Key Takeaways

  • A Series LLC allows for multiple “cells” under one parent LLC, each insulated from liabilities of the others.
  • Illinois permits Series LLCs under the Limited Liability Company Act (805 ILCS 180/37-40).
  • Illinois requires public filing for a Series LLC unlike Delaware, including Articles of Organization with specific language enabling series.
  • Each Illinois series must maintain separate records, assets, and accounting.
  • The operating agreement must explicitly govern the internal affairs and liability protection of each series.
  • Illinois requires an annual report and imposes a $75 fee per additional series created.
  • Out-of-state recognition of Series LLC protections is inconsistent and can expose entities to liability risk.
  • Series LLCs offer cost savings compared to forming multiple LLCs, but require detailed planning and compliance.

The Series LLC operating agreement is an innovative concept that unites a series, aka cells, within one LLC. The concept was originally introduced by the State of Delaware. 

Benefits of a Series LLC Operating Agreement

In Delaware, the law states a series limited liability company may be created using individual series of membership interests. When this type of business is formed, it is referred to as a Delaware series LLC.

Delaware series LLC benefits include:

  • Retention of its own assets
  • Conduct its own operations
  • Have its own members
  • Pursuit of business objectives different from the other "cells"

By working as an independent business with the series structure, each cell is insulated from issues relating to other cells such as creditors, litigants, or claims by members.

The Delaware series LLC is similar to that of the "segregated portfolio companies" used in other countries such as the British Virgin Islands, the Cayman Islands, and any other country not under U.S. jurisdiction.

When forming a Delaware series LLC, no matter how many series/cells it contains, there is only one filing fee.

Series LLCs are considered one business and pay only one Registered Agent and one annual Franchise Tax fee versus paying separate fees and taxes associated with an individual LLC.

The formation of an LLC protects personal assets from obligations and debts incurred by the business.

How Illinois Series LLCs Are Structured and Operated

Illinois allows the formation of Series LLCs under Section 37-40 of the Illinois Limited Liability Company Act (805 ILCS 180/37-40). A Series LLC in Illinois permits one LLC to establish multiple series, each treated as a distinct entity with separate assets, obligations, and members. These are commonly used in real estate, franchise models, and investment portfolios due to their compartmentalized liability structure.

To preserve liability protection between series, each must maintain:

  • Separate books and records
  • Distinct bank accounts and accounting
  • Clear internal governance rules in the operating agreement

Importantly, in Illinois, a Series LLC must publicly disclose its structure at the time of formation in the Articles of Organization. The document must contain language that allows for the establishment of series. Additionally, a Certificate of Designation must be filed for each individual series, and a $75 filing fee applies per series created.

Requirements for Forming a Series LLC

  • Each series/cell should have a bank account separate from the other cells. The series should also have a separate asset name, tax ID number, or a separate EIN (Employer Identification Number).
  • If a sub-LLC (cell) purchases real estate, the deed needs to be in the name of that individual cell.
  • The same rule holds true for any contract, notes, and loans to avoid confusion.
  • Transactions between series should be treated as if they were with outside entities.
  • Any loan transactions between series LLCs are to be interest-bearing and well documented.
  • Assets and operations are separate from each series.
  • Assets can be owned by only one series.
  • Each series must have enough capital to support its business individually.

Illinois-Specific Compliance for Series LLCs

To ensure proper formation and liability protection of an Illinois Series LLC, compliance with the following is critical:

  • Articles of Organization: Must include a statement authorizing the Series LLC structure. This is a deviation from Delaware law, where series can be added without such initial public disclosure.
  • Certificate of Designation: Each individual series requires a separate Certificate of Designation to be filed with the Illinois Secretary of State, identifying the series name and its associated rights or duties.
  • Filing Fees: While the parent LLC pays the standard formation fee, each additional series incurs a $75 filing fee.
  • Annual Reports: Each Series LLC must file an annual report and pay a $75 fee for each series listed.
  • Name Requirements: Each series must include the name of the parent LLC and distinguish itself clearly. Many use a DBA (doing business as) to satisfy this condition.
  • Recordkeeping: Illinois law mandates that the LLC’s operating agreement clearly delineates the assets and obligations of each series to maintain limited liability across them.

