Series LLC: Everything You Need to Know
If you’ve never heard of a series LLC, you’re not alone. It’s a new corporate structure that allows entities to separate while still remaining within the same overall structure.8 min read
2. What Is a Series LLC?
3. States Permitting Series LLC
4. Forming a Series LLC
5. Tax Issues
6. Series LLC - Is it Right for Your Business?
7. Businesses that benefit from LLC
8. The Benefits of a Series LLC
9. The Drawbacks of a Series LLC
10. Series LLCs: Wise Option or Risky Strategy
11. Formation Costs.
12. Asset Protection
Updated November 25, 2020:
If you’ve never heard of a series LLC, you’re not alone. It’s a new corporate structure that allows entities to separate while remaining within the same overall structure. To decide if this is the right move for your business, you’ll need to know the costs, advantages, and legal risks involved. Research and education are critical to ensuring you don’t set yourself up for issues down the road.
What Is a Series LLC?
Unique from other types of limited liability companies, or LLCs, the series LLC has special articles of formation that allow members to completely segregate their assets, operations, and assets into independent series. These series operate as separate entities with unique names, separate records and books, and bank accounts. There may be different managers or members in every series of this type of LLC. For those managers and members, their obligations and rights will be different in each series.
Every series can be entered into a contract, be sued or sue other entities, as well as hold the title to actual personal property. For a series LLC, liability protection is the very most important aspect. Any assets that are owned by a series can be protected from any risk of liability related to the other series in a distinct series LLC. The concept is similar to corporations that have multiple subsidiaries. It’s designed to divide the risk among many different entities while not having to put up the capital to set up whole new entities.
Just one filing fee is required to form a series LLC, regardless of how many series it contains. Having a series LLC will allow your business to have a variety of purposes contained within. It’s a useful structure for protecting intangible assets or real estate.
States Permitting Series LLC
The series LLC is a creation of the state. Series LLCs are not a federal invention, they are state-based. The state which first enacted this legislation was Delaware. Iowa, Nevada, Illinois, Puerto Rico, Texas, Tennessee, and Nevada have all followed suit. California, among other states, will not let a series LLC form under their state law. That said, they will allow a series LLC that was formed elsewhere to register and do business within that state.
Forming a Series LLC
The series LLC is formed in much the same way as a regular LLC. Much of the process of forming a series LLC is similar to how you would form a regular LLC. There are still articles of formation that must be filed with appropriate government entities. Naturally, the articles must be filed in a state that permits series LLCs to be formed. Usually, the state will request that your articles of formation state specifically that your LLC is being authorized so that you can form series.
Before filing, you’ll have to have an operating agreement made for the master LLC, as well as an agreement for every series you’ll form. This doesn’t have to be done all at once, as series LLCs can make any additional series at any time as needed. Your master LLC’s operating agreement usually will provide the rules for overall operations. In the same way, the operating agreement of every series is customizable depending on the rules needed for that specific series to operate.
With a series LLC, you’ll get many benefits, including being able to just file your articles of formation one time. When you form the master LLC, you can form every additional series with internal mechanisms you’ve spelled out in your operating agreement. Generally, you accomplish this by making amendments to your master LLC’s operating agreement, then add that additional series.
The series LLC is easy to use and extremely flexible. Real estate investors can make great use of it if they own multiple properties. The properties in each series are protected and isolated from any liabilities of properties found in another series. If a company has many different profit centers, they can make use of a series LLC to shield and segregate all business operations. You’ll have to treat every series as if they were separate companies to maintain the liability protection of all your series.
You may run into tax issues that have yet to be resolved regarding a series LLC. These will primarily be regarding whether or not each series exists as a distinct entity with regards to their taxes. In California, the Franchise Tax Board taxes a unique position, stating every series operates as a spate entity. Therefore, they have to file their own tax returns as well as pay their own annual fee and tax if they are registered to do business in there
Series LLC - Is it Right for Your Business?
If your LLC has multiple members, it can be taxed as if it were a partnership. This allows profits to pass through onto members based on the size of their share in the business. It’s a popular structure since it is easier to form than corporations while still allowing similar liability protection. In a series LLC (also called an SLLC) there is a master LLC (sometimes called an umbrella LLC) as well as other LLCs. These get separated from each other strictly for liability purposes.
All the LLCs in a series will have separate assets from the others and the master LLC will control every other LLC. There are distinct members in each unit and they are only liable for their own oblations and debts. Think of it as a corporation that has many subsidiaries.
Businesses that benefit from LLC
The following are businesses that could benefit from having a series LLC.
