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 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 consists of “series” or divisions (somewhat like mini-LLCs) under a single master or parent LLC. These individual 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 series gets sued, the assets held by the other series or the master LLC are usually not up for grabs).
What purposes do series LLCs serve?
The series LLC business structure is attractive to holding companies. A holding company doesn’t actively operate businesses—it simply exists and owns. As a series LLC, the holding company would own all of the individual series beneath its umbrella.
Real estate investors with multiple properties sometimes form series LLCs to isolate liability. Each series in the series LLC can own a different property. Should one investment property run into legal trouble, any judgments against it would not affect the other series within the series LLC. To maintain the liability protection of each series, their assets should not be mingled, and separate bank accounts should be established for each. Basically, you need to treat each series of your series LLC as though it is a separate business.
Many business owners want to form a series LLC because they think it’s the same as forming multiple LLCs but for the price of one. However, this description applies, at best, only in some states (such as Delaware and Nevada) where each individual series gets established merely by amending the series LLC’s operating agreement.
In other states, such as Illinois, you’ll pay higher state filing fees for a series LLC than for an ordinary LLC, and then each series you establish might require an additional state filing—usually called a Certificate of Designation—with its own state filing feed added on ($50 for each individual series, for instance, in Illinois). And while all states claim that only the master LLC is required to file an annual report, states like Kansas and Illinois charge additional annual report fees for each series registered with the state.
Which states allow series LLCs?
Alabama, Delaware, the District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Puerto Rico, Tennessee, Texas, Utah, Wisconsin, and Wyoming all allow some form of the series LLC. California does not form domestic series LLCs, but a series LLC formed elsewhere can register as a foreign entity and do business in California.
If you’re contemplating forming a series LLC, it’s important to know that not all state statutes were created equal. In Wisconsin and North Dakota, for instance, you can form a series LLC, but the legislation in place doesn’t specifically provide separate liability protections for the different series in the series LLC. That doesn’t mean the liability protection isn’t there in these states, but it doesn’t mean the liability protection is there either.
What risks do I face when operating a series LLC?
There are no consistent tax guidelines for series LLCs. For example, in Delaware the series LLC is viewed as single taxable entity, but in California (where you cannot form a series LLC but can register a foreign one) the series LLC is seen as many different taxable entities, and each series must pay its own annual fees and taxes. The IRS has not issued official rules specific to series LLCs, but the current IRS recommendations for taxing the series LLC includes treating individual series as separate entities for federal tax purposes.
A list of other concerns you might want to address before forming a series LLC:
- Series LLCs have not been thoroughly tested in court like other common business structures. For that reason, it isn’t clear how well their liability shields hold up in court. If you’re truly concerned about surefire asset protection, the series LLC probably isn’t your best choice.
- Many banks aren’t familiar with the inner workings of series LLCs, and so you might have difficulty opening separate bank accounts for the individual series within your series LLC.
- 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 separate limited liability protections granted to each series.
Coming Changes to the Delaware Series LLC
State statutes governing series LLCs also remain in flux. Apart from new states adding series LLC statutes every few years, and apart from inconsistencies between states about how best to approach and regulate the series LLC as a business structure, there are even more changes coming in Delaware—the state that created the series LLC. Partly following the Protected Series Act created in 2017 by the Uniform Law Commission, the state recently amended the Delaware Limited Liability Company Act and introduced a new kind of series—the “registered series” (series that register with the state) to be distinguished from the ordinary “protected series”—and also granted individual series the ability to merge or convert from one kind of series to another. These changes take effect on August 1, 2019.
The Bottom Line
While series LLCs are an interesting and potentially useful business entity, they are still new to the business world. The series LLC provides 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 still the smarter, simpler choice.