a sub-chapter of the U.S.

Internal Revenue Code.

125

Rather, a LLC’s federal, and generally state,

income tax classification depends on whether it elects to be treated as a

partnership, corporation, or disregarded entity under the “check-the-

box” regulations.

126

Under check-the-box regulations, a qualifying entity

may literally check a box on the relevant federal tax form to elect its

federal income tax classification, even if that classification differs from

its state law entity classification.

127

This concurrent, simplified

classification system is possible because “the determination of whether

an entity is separate from its owners for Federal tax purposes is a matter

of Federal tax law and does not depend on whether the organization is

recognized as an entity under local law.”

128

The mechanics of the regulations provide that qualifying entities,

essentially separate business entities that are not corporations,

129

trusts,

130

125

See Samuel P. Starr, et al., Limited Liability Companies, 725-3d TAX MGMT. (BNA) U.S.

INCOME PORTFOLIOS, at VIII.C.1 (2015) (“LLCs are creatures of state law, not tax law.

In most states, the fact that a business is organized as an LLC does not dictate its state

tax treatment.”).

126

See id. at n.635 (“LLCs do not elect to be treated as pass-through entities for state tax

purposes; instead, in most states they are treated as such if they qualify for federal

partnership treatment”); see also Treas. Reg. § 301.7701-2 (as amended in 2014).

127

See I.R.S. Form 8832, Entity Classification Election (2013), available at

http://www.irs.gov/pub/irs-pdf/f8832.pdf; see also Lisa Marie Starczewski, Formation of

an LLC, Classification, TAX MGMT. TAX PRAC. SER. (BNA), at 4100.03B (2015).

128

Treas. Reg. § 301.7701-1(a)(1) (as amended in 2011). Check-the-box regulations

freed LLCs from the uncertainty of a balancing test to determine whether the LLCs

operating agreement included more corporate characteristics than non-corporate

characteristics – the basis on which it was decided whether the LLC was more

appropriately treated as a corporation rather a partnership under tax law. See Starr et al.,

supra note 125, at n.635.

129

“A business entity that is not classified as a corporation under §301.7701-2(b)(1), (3),

(4), (5), (6), (7) or (8) (an eligible entity) can elect its classification for federal tax purposes

as provided in this section.” Treas. Reg. § 301.7701-3(a) (as amended in 2006)

(emphasis added). For this purpose:

[T]he term corporation means –

(1) A business entity organized under a Federal or State

statute or under a statute of a federally recognized Indian

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or otherwise subject to special treatment under the Internal Revenue

Code, may check-the-box to elect federal income taxation under the

corporate tax regime.

131

Under the default rules (i.e., unless the entity

elects otherwise) electing eligible entities have the following federal

income tax classifications: “a domestic eligible entity is [a] partnership if

it has two or more members; or [is] [d]isregarded as an entity separate

from its owners if it has a single owner.”

132

Corporations are not eligible

entities and, therefore, may not elect a different federal income tax

classification.

133

Rather, the income of a corporation

134

is taxed at the

federal level under Subchapter C of the Internal Revenue Code, unless it

makes a qualifying election to receive pass-through tax treatment under

tribe, if the statutes describes or refers to the entity as

incorporated or as a corporation, body corporate, or body

politic; . . . (3) A business entity organized under a State

statute, if the statute describes or refers to the entity as a

joint-stock association; (4) an insurance company; (5) A

State-chartered business entity conducting baking activities . .

.; (6) A business entity wholly owned by a state or any

political subdivision thereof, or a business entity wholly

owned by a foreign government or any other entity

described in §1.892-2T; (7) A business entity that is taxable

as a corporation under a provision of the Internal Revenue

Code other than section 7001(a)(3); and (8) Certain foreign

entities . . . .

Treas. Reg. § 301.7701-2(b) (as amended in 2014).

130

Treas. Reg. § 301.7701-4 (as amended in 1996).

131

See Treas. Reg. § 301.7701-1(a), (b) (as amended in 2011); Treas. Reg. § 301.7701-

2(a), (b) (as amended in 2014); Treas. Reg. § 301.7701-3(a), (b)(1) (as amended in 2006);

see generally Starczewski, supra note 127, at 4100.03B (providing an overview of check-

the-box classification regulations).

132

Treas. Reg. § 301.7701-3(a) (as amended in 2006). It should be noted, however, that

separate and apart from federal income tax rules there are “special employment and

excise tax rules that apply to an eligible entity that is otherwise disregarded as an entity

separate from its owner.” Treas. Reg. § 301.7701-2(a) (as amended in 2014).

133

See Treas. Reg. §301.7701-3(a) (as amended in 2006) (“A business entity that is not

classified as a corporation . . . can elect its classification for federal tax purposes as

provided in this section.”).

134

As well as entities that properly elect corporate taxation under the check-the-box

regulations.

86 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

Subchapter S.

135

Thus, for federal income tax purposes, a LLC with one

member, commonly referred to as a Single Member LLC (“SMLLC”),

will be disregarded as a separate entity and its tax consequences will flow

up to the single owner unless the LLC elects to be taxed as a corporation

under the check-the-box regulations. Similarly, the income of a LLC

with more than one member will be taxed as a partnership, unless the

LLC elects to be taxed as a corporation.

Under the corporate tax regime, entities are viewed as separate

and apart from their owners and are subject to income tax at the entity

level.

136

Income tax is assessed at both the entity level in the form of a

corporate income tax,

137

as well as at the owner level when the entity

makes a taxable distribution, for example a dividend, which is included in

the owner’s gross income whether the owner is an entity or individual

person.

138

The potential for taxation at both the owner and entity level is

the hallmark of corporate taxation and is commonly referred to as

“double taxation.”

139

A partnership, on the other hand, is a pass-through entity for

federal income tax purposes. Income tax is not assessed at the entity

level but, rather, is deemed to pass through to the owners.