Information About a Series LLC Operating Agreement

  • An Operating Agreement is prepared to outline the rules and regulations that will govern the operation of the series LLC.
  • It is recommended that an attorney take on the job of drafting the agreement. An accountant is also needed to explain the tax laws associated with a series LLC.
  • It is not a requirement to publicly file the Delaware Series LLC Operating Agreement.
  • The option to add or remove a series can be done by amending the Operating Agreement. This can be done at any time. There is no limit to the number of series that can be included.
  • Generally, a series LLC is required to have only one registered agent and file a single annual report.
  • It is recommended that each sub-LLC/cell apply for a "doing business as" name. Also referred to as a DBA, it is an assumed or fictitious name.
  • The records for the DBA should list the owners of the series, so there is no confusion about which series LLC is to be held responsible for any debt or other issues. 

Drafting an Illinois Series LLC Operating Agreement

An Illinois Series LLC operating agreement must go beyond standard LLC provisions and specifically address:

  • How series are formed, amended, or dissolved
  • The powers and duties of each series
  • Allocation of profits and losses per series
  • Management structure for each series (can differ from the parent LLC)
  • Procedures for maintaining asset segregation
  • Rules regarding inter-series transactions and liability boundaries

Unlike Delaware, where an operating agreement can remain unfiled, in Illinois it must be carefully drafted and consistent with public filings. The agreement should also clarify tax treatment for each series, since the IRS allows for different classifications (disregarded entity, partnership, or corporation) based on elections made by the individual series.

It is highly advisable to work with both a business attorney and accountant experienced in Illinois Series LLCs. This ensures compliance and minimizes the risk of piercing the liability shield due to poor documentation or commingled assets.

Things to Consider When Forming a Series LLC

Series LLCs are a popular option, but there is still some uncertainty surrounding rules and regulations.

  • Delaware law states each series is treated separately in legal matters but whether the assets and liabilities would be considered separate in other states that allow series LLCs would depend on that state.
  • Regardless of whether a Delaware Series LLC was properly formed, structured, and operated outlining the assets and liabilities of the individual series, it is up to the jurisdiction of that state whether to recognize those assets and liabilities as separate as adhered to under Delaware law.
  • The tax treatment for individual series is not a certainty.
  • As of January 2008, the IRS (Internal Revenue Service) notes individual series within the LLC will be taxed separately.

Potential Risks and Limitations in Illinois

While Series LLCs offer compelling advantages, particularly in asset protection and cost savings, there are important caveats for Illinois businesses:

  • Interstate Recognition: Not all states recognize the liability protections afforded by a Series LLC. If your business operates or owns property in other states, those jurisdictions may treat the series as part of the parent LLC, exposing its assets to liabilities from other series.
  • Lack of IRS Guidance: Although the IRS allows each series to file separately, ambiguity remains about how income, deductions, and distributions should be reported if series have different tax elections.
  • Complex Accounting: Managing separate books, bank accounts, and tax filings for each series can become administratively burdensome and requires rigorous compliance practices.
  • Legal Challenges: Because the Series LLC is still a relatively new structure, it may be subject to increased scrutiny in litigation, especially if the entity fails to maintain separateness between series.

Given these risks, an Illinois Series LLC is best suited for business owners who are committed to maintaining strict operational and financial segregation across series.

Frequently Asked Questions

Can I form a Series LLC in Illinois? Yes. Illinois permits Series LLCs under 805 ILCS 180/37-40, provided the correct language is included in the Articles of Organization and Certificates of Designation are filed for each series.

How do I maintain liability protection between series in Illinois? Maintain separate financial records, bank accounts, and asset ownership for each series, and document all operations in a detailed operating agreement.

Does each Illinois series need its own EIN? While not required by law, it is strongly recommended that each series obtain its own EIN to reinforce financial separateness and ease tax filings.

Is an Illinois Series LLC recognized in other states? Not necessarily. Some states do not recognize series structures, potentially undermining liability protection outside Illinois.

Where can I get legal help to form an Illinois Series LLC? You can post your legal need on UpCounsel to connect with top-rated attorneys experienced in forming and structuring Illinois Series LLCs.

If you need help with a series LLC operating agreement, 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.