In 1996, Delaware was the first state to establish a statute permitting the “series LLC,” which allows a single master series LLC to house multiple separate LLCs. In a series LLC, each unit within the series can operate as a separate entity and can even have different members, as well as hold its own assets and incur its own liabilities.
Many business owners are attracted to the Series Limited Liability Company because it allows them to form multiple LLCs with greater ease. Not all states allow for them as only Alabama, Delaware, the District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Puerto Rico, Tennessee, Texas, Utah, Wisconsin, and Wyoming allow for them.
Within these states, the Series LLC statutes 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.
A traditional LLC is what’s referred to as a single Limited Liability Company. A series LLC is comprised of a parent 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 holding company.
What are the benefits of a Series LLC?
One of the most significant advantages of 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 is less for one series LLC than the costs of setting up multiple individual LLCs. In the same way, the administrative burden to maintain one LLC vs. a series LLC as there is only one annual report, one tax return, etc.
A typical example showing the benefit of a series LLC is when real estate investors put each rental property in a separate series, so if a tenant gets hurt in investment property A, then investment property B, C, and so on are safe. The series LLC is less expensive than forming an LLC for each property.
State laws may vary depending on the state, so before deciding on the series, be sure the laws don’t diminish the value of the series LLC.
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 Internal Revenue Service has previously taken the position that, in certain cases, each series should be taxed as a separate business entity, the specific 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 fees for each separate entity.
Rigorous recordkeeping is required for tax purposes of running a series LLC. To maintain the liability shield, each series must operate as a separate business 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 as an umbrella 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 inside the LLC, the assets and income of all the others are at risk.
How to Form a Series LLC
The formation of 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 (typically the Secretary of State). 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 creating the master LLC, each additional series is formed through the processes described in the operating agreements.
Like a domestic LLC, a Series LLC will also need to have a registered agent. A registered agent can be any person or registered agent service that has a presence in the state where the LLC is being formed.
Next, you should create a Series LLC 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. While most states do not require the operating agreement to be publicly filed, it’s vital to maintain asset protection. 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 ensure the member’s personal assets are protected. There are plenty of places online to get an affordable and legally reviewed operating agreement like EForms or LawDepot.
Last, a separate bank account should be created for each series, and no commingling of funds should occur to ensure the liability protection between each series.