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In 1996, Delaware was the first state to establish a statute permitting the “series LLC,” which allows a single, master LLC to house multiple separate LLCs. In a series LLC, each unit within the series can have separate owners as well hold its own assets and incur its own liabilities.
Although many business owners are attracted to the Series Limited Liability Company because it allows them to form multiple LLCs with greater ease, this structure is only recognized in a few states: Alabama, Delaware, the District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Puerto Rico, Tennessee, Texas, Utah, Wisconsin, and Wyoming.
Within these states, the statutes providing for series LLCs are all different and the requirements should be thoroughly examined before attempting to structure your business.
What is the difference between an LLC and Series LLC?
Both LLCs and series LLCs afford liability protection of the owner’s personal assets.
An LLC is a single Limited Liability Company. A series LLC is comprised of a master LLC with one or more individual series within the umbrella of the LLC. The individual series are protected from liabilities and losses suffered by the other individual series and the master LLC.
What are the advantages of a Series LLC?
One of the biggest advantages to using a series LLC is that if one of the LLCs gets sued, the assets held by the other entities are not usually vulnerable to creditors or judgments.
There is also the additional benefit of reduced costs and administrative tasks. In some states, the filing fee required is less than the costs of setting up multiple individual LLCs. In the same way, the paperwork and filing requirements are usually less burdensome than filing multiple LLCs and other compliance documents for each individual entity.
A common example showing the benefit of a series LLC is when a real estate investor puts each unit in a separate series so if a tenant gets hurt in property A, then property B, C and so on are safe. The series LLC is less expensive than forming an LLC for each property.
What are the disadvantages of a Series LLC?
While there are compelling advantages to forming a series LLC, there are also disadvantages. For instance, there are some unresolved tax issues regarding series LLCs. Although the IRS has previously taken the position that in certain instances, each series should be taxed as a separate entity, the exact tax treatment may vary. In regards to state taxes, series LLCs may need to pay only a single state franchise tax for a single entity or may be required to pay separate fees for each entity.
Rigorous recordkeeping is required for your series LLC. To maintain the liability protection, each series must operate like a separate entity with a unique name, bank account, separate books, and records.
If you conduct business primarily out-of-state, a series LLC may not be recognized in the states where the bulk of your transactions take place. This may jeopardize your limited liability protection in actions in that state.
An additional risk is that, as of now, the treatment of series LLCs in bankruptcy proceedings is relatively unclear. Since series LLCs are unique entities, it is uncertain what will happen to the other series if one files for bankruptcy.
Series LLC vs. Operating Multiple Businesses Under One LLC
Although series LLCs provide the same benefits as LLCs, using a series structure in a state where it exists can be beneficial. Establishing a series LLC to administer your many businesses is advantageous in that the risks and liabilities that impact one LLC won’t affect the assets of the other entities.
Operating multiple businesses under one regular LLC may be a good option for your business if your priority is to minimize initial costs, recordkeeping and registered agents. However, if a claim is made against any one of your businesses, the assets and income of all the others is subject to liability.
How to Form a Series LLC
Forming a series LLC first requires registering the business as a series LLC with your state. You will need to file Articles of Formation (called Articles of Organization or Certificate of Formation in some states) with the state governmental entity that handles business filings. Most states require that the Articles of Formation for a series LLC specifically state that the LLC is authorized to form series. For a series LLC you usually only need to file the Articles of Formation once. After forming the master LLC, each additional series is formed through the processes described in the operating agreements.
Next, you will need to create an operating agreement for the master LLC and all other LLCs in the series. An operating agreement is a legal document that outlines the rules and regulations governing the operation and ownership of your LLCs. The master LLC operating agreement generally provides rules for the overall operations of the series LLC. Likewise, operating agreements for each series should provide customized rules for operations. Your operating agreements should be tailored and carefully written to assure your businesses are protected. Most states do not require the operating agreement to be publicly filed.