140

Thus,

unlike corporate taxation, where the owners are generally only taxed

when they receive a distribution from the entity, owners of an entity

subject to partnership taxation must pay tax on their distributive share of

partnership income each tax year, regardless of whether they receive an

actual distribution from the entity.

141

Although the income tax is not

assessed on the entity, the entity must nevertheless calculate its taxable

income

142

and file an informational return with the Internal Revenue

Service (“IRS”) describing its income production activities

143

for the tax

135

“The term ‘S corporation’ means . . . a small business corporation for which an

election under section 1362(a) is in effect for such year.” I.R.C. § 1361(a)(1) (2012).

136

See generally Starr et al., supra note 125.

137

See I.R.C. § 11 (2012).

138

See I.R.C. § 61 (2012).

139

See Starr et al., supra note 125, at n.159.

140

I.R.C. § 701 (2012).

141

I.R.C. §§ 701, 702, 704 (2012).

142

I.R.C. § 703(a) (2012).

143

Specifically, partnership income, loss, gain, deductions, credits, and items thereof. See

I.R.S. Form 1065, Instructions (2014).

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year.

144

The entity is also responsible for providing information to the

owners and the IRS about the owners’ respective share of partnership

income, loss, gain, deduction, and credit (i.e., the calculation of the

owner’s distributive share) that passes through to the individual

owners.

145

Finally, a disregarded entity is an entity that is treated as a “tax-

nothing”

146

for federal income tax purposes–“its activities are treated in

the same manner as a sole proprietorship, branch, or division of the

owner.”

147

For federal income tax purposes, a disregarded entity is not

viewed as a separate entity, resulting in pass-through treatment,

notwithstanding its state law classification. Practitioners and business

people must be aware, however, that an entity considered disregarded for

one tax purpose, such as the federal income tax, may not be treated as

disregarded for all tax purposes.

148

While state corporate income taxation generally follows federal

income tax treatment, unique differences arise at the state level with

respect to partnership taxation. One notable issue arising at the state

level is the application of state nexus.

149

Because of the pass-through

144

See I.R.C. § 6031(a) (2012).

145

See I.R.C. § 6031(b) (2012); Temp. Treas. Reg. § 1.6031(b)-1T(a)(3) (1988).

146

See Thomas E. Rutledge, Regarding the Disregarded Entity, J. PASSTHROUGH ENTITIES

55, 55 (Mar. – Apr. 2011) (“The ‘disregarded entity’ is often described as a ‘tax nothing,’

an entity not only transparent to, but actually outside the contemplation of, the tax

code.”).

147

Treas. Reg. § 301.7701-2(a) (as amended in 2014); see also Treas. Reg. § 301.7701-

3(b)(1) (as amended in 2006).

148

For example, the state income tax, franchise and excise tax, employment tax, or sales

and use tax among others. See Starr et al., supra note 125, at VIII.C.8.

149

One expert has commented that “[e]xactly what constitutes nexus is one of the most

vexing problems in the field of state taxation.” Carolyn Joy Lee, Bruce P. Ely & Dennis

Rimkunas, State Taxation of Partnerships and LLCs and Their Members, J. MULTISTATE

TAX’N & INCENTIVES, Feb. 2010, at 6, 17. Nexus is generally defined as the contact an

entity or individual must have with a state before it becomes subject to the state’s tax

laws. This minimum contact is generally understood in the context of constitutional

minimum contacts, as required by the Due Process Clause and Commerce Clause. The

quality and extent of these contacts remains a source of controversy, however. A

commonly used standard is whether the entity is “doing business” or “transacting

business” in the state. Some states use a broader definition of nexus, taxing entities

88 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

nature of partnership taxation, for entities taxed as partnerships, state

income tax law views the owners as if they are doing business in the state

themselves when the entity has nexus – even if the owner is not actually

participating in the operation of the partnership or present in the state.

Thus, when an entity electing partnership taxation does business in

multiple states, the owners may find themselves with a significant

compliance burden because they must file and pay income taxes in each

state.

150

Additionally, some states levy a tax or fee on pass-through

entities doing business in the state.

151

These entity-level taxes include

state excise and franchise taxes, which are wholly separate from state

income taxes, and are typically based on the entity’s gross receipts or net

worth, respectively.

While LLC tax entity classification is now well settled for federal

income tax purposes, this was not always the case. The first LLC statute

was enacted in Wyoming in 1977,

152

but the IRS did not issue guidance

on how the state-law hybrid LLC would be treated for federal income

tax purposes until 1988.

153

Before the IRS definitively addressed the

proper federal income tax treatment of LLCs, the question of whether

the LLC should be taxed as a partnership or corporation was a

significant issue.

154

During that time, the LLC, one of the most

innovative and popular vehicles for doing business today,

155

remained

relegated to the sidelines, too risky to be taken seriously as a legitimate

option. The same is true for the SLLC.

that “‘derive income’ from sources within the state.” Id.; see McLoughlin & Ely, supra

note 18, at 7.

150

Lee et al., supra note 149.

151

Id. at 12-13.

152

Charles A. Borek, Legal Issues for Accountants and Auditors Advising Business Entities,

5512-2nd ACCT. POL’Y & PRAC. REP. (BNA) TAX AND ACCOUNTING PORTFOLIO, at

III.B.3 (2015).

153

Id.

154

McLoughlin & Ely, supra note 18, at 18 n.53 (“The first LLC statute was enacted in

Wyoming in the 1970s but LLCs did not come into vogue until the 1990s, after the IRS

began issuing guidance that helped make the tax picture more clear. See, e.g., Rev. Rul.

88-76, 1988-2 CB 360.”).

155

See, e.g., TENN. SEC’Y OF STATE, BUSINESS ENTITY STATISTICS (2015), available at

http://sos.tn.gov/products/business-services/business-entity-statistics-0. (In 2014

there were more active LLCs (98,336) on file with active status in Tennessee than for-

profit corporations, limited partnerships and limited liability partnerships combined

(89,038)).

