Series LLC in Delaware (What Is It & How to Get One?)
Series LLCs have gained a lot of attention from business owners in the past few years. This is because a series LLC offers some great benefits that other business entities do not provide.
Delaware has been a popular state for entrepreneurs because it has some of America's most advanced business laws. So it's no wonder that Delaware is also home to many series LLCs.
As a legal expert in business formation, I have analyzed the complexities and strategic advantages of series LLCs in Delaware. Drawing from my experience in high-stakes transactions, I will provide the intricacies of how a Delaware Series LLC can serve as a pivotal business tool for entrepreneurs.
Quick Summary
- A Series LLC in Delaware is a unique form of limited liability company that allows for the creation of multiple series within a single LLC framework, each with its own assets and liabilities.
- Delaware is a popular choice for Series LLCs due to its advanced business laws.
- With Delaware's first-year business failure rate standing at 22.5%, significantly higher than the national average of 20.8%, Series LLCs offer a strategic framework for entrepreneurs to mitigate risks and manage liabilities more effectively.
- From my perspective, the structure of Series LLCs can significantly impact high-stakes transactions by providing a versatile tool for asset protection and risk management.
What is Delaware Series LLC?
A Delaware series LLC is a type of limited liability company that provides the benefits of an LLC but with more flexibility.
In a nutshell, it means that you can organize your business in such a way as to limit the liability for certain assets and operations.
This structure could be particularly appealing in Delaware, where 98,356 small businesses make up 98.6% of the state's business landscape as per the US Small Business Administration, offering them a unique opportunity to manage their assets and liabilities with greater precision [1].
Delaware series LLCs are becoming increasingly popular because they offer multiple LLCs under one umbrella (master LLC). This can be highly beneficial for business owners who want to separate their assets and liabilities.
Series LLC allows you to segregate your assets into different 'cells' or 'series' while still being treated as one entity for tax purposes and liability protection purposes under state law.
For example, you could have a series LLC that owns your commercial property and another series LLC that operates your business.
If someone sues the company, they would only use the series LLC that owns the property, not the series LLC that conducts the business.
Each particular series represents a separate entity with its own assets and liabilities.
You have to maintain separate accounting for each series to keep track of the finances associated with that particular asset or liability, but this is a small price to pay in exchange for what will essentially be absolute protection under Delaware law.
The Formation of Series LLC in Delaware
Before your series LLC can conduct business in Delaware, you need to register it with the State. The process is relatively simple.
However, handling separate LLCs at once can be overwhelming, so hiring someone to help you in the process is highly recommended.
1. Choose a Business Name
The first step is to develop a unique business name for Series LLC. Delaware LLC naming rules are mainly similar to those of traditional LLCs, although there are some differences. Generally, LLCs can't use the words bank, insurance, or trust in their business name.
Terms associated with any government agency are also prohibited (FBI, IRS, etc.).
Each cell within a series LLC should clearly display a master LLC's name in its name. The name of the series LLC should be included in parentheses after the master LLC's name. Each separate LLC should contain the phrase "protected series," too.
For example, the name of your series LLC should look like this: "XYZ LLC Protected Series of ABC."
2. Appoint a Delaware Registered Agent
Each child LLC should have its own registered agent or a company providing registered agent services in Delaware that will be in charge of receiving legal notices on behalf of the LLC. A registered agent must have a physical address in Delaware.
To appoint a registered agent, the child LLCs must file an appointment of registered agent form with the Delaware Division of Corporations.
The registered agent can be an individual or a company. If you choose to appoint an individual, that person must reside in Delaware.
If you choose to nominate a company, the company must have a physical address in Delaware and be authorized to do business in Delaware.
The registered agent must agree to accept legal notifications and service of process on behalf of the child LLCs. If you choose a company as your registered agent, it cannot be an existing member or manager of any of the child LLCs.
3. File Certificate of Formation
You don't have to file the Delaware Certificate of Formation for each protected series LLC. Instead, you file one Certificate of Formation for the entire LLC.
As provided by Delaware Law School, the obligation to provide a notice of certification of formation is deemed adequate, irrespective of whether a series is established when the Limited Liability Company (LLC) is originally formed [2].
The Certificate of Formation must include:
- The name of your LLC
- The registered agent's name and address
- The principal office address
- The purpose of the LLC
- Names and addresses of all members and managers
Series LLC Certificate of Formation is filed with the Delaware Secretary of State. The filing fee is \$90.
4. Create LLC Operating Agreement for Each LLC
With the Delaware Certificate of Formation, series LLC's operating agreement will be the second most important document. Series LLC operating agreement represents the contract between the LLC members and governs the company's internal affairs.
It specifies how profits and losses are allocated, who makes decisions for the company, and other critical operational details.
"Series LLC operating agreements must be meticulously crafted to align with the unique requirements of your business. Similar to the Certificate of Formation, engaging with a legal professional to draft this document is advisable," emphasizes a seasoned business attorney."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
You are not required to file your company's operating agreement with the Delaware Secretary of State.
5. Open a Separate Bank Account for Each LLC
When you form multiple LLCs, you need to make sure you keep separate records for each. This includes opening a separate bank account for each separate series.
This will help you keep track of your finances and make it easier to file LLC taxes. You should also make sure that all business transactions are carried out through the appropriate LLC's bank account.
If you don't follow these steps, you could run into some serious legal trouble. So make sure you take the time to set everything up correctly from the start.
6. Obtain an EIN
Employer identification number (EIN) is an identifying number given to companies by the Internal Revenue Service (IRS). It's used for tax purposes. Since most series LLCs are pass-through entities, they will need this EIN.
