Defining the Series LLC
Limited liability companies (LLCS) come in a variety of shapes and sizes: single-member LLCs, manger-managed LLCs, multiple-member LLCs, low-profit LCCs (L3Cs), member-managed LLCs.
The list goes on. But of all the various ways someone can structure an LLC, the least understood LLC is the series LLC.
What is a series LLC?
Picture a grapefruit cut in half. Each piece of fruit is sectioned off from the other pieces by a natural, cellular wall. Each piece is a section of the whole and held together and protected by the peel. A series LLC is much the same as this grapefruit.
First brought to life as a business entity in 1996 in Delaware, the series LLC is a group of series (mini LLCs) held together by one encapsulating, master LLC. Typically, series LLCs are used as holding companies. The company as a whole is composed of many different, individual series held together as one company. These individual, smaller LLCs (the series) are independent of each other business-wise (each LLC can run a different kind of business), and liability-wise (each LLC can hold its own assets, and if one of the smaller LLCs get sued, generally speaking, the assets in the other LLCs are not up for grabs).
What purpose do series LLCs serve?
Predominantly, holding companies tend to utilize series LLCs. A holding company doesn’t actively operate any business—it simply exists and owns. As a series LLC, the holding company would own all of the LLCs beneath its umbrella. In essence, a series LLC is ideal for someone who wants to form multiple LLCs into one large conglomerate without changing the function or business operations of each individual LLC.
Real estate investors who own multiple properties use series LLCs to isolate liability. In theory, each LLC in the series can own a different property and, should any of the investment properties run into legal trouble, any judgments against it would not affect the other properties/LLCs. In order to maintain the liability protection of each LLC in the series, assets should not be mingled and separate bank accounts need to be established for each of the LLCs. In short, each of the LLCs in the series needs to be treated as a separate business.
Another much simpler reason some business owners want to form a series LLC is they think they can basically form multiple LLCs for the price of one. However, this is only true in some states (Delaware, Nevada, and Montana), where all the series that exist within the series LLC are formed in the LLC’s governing document—the operating agreement. In other states, like Illinois and Kansas, when you form a series LLC, you file a completely different form than a regular LLC, which may cost you more ($200 more in Illinois), and for each series you add to the company, you must file a Certificate of Designation and pay a fee (typically between $50 and $100 per series). Annual fees can also pile up in some states. While all states claim that only the master LLC is required to file an annual report, states like Kansas and Illinois, also charge an additional fees for each series registered with the state.
Which states allow series LLCs?
Delaware, District of Columbia, Illinois, Iowa, Kansas, Minnesota, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Wisconsin, and Puerto Rico all have provisions for series LLCs. California does not, but a series LLCs formed elsewhere can register as a foreign entity there and do business as a series LLC, but as stated above, it must pay taxes and fees for each LLC in the series.
One important item to note if you’re contemplating forming a series LLC is that not all state statutes concerning these entities were created equal. In Wisconsin, Minnesota, and North Dakota, you can form a series LLC; however, you should know that the legislation in place doesn’t specifically provide liability protection between the different LLCs in the series, unlike the other states where you can form a series LLC. That doesn’t mean the liability protection isn’t there, but it certainly doesn’t mean that the liability protection is there.
What risks do I face when operating a series LLC?
In the tax department, series LLCs are sticky. There’s no consistent tax rule for series LLC. The states that allow and recognize series LLCs have different rules concerning how they’re taxed. For example, in Delaware the series LLC is viewed as one big LLC, but in California (where you cannot form a series LLC, but you can register a foreign one) the series LLC is seen as many different LLCs where each piece of the series must pay its own annual fees and taxes if it’s registered to do business in the state. The IRS has not issued any official rules specific to series LLCs, but since the IRS regards LLCs as pass-through entities, any income passed onto an individual through the series LLC is taxed as personal income.
A list of other concerns you may want to address before forming a series LLC follow:
- Series LLCs have not been tested in court like other entities, including the typical LLC. For that reason, it’s yet to be determined how well their liability walls will hold up in court. If you’re truly concerned about sure fire, bullet-proof asset protection, series LLC probably aren’t the best choice.
- Many banks aren’t familiar with the inner workings of series LLCs and you may find difficulty opening different bank accounts for the LLCs in the series.
- If you’ve registered your series LLC in another state that doesn’t recognize series LLCs, there’s no guarantee that state’s court will recognize the separation of liability in the series.
While series LLCs are an interesting and useful business entity, they are new to the business world. These entities provide a unique opportunity for those who want to operate multiple LLCs as one company. The series LLC has yet to tread any real water in the courtroom, however, and if you’re operating in states other than your home state, you may want to operate with caution, as there is not foretelling how other states may treat your series LLC. Overall, while the series LLC does provide the opportunity to own multiple businesses inside of one LLC, for most people, forming multiple LLCs is the smarter, simpler choice.
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