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The concurrent federal and state tax regimes layered on this

general LLC tax foundation create two primary levels of complexity

when considering the tax consequences of SLLC series. First, as

discussed infra Part IV.B, federal tax issues arise related to the general

federal tax classification and treatment of series and the SLLC itself.

Entity classification is an important threshold issue that determines how

the business organization should be viewed in the eyes of federal tax

law.

156

Without guidance, this issue is particularly complex as a result of

the theoretical inconsistencies presented by the SLLC, particularly the

tension between the “separateness” of the series and most state’s

determination that a series is not an entity separate from the SLLC for

state law purposes.

157

Federal guidance in this area improved in 2010, however, when

proposed amendments to entity classification regulations (“Proposed

Regulations”) were published, providing the Treasury’s and IRS’ long-

awaited position regarding the federal income tax treatment of SLLCs.

158

Proposed regulations become authoritative Treasury regulations when

they are published in the Federal Register.

159

This was expected to take

place by June 30, 2015, but has not yet occurred.

160

Nevertheless,

practitioners have become comfortable in following the proposed

156

Supplementary information, 75 Fed. Reg. 55,699, 55,700 (Sept. 14, 2010) (“The

threshold question for determining the tax classification of a series of a series LLC . . .

is whether an individual series or cell should be considered an entity for Federal tax

purposes.”). See infra Part IV.B (discussing specific SLLC federal income tax guidance

provided by the Proposed Regulations, and noting continuing areas of uncertainty with

respect to SLLC federal taxation more generally).

157

See supra Part II; REVISED UNIF. LTD. LIAB. CO. ACT prefatory note (2006) (“How

can a series be – and expect to be treated as – a separate legal person for liability and

other purposes if the series is defined as part of another legal person?”).

158

See 75 Fed. Reg. at 55,699; Bruce P. Ely, J. Leigh Griffith & James E. Long, Jr., Will

the States Conform to Federal Classification of Series LLCs Once the Proposed Regulations are

Finalized? 2013 TAX MGMT. WEEKLY STATE TAX REPORT (BNA) 4 (May 3, 2013)

(“The Proposed Regulations govern only Federal income tax issues; they expressly

reserve a determination as to the Federal (and state) employment tax issues.”).

159

See 75 Fed. Reg. at 55,706.

160

A.L.I. Series LLC CLE, supra note 8, at § VI.A.1.

90 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

guidance in the interim.

161

While the Proposed Regulations were a

critical first step in illuminating the federal income tax treatment of

SLLCs, several significant uncertainties remain, particularly with respect

to employment taxes.

Second, as discussed infra Part IV.C, these and other issues arise

in the context of state taxation where the SLLC series has a sufficient

nexus

162

and is thus subject to the state’s tax laws. Although there have

been some attempts at unification of state and local taxation among the

states and with the federal treatment, it is in each state’s discretion

whether it decides to follow any of these external approaches.

163

Indeed,

after the issuance of the Proposed Regulations, a significant question still

remains as to “whether or to what extent the states plan to conform with

[the federal] proposed tax classification of series within a [SLLC].”

164

The mosaic of state and local tax rules provides for a vast and divergent

tax landscape for entities operating in more than one state.

165

This

variability can provide an opportunity to structure transactions and

business operations to “minimize or avoid state taxes without sacrificing

the business or federal tax objectives of the parties.”

166

The ability to

161

Griffith & Long, supra note 7, at 86. The purpose of a proposed rule is to

“announce[ ] and explain the agency’s plan to address a problem or accomplish a goal.”

After the publication of the proposed rule in the Federal Register, the agency receives

comments from the public. Following the comment period, the agency determines

whether it will move forward with the proposed regulation, developing it into a final

rule. These final rules are integrated into the Code of Federal Regulations, carrying

with the full force of law. OFFICE OF THE FEDERAL REGISTER, A Guide to the

Rulemaking Process,

https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf.

162

See supra note 149 (discussing standards commonly used to determine whether

sufficient nexus exists between the taxpayer and the taxing jurisdiction to subject the

taxpayer to the jurisdiction’s tax laws).

163

SWENSON ET AL., STATE AND LOCAL TAXATION: PRINCIPLES AND PLANNING 3-4

(2d. ed. 2004).

164

Letter from Rudolph R. Ramelli, Chair, Section of Taxation, A.B.A., to Steven T.

Miller, Acting Comm’r, I.R.S. (Apr. 30, 2013), available at

http://www.americanbar.org/content/dam/aba/administrative/taxation/policy/04301

3comments.authcheckdam.pdf) [hereinafter A.B.A. Section of Taxation Letter].

165

See, e.g., Prentiss Willson & Mark Windfeld-Hansen, State Taxation of Pass-Through

Entites: General Principles, 1550-2d TAX MANAGEMENT (BNA) STATE TAX PORTFOLIOS,

at 1500.01.B (2015) (“Not only do the states vary widely in their methods of taxing

pass-through entities and their participants, but often the same state will apply markedly

different rules depending on the particular type of pass-through entity involved.”).

166

Id.

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leverage non-uniform state laws is contrasted with perilous uncertainty

of the law itself, as has largely been the case for SLLCs. The “chair of

the [ABA] joint task force and of the [State and Local Tax] Practice

Group at Bradley Arant Boult Cummings LLP in Birmingham,

Ala[bama], likened the uncertainty surrounding the use of [SLLCs] to

that of ‘placing a loaded gun in the hands of a child.’”

167

The tax

uncertainties are complex and wide-ranging, including: entity

classification, nexus, apportionment, sales and use tax, entity-level taxes,

state unemployment taxes, and gross receipts taxes.

