Series LLC in California: Everything You Need to Know
Although California does not allow the formation of a series LLC, it does allow foreign LLCs to both register and conduct business in that state.3 min read
2. Dangers of Series LLCs
3. California Series LLC: Everything You Need to Know
When operating a series LLC in California, it is important that you have a clear sense of direction. Although California does not allow the formation of a series LLC, it does allow foreign LLCs (those from another state) to both register and conduct business in that state. Although a series LLC appears to be attractive, offering separate LLCs under one umbrella LLC, there are reasons to be cautious.
How to Operate a Series LLC in California
If you're not familiar, a "series LLC" is essentially a master LLC. This allows separate LLCs to be formed under a single series LLC umbrella. In this case, each LLC must maintain individual records and may have varying members, managers, bank accounts, and names. Once formed, each LLC is treated as a separate entity. This is beneficial in that each LLC is protected from the other units.
Here are some of the things you should know if you are planning to form a series LLC in California:
- As mentioned, you cannot form a series LLC in California unless you are a foreign entity.
- Delaware was the first state to allow the formation of a series LLC. It is also a desirable state to conduct business.
- Once formed in another state, that series LLC can register in California. To do so, you will need to fill out an application. This can be found on the California Secretary of State's website. In doing so, you will be required to file Form 568 and pay all associated yearly taxes and fees.
Dangers of Series LLCs
With so many business owners talking about series LLCs, it has led to one burning question: is forming a series LLC a good idea?
The short answer to this question is no. This is because series LLCs have not been thoroughly tested.
At first, it appears as though a series LLC is the best solution to protect multiple assets since many LLC owners are concerned with losing investments that are placed within one LLC. Although they can form numerous LLCs, this isn't ideal for everyone, especially those with lots of investments. Since a series LLC separates each series within a single LLC, in theory, it is an attractive option. However, there are also reasons to avoid a series LLC, including:
- This option is expensive due to its complexity. Since each series is considered its own entity, the annual $800 fee administered by the Franchise Tax Board in California is applied to each series.
- There may be legal uncertainty surrounding your series LLC, as many states (including California) do not have series legislation. This may place your limited liability protection at-risk.
- Possible issues across state lines. Once again, this can lead to possible legal complications.
- The American Bar Association does not endorse series LLC.
California Series LLC: Everything You Need to Know
Remember, you cannot form a series LLC in the state of California. Instead, you must register as a foreign LLC. If you do take this approach, please be mindful of the following:
- Separate your assets, as this will be the most effective way to protect them. You can also group your assets into LLCs.
- When forming a series LLC, each individual LLC will be treated as a distinct entity. This is the greatest benefit, as each LLC is shielded from the debts and liabilities of every other entity.
- New regulations were put in place by the IRS in 2010. As a series LLC, you can be treated as a disregarded entity, partnership, a C or an S corporation. This means that each LLC within a series LLC can be taxed differently.
At the end of the day, forming a series LLC is still a new concept. This is leading to some confusion, especially in regards to the legal system. Since only around one-third of the states have series statutes in place (many which are not in any way uniform), this is concerning for those involved. However, under the right circumstances and when properly operated, a series LLC can be an ideal choice for certain businesses. For example, a real estate investor who owns multiple properties may wish to explore this option further.
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