What Is a Series LLC and How It Works in California

Key Takeaways

• A series LLC is a unique type of limited liability company allowing multiple “series” or sub-LLCs under one umbrella, each with its own assets and liability protections.
• California does not allow formation of a series LLC but permits foreign series LLCs to register and operate within the state.
• Each series in a series LLC should have separate records, bank accounts, and operations to maintain liability protection.
• A series LLC can be cost-effective for businesses managing multiple assets like rental properties, but there are legal and tax complexities, especially in California.
• Risks include unclear legal standing, higher compliance costs, and lack of uniform state treatment.

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.

Key Characteristics of a Series LLC

A series LLC operates as a master LLC that contains multiple series, each treated as a distinct entity for liability and asset protection purposes. Key features include:

• Segregated Liability: Each series can shield its assets from liabilities incurred by other series within the same umbrella.
• Separate Management: Series may have different members and managers.
• Internal Governance: Each series can operate under its own operating agreement.
• Flexible Use: Commonly used by real estate investors and businesses with multiple revenue streams.

Despite its flexibility, maintaining the separateness of each series is critical. This includes:

• Unique bank accounts for each series
• Independent recordkeeping
• Distinct contracts executed in each series’ name
• Adequate capitalization per series

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.

Series LLC vs Traditional LLC

While a traditional LLC provides liability protection for its owners, a series LLC goes a step further by offering internal divisions, each with independent liability protection. Here’s a comparison:

Drawbacks of a Series LLC:

• Some states (including California) do not recognize the liability shield between series.
• Legal recognition of internal series is still evolving.
• More complex recordkeeping and operations required.

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.

Tax Treatment of Series LLCs in California

Taxation of series LLCs in California is particularly burdensome:

• The California Franchise Tax Board treats each individual series as a separate entity for tax purposes.
• This means each series must file its own Form 568 and pay the $800 minimum franchise tax annually.
• This eliminates some of the cost benefits typically associated with using a series LLC structure in other states.
• From a federal standpoint, each series may elect its own tax classification — as a disregarded entity, partnership, or corporation — which adds to the complexity.

For this reason, many business owners consider forming separate LLCs instead of a series structure when operating in California.

Best Use Cases for a Series LLC

Despite limitations, series LLCs can be beneficial in certain scenarios. Common use cases include:

• Real Estate Portfolios: Investors can hold each property in a separate series to isolate risk.
• Franchise Operations: Each franchise location can operate independently under a series.
• Holding Companies: Entrepreneurs managing diverse business lines can structure each one as a separate series.

These setups allow centralized administration while minimizing exposure to liability across different assets.

Frequently Asked Questions

1. What is a series LLC in simple terms?
   A series LLC is a special type of LLC that allows one overarching entity to hold multiple “series” or divisions, each treated as a separate business for liability purposes.
2. Can you form a series LLC in California?
   No. California does not allow the formation of a series LLC, but it does allow foreign series LLCs to register and operate in the state.
3. How much does it cost to run a series LLC in California?
   Each series must file a separate tax return and pay the $800 annual franchise tax, making it potentially expensive for multiple series.
4. Is a series LLC good for real estate investors?
   Yes, many real estate investors use series LLCs to separate property assets and limit liability within a single structure.
5. Are series LLCs recognized in all states?
   No. Only a limited number of states recognize series LLCs, and the legal treatment may vary, which can create complications in multi-state operations.

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