168

B. Federal Tax Issues

As described supra Part IV.A, until recently, substantial

uncertainty surrounded how the SLLC would be treated for federal

income tax purposes. The root of SLLC federal tax issues has concerned

whether a series is treated as a separate entity for federal income tax

purposes. The preamble to the Proposed Regulations addressing the

SLLC’s federal income tax classification emphasizes that when the

Proposed Regulations were published in 2010 “there [was] little specific

guidance regarding whether for Federal tax purposes a series . . . [should

be] treated as an entity separate from other series or the [SLLC] . . . or

whether the company and all of its series . . . should be treated as a single

entity.”

169

The issuance of the Proposed Regulations brought clarity to

an aspect of SLLC tax entity classification by expanding check-the-box

regulations to specifically address series organizations.

170

167

Deborah Swann, States Undecided on How They Will Treat Series LLC Employment Taxes,

2013 TAX MGMT. WEEKLY STATE TAX REPORT (BNA) 15 (May 17, 2013).

168

See, e.g., McLoughlin & Ely, supra note 18 (providing an overview of state tax issues

arising from the use of a SLLC).

169

See supplementary information, 75 Fed. Reg. 55,699, 55,699 (Sept. 14, 2010).

170

The proposed regulations define a series organization as “a juridical entity that

establishes and maintains, or under which is established and maintained, a series . . . ”

Prop. Treas. Reg. § 301.7701-3(a)(5)(viii)(A), 75 Fed. Reg. 55,699, 55,708 (Sept. 14,

2010). For federal tax classification purposes a series is “a segregated group of assets

and liabilities that is established pursuant to a series statute (as defined in paragraph

(a)(5)(viii)(B) of this section) by agreement of a series organization . . . .” Prop. Treas.

Reg. § 301.7701-3(a)(5)(viii)(C), 75 Fed. Reg. at 55,708.

92 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

Specifically, the Proposed Regulations clarify SLLC tax entity

classification by providing that, notwithstanding the state law entity

status of a SLLC series, each series in a SLLC is treated as a separate

entity for purposes of determining its tax classification for federal

income tax purposes.

171

Each qualifying series

172

may make an

independent check-the-box election, allowing the series to choose how it

will be taxed for federal income tax purposes within the relevant rules.

Thus, a series that has only one associated member will be treated as a

disregarded entity for federal income tax purposes, unless it elects to be

treated as a corporation, and a series that has two or more associated

members will be taxed as a partnership unless it elects to be treated as a

corporation.

173

For federal income tax purposes, the series will be

considered “organized under the laws of [the] State” that permits the

establishment of the respective series.

174

Similarly, the SLLC, as a state law entity, is considered a federal

income tax-reporting unit separate and apart from its respective series.

175

As a result, the SLLC itself may have federal income tax reporting

171

“For Federal tax purposes, except as provided in paragraph (a)(5)(ix) of this section,

a series, (as defined in paragraph (a)(5)(viii)(C) of this section) organized or established

under the laws of the United States or of any State, whether or not a juridical person

for local law purposes, is treated as an entity formed under local law.” Prop. Treas. Reg.

§ 301.7701-1(a)(5)(i), 75 Fed. Reg. 55,699, 55,707 (Sept. 14, 2010); see also Prop. Treas.

Reg. § 301.7701-1(a)(5)(viii), 75 Fed. Reg. at 55,708 (specifically providing that a SLLC

is a series organization as defined by the regulation).

172

Prop. Treas. Reg. § 301.7701-1(a)(5)(iii), 75 Fed. Reg. at 55,707 (“Whether a series

that is treated as a local law entity under paragraph (a)(5)(i) or (ii) of this section is

recognized as a separate entity for Federal tax purposes is determined under this section

and general tax principles.”); Prop. Treas. Reg. § 301.7701-1(a)(5)(iv), 75 Fed. Reg. at

55,707 (“The classification of a series that is recognized as a separate entity for Federal

tax purposes is determined under paragraph (b) of this section.”).

173

For example, assume a qualifying domestic SLLC has two series, Series A and Series

B. Members 1 and 2 are associated with Series A, and Member 3 is associated with

Series B. Analysis under Prop. Treas. Reg. § 301.7701-1(a)(5)(i) provides that “Series A

and Series B are each treated as an entity formed under local law. The classification of

series A and Series B is determined under of this section. The default classification

under §301.7701-3 of Series A is a partnership and of Series B is a disregarded entity.”

Prop. Treas. Reg. § 301.7701-1(a)(x), Example 1, 75 Fed. Reg. at 55,708.

174

Prop. Treas. Reg. § 301.7701-1(a)(5)(v), 75 Fed. Reg. at 55,707.

175

See supplementary information, 75 Fed. Reg. 55,699, 55,704 (Sept. 14, 2010).

Although the proposed regulations are silent on this point, the preamble provides that

an organization recognized as a state law purposes is generally treated as an entity for

federal tax purposes. Id.

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responsibilities and may make federal income tax elections independent

of its series.

176

While the preamble acknowledges that a tax entity may

not have a filing obligation under some circumstances where it does not

undertake income producing activities,

177

the proposed regulations do

not specifically address “whether a series organization is recognized as a

separate entity for Federal tax purposes if it has no assets and engages in

no activities independent of its series.”

178

Thus, additional federal

income tax uncertainty exists where a SLLC is used as a mere holding

company.

Further, the Proposed Regulations provide that each series and

the SLLC will have to make annual informational disclosures by March

15th for the preceding tax year, effective for tax years following the

adoption of the final regulations.

179

SLLCs will have to provide

“identifying information . . . as proscribed by the Internal Revenue

Service . . . ,”

180

although the IRS has yet to determine exactly what

information will be required to be disclosed by the SLLC to satisfy these

annual reporting requirements.

181

The Proposed Regulations depart from the state SLLC statutes

with respect to some ancillary SLLC issues, appearing to favor substance

over form in these instances. For example, the Proposed Regulations

provide that “the ownership of interests in a series and of the assets

associated with a series is determined under general tax principles” and

that “[a] series organization is not treated as the owner . . . of a series or

of the assets associated with a series merely because the series

176

State tax experts have commented that “under the Proposed [SLLC] regulations, the

[SLLC] itself (as opposed to the series within the [SLLC]) is considered a separate tax

reporting unit independent of the various series within it.” A.B.A. Section of Taxation

Letter, supra note 164 at 2; see also Ely et al., supra note 158.