- Property management companies with multiple properties. Every property could exist under a parent LLC.
- A construction business might have many LLC's in a series, based on the demographics of their customers.
- Any business with many unique product lines/services could isolate each line’s liabilities from the others.
The Benefits of a Series LLC
Here is a quick review of the advantages of using a series LLC:
- Lower costs for startup since you only need a single filing fee.
- Assets of each cell are protected from judgments against assets in other cells.
- There’s no limit to the number of LLCs you can have. That said, each must be separate from the others and has to be run as a distinct entity.
- This structure won’t experience the same complex structure, taxes, or formalities as corporations that have subsidiaries.
- Rent any cell pays to other cells may not be subject to your state’s sales tax depending on regulations imposed by that state.
- Your parent LLC is the only LLC that has to register with the state. This means that there will be fewer registration fees or legal fees. It also means that you’ll only need on biennial or annual fee for the series.
- You’ll only have to file a single tax return for the parent LLC, which will include all the cell LLCs.
The Drawbacks of a Series LLC
There are, however, several drawbacks to a series LLC. They include:
- Your state will probably require that you assign separate registered agents for every LLC in a series. This means added costs.
- The up-front cost will be higher than a traditional LLC.
- The state of Illinois, for example, charges $600 to form a regular LLC and $850 for a series LLC.
- There is no additional cost for adding more LLCs in the series.
- There are many legal questions still to be answered because this is still such a new process.
Series LLCs: Wise Option or Risky Strategy
In the last 19 years, there have only been a few states to adopt legislation for allowing series LLCs. They include Kansas, Missouri, Nevada, Montana, Oklahoma, Texas, Tennessee, Delaware, Alabama, and the District of Columbia. Given that this structure is novel but lacks universal acceptance in the United States, it would be reasonable to conclude that there is still much to settle regarding the law around series LLCs. In fact, while many states have accepted the structure, their laws don’t have much uniformity.
All states agree that this process must start with the creation of a master LLC and that the entity must have many series LLCs operating independently under the master. However, they all disagree on the required language needed for the articles of formation, the degree of sovereignty each series LLC may enjoy, and how each series LLC should be created. For form your series LLC, you’ll need to know the specific requirements in your state, and how it differs from the others. There may a different state which better suits the goals of your enterprise
In some states that have approved series LLCs, the series can be created through the existing operating agreement. However, other states demand a formal filing process, complete with fees. Even so, the costs of a series LLC are far lower than the traditional process in most cases. The exact savings will vary depending on the initial series’ fees and how the fees and filings will be charged each time you file a new LLC. The biggest advantage is in allowing you to reduce the cost of starting up the LLC.
Illinois is more expensive than most states when it comes to forming an LLC. They charge $500 if you want to form a regular LLC and $750 for a series LLC. However, they only charge $50 for the Certificate of Designation with any LLC you add to a series. If you formed 10 distinct LLCs, the cost would be $5,000. Forming a series LLC reduces that cost to just $1,250. Most states have a series of LLC laws that don’t see individual LLCs as separate entities for the purposes of filing. In this case, you’ll only have to consider the master LLC for any state purposes like annual report filings. Keep in mind, however, that the treatment of combining costs is usually only applied to filings with the Secretary of State.
Asset protection is another touted advantage. Another commonly mentioned advantage of a series LLC is asset protection. The theory is that assets within each LLC can be protected from any claims that get made against other LLCs. As an example, take the real estate example from earlier. They can separate their properties into many LLCs within the series. If a lawsuit were brought against the management of any property, the other properties could potentially remain protected. Obviously, this is all theoretical unless there are specific laws in your state. If a state doesn’t have any series LLC law, they may not honor this separation. Further, there is no clear precedent for how bankruptcy affects the structure.
While there may be many upsides to using a Series LLCs, particularly in high-risk industries such as construction or real estate or for financial planning, it must be stressed that this is a very new type of business structure. There are several advantages to the use of series LLCs, especially if you’re work involves a high-risk industry like real estate, construction, or financial planning. However, you have to understand that the entire concept of this structure is still extremely new. There are still plenty of uncertainties when it comes to establishing legal precedent, or predicting how existing laws could apply.
The IRS has not issued final rules regarding taxation which creates another layer of planning uncertainty. There have been no final rules on taxation issued by the IRS, adding to the uncertainty. If you choose to form a series LLC, you have to ensure that your articles of organization have been prepared correctly and are to the exact, specific specifications of the state where you’re forming the master LLC regardless of who is creating the documents.
If you need help with forming a series LLC, you can post your legal need (or post your job) on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.