Key Takeaways

  • A Delaware Series LLC allows for multiple, distinct "series" under a single LLC, each with separate assets and liabilities.
  • Delaware’s statutory framework enables strong liability protection between series and the master LLC.
  • Registered Series and Protected Series offer formal recognition and enhanced legal standing.
  • Series must maintain separate records and accounting to ensure liability protection.
  • Delaware does not require separate tax filings for each series; taxation depends on IRS classification and business structure.
  • Proper drafting of the operating agreement is crucial to clarify internal management and asset segregation.
  • Delaware is a leading jurisdiction for forming Series LLCs due to its flexible and business-friendly laws.

Series LLC Delaware statute allows a business owner to create several associated limited liability companies and shield each one from the financial debts and obligations of the others. This type of entity originated with the mutual fund industry to provide a single entity offering the benefits and protections of multiple LLCs. This limits the need for several SEC filings for each mutual fund class and allows each to be managed independently. Today, the series LLC is primarily used as an asset holding and investment company. However, it's also advantageous for business owners who want to reduce LLC costs and administrative burdens of maintaining individual entities.

Elements of a Delaware Series LLC

Aspects of a Delaware Series LLC include the following:

  • Internal asset segregation insulates each LLC within the series from the liabilities and debts of all other cells.
  • Each cell created using a private operating agreement does not need to be registered with the state Division of Corporations.
  • Private record keeping for each series is required to maintain limited liability.
  • Unlimited daughter entities can be established under one main LLC.
  • Each individual cell is similar to a DBA (doing business as) entity.
  • Only the main LLC is on the official public record unless the entity is formed in Montana, Missouri, or Illinois.
  • Annual Delaware tax for an LLC is $300 due by June 1.
  • The Series LLC is governed by the Delaware LLC Act.
  • Each series within the LLC can have a separate purpose, enter contracts in its own name, make separate tax elections, and sue and be sued in court.
  • One LLC in the series can close or go bankrupt without affecting the other entities.
  • LLC owners, known as members, can be associated with one or more daughter cells.
  • Each cell can be operated autonomously.

Protected and Registered Series in Delaware

In Delaware, Series LLCs can be structured as either protected series or registered series, each offering different levels of recognition and liability protection:

  • Protected Series: These are established internally within the LLC’s operating agreement and are not individually registered with the Delaware Division of Corporations. Each protected series must maintain separate records and accountings, and liability is shielded between series if this separation is respected.
  • Registered Series: Introduced in 2019 through amendments to the Delaware LLC Act, registered series are filed separately with the state and receive a unique name and Certificate of Formation. This status can help with:
    • Opening bank accounts
    • Entering into contracts
    • Being recognized more clearly by third parties such as lenders and courts

A Registered Series must also file an annual franchise tax report and pay an additional fee, unlike protected series.

Forming a Delaware Series LLC

Creating an LLC in Delaware requires a $90 fee to the Division of Corporations and filing the one-page Certificate of Formation. You must name a registered agent and include language that indicates the right to create a series LLC. This can include specific language from the Delaware LLC Act as follows:

“Notice is hereby given pursuant to Section 18.215(b) of the LLC Act that the debts, liabilities, and obligations incurred, contracted for, or otherwise existing with respect to a particular series of the LLC, shall be enforceable against the assets of such series only and not against the assets of the LLC generally, or any other series thereof, and none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the LLC generally, or any other series thereof, shall be enforceable against the assets of such series.”

Key Steps to Maintain Series Separation

To preserve the liability protections between the master LLC and each series, Delaware law requires that the LLC and its series observe certain formalities:

  • Maintain separate bank accounts and records for each series
  • Ensure individual asset ownership documentation is clear
  • Avoid commingling funds or using shared credit lines
  • Clearly identify series relationships in contracts (e.g., "Series X, a protected series of ABC LLC")

Failure to uphold these practices may result in piercing the series veil, making the master LLC liable for the debts of an individual series.

Series LLC Operating Agreement

The operating agreement is used to structure the Delaware Series LLC. This document is designed for maximum flexibility to define the administrative structure of the business. In most cases, the agreement allows for both founding members and second-tier separate series members. If these are the same members, you avoid the possibility that rogue members who own only a percentage of a single sell could sue other members and tie up the LLC's assets.

The operating agreement can be updated or changed by adding amendments. These usually must be in writing and signed by every LLC member, although in some cases you can allow for just a majority of signors.

Each cell should also have a separate operating agreement in addition to the main operating agreement of the series itself. These should include the name and purpose of the cell, as well as the names of the members and managers. The flexibility of this arrangement allows some members to be associated with only a specific cell.

Legal Requirements and Best Practices for Series Agreements

Delaware does not mandate a specific form of operating agreement for a Series LLC, but it is critical to include:

  • Provisions for the creation and dissolution of individual series
  • Specific powers, rights, and duties of members and managers in each series
  • Allocation of profits, losses, and liabilities on a per-series basis
  • Procedures for recordkeeping and segregation of assets
  • Whether each series may sue or be sued in its own name

Customizing the agreement ensures clarity for internal governance and external dealings. Some businesses also draft separate sub-agreements for each series, tailored to its operations.

Delaware Series LLC Taxation

Each cell within the series LLC can opt for separate tax treatment as designated in a 2010 rule introduced by the IRS. This means you can choose to have one entity taxed as a C-corp, another as a partnership, and so on. Each cell will have to register separately with the IRS for an Employer Identification Number (EIN). This carries no fee and can be done online, on the phone, or via mail by filing Form SS-4.

Federal and State Tax Considerations for Delaware Series LLCs

The IRS does not automatically treat each series as a separate entity. Instead, tax treatment depends on the structure and operations of each series:

  • A series with a single owner may be treated as a disregarded entity.
  • A series with multiple owners is usually taxed as a partnership.
  • You may elect corporate taxation by filing IRS Form 8832.

State-level considerations:

  • Delaware only requires the master LLC to file an annual report and pay a franchise tax, unless a registered series is formed.
  • Some other states (e.g., California, Illinois) do not recognize series LLCs for tax or legal purposes, so operating across state lines may require forming individual LLCs or registering each series as a foreign entity.

Frequently Asked Questions

  1. What is the difference between a registered and protected series in Delaware?
    A registered series is filed with the state and has separate legal recognition, while a protected series is created through the operating agreement and not individually registered.
  2. Can a Delaware Series LLC operate in other states?
    It depends on the state's laws. Not all states recognize series LLCs, so additional filings or separate LLC formations may be necessary.
  3. Do I need a separate EIN for each series?
    Not always. It depends on how each series is taxed. If treated as a separate tax entity, it will require its own EIN.
  4. Is liability protection guaranteed between series?
    Only if each series maintains strict separation of records and operations. Otherwise, courts may hold one series liable for another’s debts.
  5. How many series can a Delaware Series LLC have?
    There is no statutory limit. You can create as many series as needed, provided each complies with the legal requirements for separation.

If you need help with establishing a Delaware Series LLC you can post your legal need 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.