177

Supplementary information, 75 Fed. Reg. at 55,704 (“For example, §301.6031(a)-

(1)(a)(3)(i) provides that a partnership with no income, deductions, or credits for federal

income tax purposes may not be required to file a partnership return for that year.”).

178

Id. at 55,703.

179

Prop. Treas. Reg. § 301.6011-6, 75 Fed. Reg. 55,699, 55707 (Sept. 14, 2010);

supplementary information, 75 Fed. Reg. at 55,705.

180

Prop. Treas. Reg. § 301.6011-6(a), 75 Fed. Reg. at 55,707.

181

Id.

94 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

organization holds legal title to the assets associated with the series.”

182

Similarly, a liability-sharing or other similar arrangement between or

among series or the series organization will be disregarded for purposes

of determining whether a series has been formed under the proposed

regulations.

183

Further, “a failure to comply with the record keeping

requirements for the limitation on liability available under the relevant

series statue[] will [also] be disregarded [for purposes of defining the

series].”

184

This is significant for Tennessee SLLCs because Tennessee’s

SLLC statute allows the SLLC to utilize private ordering with respect to

third-party liability but requires separate books and records to be

maintained for the internal liability shield to be effective.

185

Finally, in Proposed Regulation section 301.7701-1(a)(5)(vii), the

IRS considers the effect of state law classification on federal income tax

collection and enforcement.

186

First, consistent with the series’ entity

designation for federal tax purposes (and thus notwithstanding the state

law classification), the Proposed Regulations provide that tax may be

collected from a series as if it were any other taxpayer.

187

Additionally,

where state or federal law provides that “a debt attributable to [a] series

[may] be collected from the series organization or other series of the

series organizational”

188

then the IRS may collect the federal income tax

due from the SLLC or any of its component series.

189

Similarly, where “a

creditor is permitted to collect a liability attributable to a [SLLC] from

any [of its] series” the IRS may likewise collect tax assessed on the SLLC

directly from a series.

190

Notwithstanding the guidance provided by the Proposed

Regulations, several federal tax issues remain. The IRS requested

182

Prop. Treas. Reg. § 301.7701-1(a)(5)(vii), 75 Fed. Reg. 55,699, 55,703 (Sept. 14,

2010).

183

Prop. Treas. Reg. § 301.7701-1(a)(5)(viii)(C), 75 Fed. Reg. at 55,708.

184

Id.

185

TENN. CODE ANN. § 48-249-309(b)(1)(A), (B) (2012).

186

See Prop. Treas. Reg. § 301.7701-1(a)(5)(vii), 75 Fed. Reg. at 55,704.

187

Prop. Treas. Reg. 301.7701-1(a)(5)(vii), 75 Fed. Reg. at 55,708.

188

Id. (for example, if the series is not a protected series).

189

Id.

190

Id.

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REVISITING THE TENNESSEE SERIES LLC

comments regarding seven specific issues in the Proposed Regulations.

191

Several of these issues relate to employment taxes, a complex area

192

further complicated by the series construct.

193

Specifically, the bi-polar

“series structure [makes] it difficult to determine whether the series or

the series organization is the employer. . . .”

194

This should give

employers pause because employers are responsible for withholding and

remitting employment taxes from employees’ taxable compensation to

the IRS, akin to a trustee or agent for the government.

195

Harsh penalties

191

Specifically, the proposed regulations called for comments on the following seven

issues:

(1) Whether a series organization should be recognized as a

separate entity for Federal tax purposes if it has no assets

and engages in no activities independent of its series; (2)

The appropriate treatment of a series that does not

terminate for local law purposes when it has no members

associated with it; . . . (4) How the Federal employment tax

issues . . . and similar technical issues should be resolved;

(5) How series and series organizations will be treated for

State employment tax purposes and other state

employment-related purposes and how that treatment

should affect the Federal employment tax treatment of

series and series organizations . . . ; (6) What issues could

arise with respect to the provision of employee benefits by

a series organization or series; and (7) The requirement for

the series organization and each series of the series

organization to file a statement and what information

should be included on the statement.

Supplementary information, 75 Fed. Reg. 55,699, 55,707 (Sept. 14, 2010).

192

See, e.g., ERNST & YOUNG, Employers and the Employment Tax Portfolio (2012),

http://www.ey.com/Publication/vwLUAssets/Managing_the_tax_risks_and_growing

_complexity/$FILE/ETS-2012March.pdf (“[E]mployers can count on two things in

the realm of employment tax: a complex operating environment and an aggressive

enforcement climate.”).

193

See Griffith & Long, supra note 7 (describing several employment tax issues arising

from the series structure).

194

Supplementary information, 75 Fed. Reg. at 55,705.

195

See I.R.S., Employer's Tax Guide, Publication 15 (2015), available at

http://www.irs.gov/publications/p15/index.html; Robert W. Wood, Failing to Pay

Employment Taxes Means Personal Liability, FORBES (Mar. 12, 2014),

http://www.forbes.com/sites/robertwood/2012/03/12/failing-to-pay-employment-

taxes-means-personal-liability/.

96 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

exist for the failure to fulfill this duty,

196

which can result in personal

liability for the business owners and other “responsible persons.”

197

C. State Tax Issues

Much like the uncertainty surrounding whether states will respect

a foreign SLLC’s liability shield,

198

it is yet to be seen how many states

will address the series concept with respect to state and local taxation.

With the issuance of federal guidance, the next question became, as

noted supra Part IV.A., whether states would adopt the federal

classification regime and the issues that accompany treating a series as a

separate tax entity.

