What is a Series LLC
Many entrepreneurs opt to establish a Limited Liability Company, more commonly known by its abbreviation of ‘LLC’.
The reason behind this is that a limited liability company is the kind of business structure in the United States that protects its owners from personal liability.
Through a limited liability company, the owners or members of an LLC cannot be held personally accountable to settle, pay, or reimburse financial obligations, court cases or debts of the company.
In the event that the company is liable for certain matters, it will be the company’s assets that are put on the stake and not the personal belongings of the owners or members of the company.
LLCs are hybrid business entities that combine the attributes of a corporation with the attributes of a sole proprietorship or partnership.
Limited liability companies can fall under different branches that grants its owners or members different advantages such as a series LLC.
What is a Series Limited Liability Company?
A series LLC is considered as a unique form of a limited liability company that is comparable to a corporation with several subsidiaries.
Series LLCs cannot be established in every state with some states allowing the forming of a series limited liability company while others do not recognize its creation.
The articles of formation of a series LLC specifically permits for the unlimited segregation of its owners’ assets, interests and operations into independent series called “cells”.
The segregation is done for liability protection purposes.
The series LLC has an umbrella or master LLC that controls all the LLCs in the series.
Each series of a series LLC runs, administers and operates its business as if it is a separate entity.
Each series has its own bank account, individual name, and its own separate books as well as records.
A series limited liability company may be composed of different members and managers in each of the series it contains.
As such, the obligations and rights of a series LLC’s members and managers will differ depending on which series they belong to.
Each of a series LLC’s cells can enter into contracts, hold titles to real or personal properties and can also sue or be sued without affecting the assets of the other cells under the same umbrella.
The most vital attribute of a series LLC is the limited liability protection that it offers to each of its cells.
Assets that are owned by one cell are secured from the risk of liability that other cells within the same series LLC may incur.
It is this aspect that makes a series LLC comparable to a corporation with several subsidiaries.
The difference lays in the fact that the concept of a series LLC is designed to separate and isolate risks within its autonomous entities without having to invest in the cost of filing, setting up and formally establishing new entities.
States Permitting the Formation of a Series Limited Liability Company
A series limited liability company is considered as a creation of the state.
There are only certain states that allow the formation of series limited liability companies.
The first state to enact the legislation authorizing the creation of series limited liability companies was Delaware.
Since its first enactment, several states have followed suit.
States that allow the formation of series limited liability companies include: Puerto Rico, Alabama, Arkansas, District of Columbia, Indiana, Kansas, Missouri, Utah, Texas, Tennessee, Oklahoma, Nevada, Iowa, and Illinois.
The list of states that allow the formation of series limited liability companies may change with the possibility of more states being added.
It would be best to check in with your presiding state to know if the series limited liability option is available.
There are state laws that do not allow the formation of series limited liability companies like those in California for example however, series limited liability companies formed in the states that allow and recognize its creation can also register with other states to do business in areas that do not permit their formation.
Forming a Series Limited Liability Company
Forming a series limited liability company is highly identical to forming a regular limited liability company.
Articles of formation will need to be filed with the presiding government entity though this time, it will need to be specifically filed in a state where the formation of series limited liability companies are permitted.
To be formally recognized as a series LLC and be distinguished from a regular LLC, most permitting states will require that the articles of formation explicitly declare that the LLC is authorized to form series.
What will also be needed is an operating agreement. Operating agreements will be needed for the master LLC and one for each series that will be formed under a master LLC.
A series limited liability company can create additional series as the need arises.
The operating agreement of the master limited liability company will form the general governing body and set of rules for the overall administration and operations of the series LLC.
As such, operating agreements of each series will provide tailored and customized rules for their respective businesses.
One of the benefits of forming a series limited liability company is that its articles of formation only need to be filed once.
Once the initial master limited liability company is formed, each series that is made and added under that master LLC will only go through internal mechanisms that are laid out in the operating agreements.
How each cell will fit into the series LLC structure and its master operating agreement is by amending the master LLC operating agreement to reflect the addition of additional series or cells.
Using a Series Limited Liability Company
A series limited liability is a flexible and relatively easy to use business entity.
A series LLC will provide reduced start up costs since only one filing fee is required with the option to have an attorney set up the parent LLC and its cells at a lesser cost than setting up multiple standalone LLCs.
There is a protection of assets granted as each cell is protected from the liability judgements against the assets of other cells.
There are less administration complications since series LLCs can save on administrative time and expenses in contrast to regular LLCs that when established more than once would also need to have its own administration for each LLC separately.
There are less complexities to consider than a corporation or a subsidiary structure since a series LLC does not have the same complexities of structure, taxes and formalities like corporate records.
There is lower sales tax depending on the regulation of the presiding state where rent paid by one cell to another cell in the series may not be subjected to sales tax for example.
Only one state registration is needed for the parent LLC which means fewer legal costs and registration fees with only one annual or biennial fee being needed for the series assuming that all LLCs in the series are registered within the same state.
Lastly, depending on the presiding state, only one tax return will need to be filed by the master limited liability company which is inclusive of all the cells of the master LLC.
A series LLC can be used by real estate investors who possess multiple properties.
Each cell will isolate and protect the properties it contains from the judgements of liabilities of other cells in the series LLC. Companies that possess different profit centers under a series LLC can separate and secure each of their business operations.
Maintaining the liability protection of each series is in the treatment of each series or cell as a separate company.
To treat each cell as its own company, there would need to be separate bank accounts, maintenance of separate records and books, documenting of all transactions, keeping sufficient amounts of capital on hand for transactional and business purposes and signing of contracts using the name of the series involved.
Tax Issues Faced by a Series Limited Liability Company
An experienced Certified Public Accountant (CPA) or a tax attorney will be needed before attempts are made to file the tax returns of a series limited liability company.
This is due to the fact that how a series limited liability company pays federal tax is complicated leading to tax issues that will need an experienced tax preparer to properly handle this type of tax return.
There are a few unresolved tax issues with series limited liability companies particularly in regards to whether each series is treated as a separate entity for tax purposes.
Some states will require each series to file its own tax returns as if it is not a cell under a parent limited liability company.
Tax regulations will vary greatly depending on the business’ presiding state.
The California Franchise Tax Board has taken its stance that each cell in a series limited liability company is to be treated as a separate entity thus it follows that it must file its own tax returns.
Each cell of a series limited liability company will also need to pay its own annual limited liability company fee and tax if it has been properly registered to do business in the state of California.