What is a Series LLC? | Everything You Need To Know
A series limited liability company (Series LLC) is a specific kind of limited liability company that offers several tax and operational benefits.
To help you understand this company structure, I teamed up with a group of certified LLC experts with over a decade of experience.
This blog post will discuss what a series LLC is, how they are formed, and what business owners need to know before choosing one.
Quick Summary
- A Series LLC is a unique form of limited liability company that allows for the creation of multiple, separate entities (or "series") under a single LLC umbrella.
- This structure offers flexibility and efficiency in managing diverse businesses or assets within one entity.
- Considering that 33.3 million small businesses constitute 99.9% of US businesses, the Series LLC structure offers a flexible and efficient solution for entrepreneurs looking to manage multiple business ventures under one legal umbrella.
- In my opinion, the Series LLC is an underutilized structure that could revolutionize how small businesses manage risk and growth in a competitive market.
What is a Series LLC?
Series LLCs are limited liability entities with multiple layers or tiers established with a single filing fee and annual fees [1].
There is a distinction between a parent LLC (Master LLC, or simply Series LLC) and a Child LLC (Individual Series, Cells, or Individual Protected Series).
The master LLC acts as the parent, holding the original filings and assets for each Series within it.
It has the capability to hold ownership and make investments in other Series or Master LLCs, providing a framework in which each business endeavor is insulated from the liabilities of the rest. Series LLCs are structured to reduce risks, a vital feature given that Lending Tree data indicates a 20.8% failure rate for new businesses in their first year in the US [2].
From experience running a master LLC, this setup provided us with flexibility in managing diverse income streams, such as rental properties and investments, allowing for segmented tax filing.
The Pros of Series LLC
Series LLCs have several benefits, with liability protection, cost savings, and taxation separation being the most notable benefits.
The pros of Series LLCs include:
- Individual series within a master LLC can operate independently, limiting liability across different business ventures.
- Offers flexibility in managing and segregating assets and income streams, enhancing financial organization.
- Financial failure in one series does not affect the others, protecting assets and operations.
- Tax filing can be more efficient as profits and losses are separated by series.
- Allows for expansion or diversification of business under one legal umbrella, simplifying administrative processes.
For our Series LLC, we also enjoyed flexibility in management and liability protection at a lower cost than other structures.
Read More: How to Have Multiple Businesses Under One LLC
The Cons of Series LLC
Here are the cons of forming a Series LLC:
- Not recognized or allowed in all states, limiting geographical flexibility.
- Can be complex to set up and manage, requiring specific legal and accounting expertise.
- May involve higher initial setup and ongoing administrative costs compared to a traditional LLC.
- Legal and financial separations between series must be clearly maintained, adding to operational complexity.
- The protection offered by a series LLC may still be tested in court as legal precedents continue to evolve.
From our experience, managing these business structures requires more attention than operating under one standard business structure, which means having good organizational skills could maximize your success in running an LLC.
What States Permit Series LLCs?
States that permit series LLCs include Delaware, Alabama, Oklahoma, Illinois, District of Columbia, Iowa, Indiana, Montana, Missouri, Kansas, Tennesse, Nevada, Utah, and Texas. These are the only 14 states that recognize Series LLCs as legal business entities.
However, you can still conduct business as a Series LLC in the states that don't permit this business structure by forming Foreign Series LLCs.
California, for example, allows Foreign Series LLCs to register as standard LLCs, although the Series won't have the same protection it otherwise would have in those states that permit regular Series LLC registration.
How to Set Up a Series LLC
The process involves a few steps, depending on the state where you choose to do business.
Picking a Series LLC Name
Forming a Series LLC begins with its name. The names of these companies should be different, and unique, and they cannot contain any words that are prohibited by your State's Secretary of State office.
For instance, if there will be five separate divisions within one Series LLC Company, then all five entities must have unique names.
Additionally, they may not share letters between them because it might create confusion among others who see their titles on paper documents such as contracts or loan agreements.
However, each child series should include the complete name of the parent LLC as well as the assets each of them holds.
Any variations of the words "protected series," such as "P.S.," should be included in the name of your Parent LLC too.
"Series LLCs essentially imitate the business structure of holdings, so many LLC owners choose to include the terms "holding company" or "holding co." in their LLC name."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
Hiring a Registered Agent
Having a registered agent is a requirement for an LLC, so if you form a series LLC, the registered agent should be one person or company.
A registered agent is in charge of receiving important legal documents on behalf of your business and forwarding them to the appropriate people within the organization.
However, in some states, a single individual or company cannot act as both a Series LLC's agent and its child LLC registered agent at the same time.
This is because that would violate anti-merger rules in most states (and create potential tax problems).
In most cases, registered agent fees for a Series LLC are slightly higher than they would be for traditional LLCs.
The form is also fairly complicated compared to other entity types of limited liability companies.
Many states require that each Series have a different name and manager(s), which typically has to form an agreement allowing them to manage another entity within the company.
Filing Articles of Organization
Articles of Organization, also called Certificate of Formation in some states, are filed with the Secretary of State, and the form of this document can also vary from State to State.
The details to be provided in this document include:
- Name of the LLC
- Location
- The office where it's incorporated
- A statement indicating that LLCs may establish Series that are immune from other series' liabilities.
The most important part of your Articles of Organization has to focus on the limitation of liability.
For our company, this section specified the extent to which each Series is shielded from claims against other Series.
It should also include any requirements you have for liability transfers between LLCs and even members within the same Series LLC structure.
Make a Series LLC Operating Agreement
A limited liability company agreement, or operating agreement, is a document that outlines the rights, security interests, powers, duties, membership interests of its separate members, and liabilities of each member.
In the future, if Master LLC wishes to remove or add a separate LLC from the Series, it can do so by amending the operating agreement.
You should also create a separate operating agreement for each separate entity within the Master LLC.
Applying for EIN
EIN represents a nine-digit Employer Identification Number, and all LLCs need this number to file taxes, no matter if they're Series LLCs or traditional LLCs.
Series LLCs have two options: they can either obtain one EIN for their entire enterprise or obtain one for each Child LLC. However, the options will depend on the state laws where you register your Series LLC.
For example, if your state LLC statutes stipulate that each LLC under the Master LLC is a separate entity, that LLC has to file taxes separately and have separate bank accounts and separate books.
If the state treats all child LLCs under one Master LLC as one business entity, you will only need an EIN for all of them.
However, the Internal Revenue Service might have some additional requirements and provisions regarding the tax treatment of Series LLCs.
FAQs
Does a Series LLC Need Separate Bank Accounts?
Yes, Each entity within a Series LLC should have a separate bank account. Series LLC consist of separate LLCs under one Master LLC. In most cases, each of these entities is treated as a separate liability shield, so you need to have individual bank accounts for each LLC.
Can a Series LLC Be a Disregarded Entity?
Yes, a Series LLC can be a disregarded entity only if it's a single-member LLC. The only exception is when you elect to be taxed as an association or corporation.
Can Series LLC Have Different Ownership?
If the same people were the property owners, they can't combine into a single LLC. Instead, they must split into separate Series since the owners and their percentage interests in each Series don't have to be identical.
Can You Change an LLC to a Series LLC?
Yes, you can change an LLC to Series LLC, but on the condition that the state law of your LLC recognizes Series LLC. If that's the case, you will have to modify your Articles of Organization through an amendment and file it with the state.
References:
- https://www.ftb.ca.gov/file/business/types/limited-liability-company/series-limited-liability-company.html
- https://www.lendingtree.com/business/small/failure-rate/