199

This determination in turn spawns a myriad of

additional state tax issues arising from the entity/non-entity tension

inherent in the SLLC structure under state LLC law. While the states

have issued little formal guidance,

200

available information regarding the

state tax treatment of the SLLC has greatly benefitted from the ABA

Section on Taxation’s Survey of the States Regarding their Intent to Conform to

the Classification of Series LLCs for Federal Income Tax Purposes and related

comments (“ Survey”).

201

In particular, five areas stand out as unsettled

SLLC state tax issues: entity classification, gross receipts/net worth

taxes, employment taxes, sales and use taxes, and nexus. Tennessee has

been a leader in developing state guidance on these issues, illuminating

the state’s position on aspects of SLLC taxation by issuing formal

196

See, e.g., I.R.C § 6672 (2012) (providing for the trust fund penalty, providing for a

100% penalty under some circumstances); I.R.C. § 6651 (2012 & Supp. 2014)

(providing a failure to file a the tax return or pay tax results may result in a penalty of

up to a 25% of the tax due).

197

See I.R.S., Employment Taxes and the Trust Fund Recovery Penalty (TFRP),

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employment-

Taxes-and-the-Trust-Fund-Recovery-Penalty-TFRP (June 2015) (“A responsible person

is a person or group of people who has the duty to perform and the power to direct the

collecting, accounting, and paying of trust fund taxes.”). Id.

198

See supra Parts II, III.

199

See, e.g., Ely et al., supra note 158.

200

A.B.A. Section of Taxation Letter, supra note 164, at 7. As of April 30, 2013, the only

states with statutes acknowledging SLLCs that have issued state taxation guidance were

Tennessee and Texas. Id.

201

Id. at 2. Survey responses were received from thirty-one states providing feedback

on how the states intend to address various state tax issues related to the SLLC.

Although the survey provides a wealth of information, its findings are not binding

authority.

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REVISITING THE TENNESSEE SERIES LLC

guidance and by shedding light on the state’s anticipated treatment of

other remaining issues through its participation in the Survey.

202

Tennessee is one of a handful of states that have issued

authoritative guidance providing that the state will conform to the

Proposed Regulations.

203

Thus, under Tennessee tax law, a series is

considered a separate entity that may elect its state tax classification.

204

This comports with other states’ anticipated classification of series for

state tax purposes.

205

Indeed, this may be the area in which states are

most in agreement with respect to SLLC state taxation issues. No state

responding to the Survey indicated that it planned to depart from the

federal income tax treatment of SLLC series set forth in the Proposed

Regulations.

206

Because the series is considered a separate entity for Tennessee

tax law purposes, an individual series may be liable for franchise and

excise tax for the privilege of conducting business in the state and having

substantial nexus in the state.

207

Practitioners and business people

202

See Tenn. Dep’t of Rev. Ltr. Rul. 11-42 (Sept. 6, 2011) [hereinafter Tenn. D.O.R.

Letter Rule 11-42]; A.B.A. Section of Taxation Letter, supra note 164, at 7; Brett R. Carter &

James E. Long, Jr., Tennessee: State Issues Significant Guidance on the Tax Treatment of Series

LLCs, J. MULTISTATE TAX’N & INCENTIVES, Feb. 2012, at 34, 34.

203

This includes the Proposed Regulations addressing series federal income tax

classification, which conclude series are considered separate entities for federal tax

purposes, notwithstanding state business law. Tenn. D.O.R. Letter Rule 11-42.

204

A.B.A. Section of Taxation Letter, supra note 164, at 3.

205

Id. at 6-7.

206

Id. at 6.

207

TENN. CODE ANN. §§ 67-4-2005, -2104 (2013); Tenn. D.O.R. Letter Rule 11-42, supra

note 203; see generally TENN. DEP’T OF REVENUE, FRANCHISE AND EXCISE TAX GUIDE

(2014), available at

http://www.tn.gov/assets/entities/revenue/attachments/feguide.pdf. The excise tax is

levied on LLCs doing business in the state and having a substantial nexus in the state,

and is equal to six and one-half percent tax based on the entity’s net earnings or income

from business done in the state for the tax year. TENN. CODE ANN. § 67-4-2007(a)

(2013 & Supp. 2015) (amended 2015, effective Jan. 1, 2016). The franchise tax is levied

on LLCs doing business in the state and having a substantial nexus in the state, or

exercising the corporate franchise in the state, and is equal to one quarter of one

percent tax based on the greater of net worth or the book value of real or tangible

personal property owned or used in Tennessee. TENN. CODE ANN. §§ 67-4-2105 (2013

98 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

should be aware, however, that whether a series is viewed as a separate

entity for Tennessee state tax purposes is merely a threshold question in

determining Tennessee franchise and excise tax liability. In Tennessee, a

second level inquiry must be made to determine the particular series’ tax

classification for state franchise and excise tax purposes. While

Tennessee generally conforms with the federal check-the-box tax

classification for LLCs (and thus series and SLLCs) for state tax

purposes,

208

state law requires a more exacting standard for tax entities to

qualify for disregarded entity classification.

209

Specifically, in Tennessee,

“to be [considered a] . . . disregarded [entity for franchise and excise tax

purposes] a particular [series] must 1) constitute[

210

] a single member

limited liability company; 2) be classified as a disregarded entity for

federal income tax purposes; and 3) be wholly owned by a

corporation.”

211

It is in this limited situation that a series may be

disregarded as a part of the corporate owner and will not have

independent filing responsibilities for Tennessee franchise and excise tax

purposes.

212

Indeed, the letter ruling setting forth these requirements

emphasizes that “[i]f any of these requirements are not met, the [series]

will be treated as a separate entity for franchise and excise tax

purposes.”

213

For example, where a SMLLC is wholly owned by a

limited partnership,

214

it cannot be disregarded for franchise and excise

& Supp. 2015, effective Jan. 1, 2016); TENN. CODE ANN. §§ 67-4-2106(a), 67-4-

2108(a)(1) (2013).

