A series limited liability company (Series LLC) is a specific kind of limited liability company that offers the tax and operational benefits of other types of businesses structures such as S corporations, partnerships, and sole proprietorships.
It is different because it can also be structured as a traditional LLC with multiple layers or tiers.
This means that you can take advantage of the protection offered by a limited liability entity without having to pay additional fees to form another type of business structure.
This blog post will discuss what a series LLC is, how they are formed, and what business owners need to know before choosing one.
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.
There is a distinction between a parent LLC (Master LLC or simply Series LLC) and Child LLC (Individual Series, Cells or Individual Protected Series).
Each LLC layer, also known as "series," operates as an individual business under the parent state jurisdiction but shares profits and losses.
This model works well if you want to segregate assets into different classifications without setting up multiple LLCs.
A master LLC represents the parent series and also holds the original LLC filing. It is the master LLC that holds the assets of each individual Series.
The master LLC also has the power to own and invest in other Series or master LLCs.
Example: If you had four different businesses under one umbrella, each could be a separate series within your master LLC.
If there is an issue with one of the business ventures, only that specific venture would be affected without jeopardizing any others.
For example, if you own a business with different types of income like rental properties and investment accounts, having an LLC to separate the profits (and losses) into each type will allow for more flexibility when filing taxes at the end of the year.
If one class or layer fails financially, it doesn't affect any other group since they are all under their own jurisdiction, which means that creditors cannot seize assets from another "series" without first going through bankruptcy proceedings against that particular Series within your parent state law.
This is good news because failure in one area should not mean total failure across all areas, so this could give you some peace of mind.
The Pros of Series LLC
Series LLCs have several benefits, with liability protection, cost savings, and taxation separation being the most notable benefits.
Flexibility with the series LLC structure to create new Series at any time without having to dissolve or reform your entire company is another great perk.
You can simply transfer assets from one Series into another series as needed – this is particularly useful for entities with multiple projects going on at once, like a real estate agency with several properties in different states/counties, etc.
The main benefit of creating separate Series within one entity is that it provides limited liability protection against lawsuits, judgments, and other debts because each individual Series operates independently under its own name, which means creditors can only seize funds related to their specific project/series.
A parent LLC series can be transferred to one Series at a time without affecting the other Series. The liability shield also allows series owners to maintain the independence of each Series.
Real estate investors who have multiple properties may benefit from Series LLCs as well.
Each property is connected with a separate series and has nothing to do with other properties. In case one particular child LLC faces litigation, the assets of that Series cannot be used to cover the expenses.
The Series LLC concept was developed in response to a need for liability protection afforded under operating agreements, but not by default when setting up an entity through the Secretary of State's office.
In most cases, creating a series can help decrease legal fees and increase asset protection.
Series can be set up as separate entities with their own series agreements. Series LLCs are not subject to the same rules that apply to multiple-member limited liability companies.
Series LLCs allow for flexibility in management and offer liability protection at a lower cost than other structures, making them an ideal choice for investors looking to file bankruptcy on assets connected within series LLCs.
The Cons of Series LLC
Forming a Series LLC can become quite complex. You must follow many rules to have a series limited liability company treated as separate LLCs for liability purposes.
You need to file separate annual reports and tax returns each year for each business entity, so record-keeping must become more difficult since all business dealings will involve multiple companies instead of just one parent company with subsidiaries underneath it.
Managing these businesses requires more attention than operating under one standard business structure, which means having good organizational skills could maximize your success with running an LLC.
For example, if there was ever any sort of legal problem involving another "series" within your business, then only assets related to a particular unit would be at risk, not the entire business as a whole.
However, there is little to no consensus about the comingling assets, so the Series LLC law is still pretty much in the dark.
In conclusion, you should always consult your business attorney before deciding to run a Series LLC structure to ensure that it is right for both business and personal needs.
What States Permit Series LLCs?
Unfortunately, most states don't permit the formation of Series LLCs. Those that do have different Series LLC statutes that vary greatly.
Delaware, Alabama, Oklahoma, Illinois, District of Columbia, Iowa, Indiana, Montana, Missouri, Kansas, Tennesse, Nevada, Utah, and Texas 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 LLC, 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
Series LLC laws vary from State to State. Generally, the formation of Series LLC will resemble the formation of a traditional LLC, but there are other requirements to consider too.
For example, the filing fee for setting up a Series LLC may be different than normal.
Additionally, it is essential to file additional documents with your State's Secretary of State office at the time you form your Series LLC.
The process involves a few steps, and you have to be careful with each one of them, depending on the state where you choose to do business.
Picking a Series LLC Name
Forming a series LLC begins with its name. In order to separate your assets from the other Series in an LLC, you should name each separate company accordingly.
The names of these companies should be different, unique, and cannot contain any word or 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 terms "holding company" or "holding co." in their LLC name.
In any case, you should abide by your state's particular LLC naming requirements.
Hiring a Registered Agent
Having a registered agent is a requirement for any 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 appropriate people within the organization.
The service can also include any number of other tasks such as answering official mail from state agencies and departments, accepting certified correspondence from third parties, etc.
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
Series LLC registration process is the same as the one required for a regular LLC.
Articles of Organization, also called Certificate of Formation in some states, is filed with the Secretary of State, and the form of this document can also vary from State to State.
Some states permit the registration on the same document regular LLCs would use for this purpose, while others have a separate form.
It is important that the name of the LLC, its location, and the office where it's incorporated be stated in this document.
It should also include a statement indicating that LLCs may establish Series that are immune from other series' liabilities.
Again, the states that permit the formation of Series LLCs may differ in their filing requirements.
While some states require registration through a certificate of registration or certificate of designation that needs to be filed with the Secretary of State, others might not require the Series LLC registration at all, as long as this business structure is specified in the Series LLC operating agreement.
The operating agreement, in that case, doesn't need to be filed with the state.
The most important part of your Articles of Organization has to focus on the limitation of liability.
This section must specify 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 an operating agreement is a document that outlines the rights, security interests, powers, duties, membership interests of its separate members, and liabilities of each member.
It is separate from your articles or certificate of formation.
Operating agreements are important to have even if you're not using outside capital because it defines how key aspects of LLC management will be handled within an organization.
The individual assets associated with a series must be specified in the operating agreement as belonging only to such Series.
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 LLC or traditional LLC.
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.
For this reason, the safest way to know the exact procedure for federal income tax is to contact the IRS directly or speak to an experienced business attorney.
Does a Series LLC Need Separate Bank Accounts?
Each entity within a Series LLC should have a separate bank account. Series LLC consists 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 Single Member?
Yes, a Series LLC can be a single member.
Can a Series LLC Be a Disregarded Entity?
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?
Technically, 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.
Forming a Series LLC has a lot of benefits. The good news is that the Uniform Law Commission is currently working on the Uniform Protected Series Act, which most states will hopefully adopt in the near future.
That will provide additional guidance and clear the air for some of the legal issues.
But it doesn't change existing law on dealing with LLCs, so Series LLC will still have to rely on case decisions from courts and attorneys' general interpretations.