As each LLC should have its own bank account, it should also have its own EIN. This can be quickly done by applying for an EIN online.
There is no cost to obtain an EIN, and it only takes a few minutes to complete the application.
How is a Series LLC taxed in Delaware?
Series LLCs in Delaware are taxed as separate taxable entities, just like traditional LLCs.
According to the American Bar Association, the proposed federal tax regulation treats each series within a series LLC as a separate entity, classified as a partnership, disregarded, or as an association taxable as a corporation [3].
Each series is part of one Delaware LLC, which has its own annual franchise tax due each year. Franchise tax payment is not required for any series that has no income or loss.
The parent LLC will file an LLC annual report on behalf of all of the entities in your series LLC. This data will also be used to calculate your franchise tax.
The Delaware Department of State handles franchise tax and charges penalties for late filings.
The deadline for franchise tax is June 1st, and there is a pre-set \$300 amount each LLC has to pay, regardless of the number of entities in the LLC.
Because each series in a series LLC is treated as a separate entity for tax purposes, each series will have its own tax identification.
Each series can elect its own tax structure, which means one series might be taxed as an S Corporation, while another could be taxed as a C Corporation, and yet another can choose partnership taxation.
The Delaware Division of Corporations is responsible for the annual franchise tax and report filing for series LLCs.
The Advantages of Series LLC in Delaware
In light of my extensive background as a legal expert, I've observed firsthand the strategic advantages that series LLCs offer in Delaware.
Their unique structure not only streamlines asset management and investor relations but also enhances legal protections, making them a pivotal component in sophisticated business structuring and operational efficiency.
Series LLCs in Delaware offer quite a few benefits that other states may not provide. Some of these benefits include:
- Limited liability protection: The assets of the series LLC are protected from the debts and obligations of the other series within the company. This protection extends to the owner(s) of each series.
- Ease of formation and management: Series LLCs in Delaware are generally easier to form and manage than corporations.
- Flexible management: The series LLC is relatively flexible in terms of its internal rules, such as how it can be managed or operated. It allows for the creation of different series which have their own assets, liabilities, and managers who may not necessarily be involved with other series within the company
- Asset protection: You can segregate your assets into different cells or series to take advantage of the Delaware Asset Segregation Exemption
- Efficiency: The Series LLCs in Delaware is easy to maintain and operate. It allows for fewer paperwork filings and lower filing fees than other corporations or limited liability companies.
- Single-tax reporting: The Internal Revenue Service views each series within a series company as an individual entity that provides.
The Disadvantages of Series LLC in Delaware
Despite major perks, a Delaware series LLC may have some downsides.
The most significant disadvantage of the Delaware series LLC is that it's complicated. This type of entity can be challenging to understand, especially if you are new to business law.
Setting up a series LLC in this State requires following specific steps and filing with your Secretary of State Office.
You must also create an operating agreement for each individual "series" within your LLC.
Additionally, since the series structure is less common than other business structures, it could be more challenging to find professionals who are familiar with this type of business entity.
This means you may have a hard time finding accountants and tax experts who can help advise on how best to set up each cell and manage your business finances.
If you are looking for a more complex business structure with liability protection and tax flexibility, Delaware series LLC could be a good option for you. However, make sure you understand the requirements and complexities before setting it up.
For help navigating these waters, consult an experienced attorney or accountant who is familiar with this entity.
The Difference Between Registered and Protected Series LLC
Series LLC legislation makes a difference between registered and protected series.
The main benefit of a registered series is the added layer of legal protection it enjoys from the State.
If there is ever a dispute between members of different registered series, the state has already weighed in and given its official stamp of approval. This can be helpful in terms of establishing jurisdiction if a legal battle ensues.
The key here is that this type of business structure requires the filing of official documentation to become official in terms of State law.
Unlike registered series, protected series are not required to undergo any formal approval process or filing requirement. This means that they are automatically protected under Delaware series LLC law without having to take any additional steps.
Similar Articles:
- How to Start an LLC in Delaware
- When Are Delaware LLC Taxes Due
- How to Dissolve a Delaware LLC
- Delaware LLC Formation Services
FAQs
What Is the Delaware Series LLC Uniform Commercial Code?
The Delaware LLC Uniform Commercial Code (UCC) is a set of statutes that provides the legal foundation for commercial transactions in all 50 states. In Delaware, the series LLC is governed by LLC Act IX of the UCC. This article provides a framework for creating and regulating separate business entities within a single-series LLC.
Does Each Series LLC in Delaware Need Its Own Operating Agreement?
No, each series LLC in Delaware does not need its own operating agreement. Although series LLC owners are not obligated to have an LLC agreement per cell LLC, it is highly recommended to have one.
What is a Delaware Series Trust?
Delaware Series Trusts, also known as series LLCs or Delaware Series LLCs, are flexible entity structures that can be used to hold real estate assets. It allows you the ease of operating multiple real estate licenses under one umbrella while separating each property held within its own separate trust account. This provides protection against personal liability to real estate investors and loss from insufficient insurance policies for real properties.
Establishing Delaware Series LLC
Establishing a Delaware Series LLC is a great way to simplify your business structure and achieve legal liability protection.
However, it must be treated as its own company with separate assets that are managed separately from the other cells within the same LLC.
This means you will need to keep careful track of each individual cell's finances if you want to avoid any legal issues down the road.
If you're considering starting a series LLC in Delaware, consult legal services like ZenBusiness to ensure you are doing everything correctly.
References:
- https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-DE.pdf
- https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1008&context=mbelr
- https://www.americanbar.org/groups/business_law/resources/business-law-today/2013-february/tax-aspects-of-series-llcs/