208

TENN. CODE ANN. § 48-249-1003 (2012); Tenn. D.O.R. Letter Rule 11-42, supra note

203, at 3.

209

TENN. CODE ANN. § 67-4-2007(d) (2013 & Supp. 2015) (amended 2015, effective

Jan. 1, 2016); TENN. CODE ANN. § 67-4-2106(c) (2013).

210

Constitute in this context refers strictly to tax principles. Specifically, no more than

one owner may be associated with the series for a series to be equivalent to a SMLLC.

For state law purposes, however, where a series is not considered a separate state law

entity, a series may never “constitute” a SMLLC because no entity exists in the eyes of

the state law. See supra Part I (noting that series are generally not recognized as separate

entities under state law).

211

Tenn. D.O.R. Letter Rule 11-42, supra note 203, at 4.

212

Id.

213

Id.

214

For example, if the SLLC is wholly owned by a limited partnership (and therefore

the single owner would be associated with 100% of each series), as the Tennessee

Letter Ruling facts provide. Id. at 1.

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REVISITING THE TENNESSEE SERIES LLC

tax purposes because the single member must be a corporation.

215

Rather, the series will be viewed as an independent entity for this limited

purpose and must separately satisfy Tennessee franchise and excise tax

reporting requirements, notwithstanding the fact that it may be

recognized as a disregarded entity for federal and other Tennessee state

tax purposes.

216

This departure from the federal treatment under the

Proposed Regulations is limited to Tennessee’s franchise and excise

tax.

217

Accordingly, Tennessee conforms to the less stringent Proposed

Regulations for all other Tennessee state taxes, where any wholly owned

series may be considered a disregarded entity unless it elects to be taxed

as a corporation.

218

Tennessee indicated that it will not require the SLLC

to file franchise and/or excise tax returns “if the [SLLC] did not have

any business activity within the state (other than being associated with a

series that has nexus within the state).”

219

In contrast to most other states responding to the Survey,

Tennessee will not impose state income tax on a non-resident owner of a

series electing pass-through taxation so long as “the series was filing

returns and remitting the appropriate tax.”

220

This means that so long as

the taxable series doing business in Tennessee files the appropriate tax

returns and pays the corresponding tax, the Tennessee Department of

Revenue will not “look to the out-of-state owner to file the return and

pay the tax in situations where such owner can be held liable for the

tax.”

221

Tennessee does not require out-of-state LLC members to file a

composite tax return or subject them to withholding requirements, both

of which are common strategies states employ to mitigate collection

215

Id. at 4-5.

216

Id. at 4.

217

Id.; A.B.A. Section of Taxation Letter, supra note 164, at 8.

218

For example, the sales and use tax, property tax, and business tax. Tenn. D.O.R. Letter

Rule 11-42, supra note 203, at 8.

219

A.B.A. Section of Taxation Letter, supra note 164, at 9-10.

220

Id. at 8, 8 n.15.

221

Id. at n.33.

100 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [Vol. 17

problems arising from out-of-state members participating in a pass-

through entity conducting business in the state.

222

Like the United States and several other states, Tennessee is

undecided on the issue of “how the series and series organization will be

treated for state employment tax purposes and other state employment-

related purposes . . . .”

223

Only fourteen states have disclosed their

anticipated treatment of these taxes, of which nine plan to treat each

series as a separate employer and five plan to take the opposite

approach.

224

As evidenced by the federal uncertainty that was the

impetus for the Survey, employment taxes remain a significant area of

uncertainty for SLLCs.

Tennessee levies a seven percent state sales or use tax

225

on retail

sales,

226

leases,

227

rentals,

228

or consumption

229

of a variety of items,

including tangible personal property,

230

computer software,

231

certain

services,

232

and amusements.

233

The tax is levied on the retailer, who or

222

Starr et al., supra note 125, at VIII.C.6.b.

223

A.B.A. Section of Taxation Letter, supra note 164, at 2.

224

Id.

225

See TENN. CODE ANN. § 67-6-201 (2013 & Supp. 2015) (amended 2015, effective

July 1, 2017); see generally TENN. DEP’T OF REVENUE, TENNESSEE SALES AND USE TAX

GUIDE (2015). Certain transactions may also be subject to the single article tax and/or

local sales taxes. TENN. CODE ANN. § 67-6-202, -702 (2013 & Supp. 2015) (amended

2015).

226

TENN. CODE ANN. § 67-6-202 (2013 & Supp. 2015) (amended 2015, effective July 1,

2017).

227

TENN. CODE ANN. § 67-6-204 (2013).

228

Id.

229

TENN. CODE ANN. § 67-6-203 (2013 & Supp. 2015) (amended 2015, effective July 1,

2017). Consumption is broadly used here to refer to “the privilege of using,

consuming, distributing or storing tangible personal property after it is brought into this

State from without this State[]’” as contemplated by the Tennessee use tax statute.

Broadacre Daries, Inc. v. Evans, 246 S.W.2d 78, 79 (Tenn. 1952) (citing Madison

Suburban Util. Dist. of Davison Cty. v. Carson, 232 S.W.2d 277, 280 (Tenn. 1950)).

230

TENN. CODE ANN. § 67-6-202 (2013 & Supp. 2015) (amended 2015, effective July 1,

2017).

231

TENN. CODE ANN. § 67-6-231 (2013 & Supp. 2015) (amended 2015, effective July 1,

2017).

232

TENN. CODE ANN. § 67-6-205 (2013 & Supp. 2015) (amended 2015, effective July 1,

2017).

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which is liable for the tax regardless of whether it is collected from

customers.

234

The use tax is the counterpart to the sales tax. It is levied

on purchases of goods imported for use in Tennessee, and unlike the

sales tax, the purchaser is liable for the tax.

235

In the context of SLLCs,

Tennessee intends to “exempt from sales and use taxation any transfers

of tangible personal property between and among series because, for

state law purposes, there is no change of title or ownership.”

236

In

Tennessee, where sales and use tax does arise, the SLLC, not the

individual series, will “ultimately . . . be responsible for the tax regardless

of the type of entity or its classification for federal income tax

purposes.”

237

Consistent with its position on sales and use taxes,

“Tennessee indicated that [it] may exempt intercompany transactions”

from rental/lease tax on “leases of tangible personal property between

the series.”

238

Further, in Tennessee, the SLLC, not the series, is the

proper “reporting entity for lease/rental taxes, even if [it] has no activity

in the state (independent of the [activity of the] series).”

239

Thus, the

SLLC may create tax savings for organizations that engage in such

intercompany transactions.

Finally, the position that series are considered separate entities

for tax purposes creates interesting questions and opportunities related

to nexus.

240

It is an open question whether a series doing business in one

state will create nexus for members associated with a different series of

the same SLLC, where the series are subject to partnership taxation and

233

TENN. CODE ANN. § 67-6-212 (2013).

234

TENN. CODE ANN. §§ 67-6-501 to -502 (2013).

235

TENN. CODE ANN. § 67-6-203 (2013).

236

A.B.A. Section of Taxation Letter, supra note 164, at 3, app. xi; TENN. CODE ANN. § 67-

6-102(78)(A) (2013) and as amended § 67-6-102(80)(A) (Supp. 2015) (amended 2015,

effective July 1, 2017) (“‘Sale’” means any transfer of title . . . in any manner or by any

means whatsoever of tangible personal property for a consideration . . . ”).

237

A.B.A. Section of Taxation Letter, supra note 164, at app. xi n.56.

238

Id. at 13.

239

Id.

240

See McLoughlin & Ely, supra note 18, at 13-14 (illustrating the potential impact of

series treated as separate entities for tax purposes with respect to nexus

determinations).

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conduct business exclusively in different states. The answer to this

question depends on whether a series will be respected as a separate

entity for purposes of determining nexus. If the series is considered a

separate entity, the associated owners will be deemed to only have nexus

where their associated series have nexus. Accordingly, associated owners

will minimize their reporting requirements, and thus tax liability, where

the series is not considered to be doing business in states to which it

otherwise would be deemed to have nexus (i.e., if the series was viewed

as an unshielded segment of a traditional LLC). Similarly, if series are

treated as separate entities for state income apportionment purposes,

241

new state tax planning possibilities may arise for SLLCs doing business

in more than one state when business operations are organized in a way

that minimizes the income allocable to high-tax jurisdictions by

strategically locating series activities in states to best take advantage of

favorable apportionment formulas.

242

However, SLLC multi-state

operations may open the door to liability: value created by optimizing the

SLLC’s state tax exposure may be outweighed by the risk created from

operating in foreign jurisdictions that do not recognize protected series.

These issues represent the general treatment of some of the

many possible SLLC state tax issues. Any particular SLLC tax issue

should be considered in the context of the broader federal, state, and

local tax and business environment and the entity’s specific facts and

circumstances. This creates numerous opportunities for tax advisors and

legal counsel.

241

Apportionment is the statutory “method of determining what portion of a multistate

taxpayer's income can fairly be said to be related to the taxpayers' activities in the

state[]” and is usually based on some combination of the entity’s sales, property, and

payroll attributable to the state. Lee et al., supra note 149, at 19; see, e.g., TENN. CODE

ANN. §§ 67-4-2012, -2111 (2013 & Supp. 2015) (amended 2015) (providing a double

weighted sales apportionment formula for tax years beginning before July 1, 2016, and

a triple weighted sales apportionment formula for tax years beginning on or after July 1,

2016). This resulting ratio is applied to the franchise and excise tax base to determine

the entity’s franchise and excise tax liability attributable to doing business in the state.

Id.; see also TENN. DEP’T OF REVENUE, Instructions for Completing Apportionment

Schedules N – R, available at

https://www.tn.gov/assets/entities/revenue/attachments/instrschednr.pdf.

242

See, e.g., McLoughlin & Ely, supra note 18, at 16-17 (providing an overview and

example of using the SLLC form to minimize taxable income under state

apportionment formulas).

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REVISITING THE TENNESSEE SERIES LLC

V. CONCLUSION

Ten years after the enactment of the Tennessee SLLC statute,

several critical uncertainties continue to cloak the SLLC form. These

uncertainties will likely continue to restrict the desirability of the

Tennessee SLLC as a multistate business entity. In particular, whether

the SLLC’s internal liability shield will be respected in foreign

jurisdictions, the appropriate treatment of the series concept with respect

to federal and state employment tax, and the state tax treatment both

within and outside Tennessee will likely continue to prevent the SLLC

from gaining more widespread use. While much progress has been made

over the past ten years with regard to SLLC taxation, particularly through

the efforts of the ABA, much of the guidance providing for the tax

consequences of organizing a business as a Tennessee SLLC is not

authoritative and simply provides the federal and states’ anticipated tax

treatment of the attendant issues. Similarly, until there is precedent or

statutory authority on point providing for the integrity of Tennessee

internal liability shields adjudicated in foreign jurisdictions, the ultimate

effectiveness of Tennessee SLLCs in multistate business remains largely

unknown.

Following this decade of doubt, however, the possibility remains

that federal and state guidance will continue to illuminate the benefits

and risks of the Tennessee SLLC form. The ongoing work by the

NCCUSL and ABA to develop uniform laws governing the SLLC and

the continued legislative and administrative activity at the federal and

state level to provide anticipated and authoritative guidance on SLLC

issues are two ongoing developments that will likely have significant

impact on the ultimate success of the Tennessee SLLC as a mainstream

business entity. Until then, it is unlikely that the SLLC will become the

next LLC and enjoy the LLC’s status as a widespread viable alternative to

traditional business entity structures in Tennessee. Rather, absent

further advances on a national scale, the Tennessee SLLC will likely

remain an exotic state law entity, limited in its usefulness to particular

intrastate business.