When you start a limited liability company (LLC), in most situations you will need to obtain an Employer Identification Number (EIN). In Indiana,the ...
What is a Series LLC?
LLC is an acronym for limited liability company. An LLC can exist in the form of a series LLC or a regular LLC.
In a series LLC, the organization’s articles of formation permit infinite divisions of operations, assets and membership interests into distinct series. The series function like completely separate businesses with distinct names, accounting records and bank accounts.
Let’s take a closer look at what series LLCs are really all about so you have a better idea as to whether forming a series LLC is financially and legally prudent.
Series LLC Distinctions
Part of the appeal of establishing a series LLC is that it can have separate managers and members in each specific series. The duties and rights of such managers and members change from one series to the next.
The series can join contracts, hold real property titles, own personal property, engage in litigation and also be served with lawsuits.
However, there is liability protection available for each series. This legal liability protection is the most valuable characteristic of a series LLC.
A series LLC is not the same thing as a corporation. Though there are similarities between the two, series LLCs have multiple subsidiaries. Series LLCs diversify risk exposure across several distinct entities.
An added bonus is the fact that there is no need to pay one fee after another to establish distinct and individual entities.
In short, the series LLC concept is an affordable and efficient means of mitigating the risk of legal liability without paying an egregiously large sum of money to do so.
Forming a Series LLC
Series LLCs are formed similar to traditional LLCs. Articles of formation are filed with the state government. The majority of states require that the series LLC distinguishes itself from a traditional LLC in that the articles of formation must state that the LLC has authorization to develop a series.
If an operating agreement for the master LLC has not been established at the time the request is made to form the series LLC, meet with a business law attorney to tailor that legal document to the nuances of your specific business. An operating agreement is required for each series you desire to create. The series LLC can then form subsequent series when necessary.
The operating agreement of the master LLC establishes the rules necessary for the series LLC’s overarching operations. The operating agreements for the series establish specific rules with regards to operations. However, the articles of formation are required only once, ultimately saving you time, effort and money.
Once the initial master LLC is formed, subsequent series are made through the operating agreements’ language. A business law attorney will help you alter the original master LLC’s operating agreement then implement subsequent series.
You can also rely on a corporate service business to help file all the documents necessary to form your series LLC. This company will provide the Registered Agent necessary for the process, secure the certificates of good standing, file all necessary yearly reports and handle the rest of your compliance needs.
Check if Series LLCs Are Permitted in Your State
There is a common misconception that series LLCs can be formed in any state. Unfortunately, you might not have the option of creating a series LLC in your state.
Delaware, widely revered as the trailblazer state in the context of business and tax mitigation, was the first-ever state to pass legislation that authorized the formation of series LLCs.
Additional states have followed in the metaphorical footsteps of Delaware, authorizing local businesses to create series LLCs.
Aside from Delaware, series LLCs can also be formed in Utah, Texas, Oklahoma, Nevada, Iowa, Puerto Rico and Tennessee.
Certain states such as California do not permit the formation of series LLCs, yet it is possible for series LLCs created in other states to register and conduct business in California.
Using a Series LLC
Series LLCs are business entities with a considerable amount of flexibility. Though there is some legal jargon attached to the formation and ongoing use of a series LLC that every business owner should be aware of, there is no reason to be intimidated by this legalese. When in doubt, consult with your business law attorney for guidance.
Take a deep dive into series LLCs and you will find they are surprisingly easy to use. As an example, real estate investors who have an ownership stake in several properties often use series LLCs to safeguard those properties through individualized legal protection. This protection guards against potential legal liability that might arise from other properties in the series.
Businesses with distinct profit centers are empowered to use a series LLC to separate and protect each of those specific business operations. The legal liability protection of the series LLC is maintained through the use of each series as a distinct company. Therefore, each of the distinct entities is required to have a distinct bank account, accounting records/books and even contracts signed with each series’ respective name. Every single transaction for each series must be documented accordingly to remain in full compliance with the law.
Tax Implications of a Series LLC
Series LLCs have their own unique taxation issues. As an example, some tax boards at the state level such as that in California mandate that the distinct series within a series LLC are separate entities and must file separate tax returns.
Each such series in the state of California is required to pay its own respective LLC yearly taxes and fees. However, these requirements are not exactly the same in every single state.
Additional Reasons to Form a Series LLC
Aside from enhanced legal protection, there are several other reasons why businesses create a series LLC.
A series LLC provides the advantage of enhanced flexibility. Series LLCs are flexible to the point that members are empowered to decide exactly how they would like to divide financial rights and management duties without extensive restrictions from statutory mandates. Such flexibility is available for the series LLC as a whole and also in each distinct series.
Series LLCs are also favored as they are economically efficient. There is no sense paying one fee after another to form distinct LLCs when the business owner can save a considerable amount of money by forming distinct LLCs.
Even if the state where you conduct business requires the payment of fees and the filing of documents for the formation of each series, it will still be cheaper than forming several different LLCs.
Though the cost savings advantages of series LLCs have dissipated as time has progressed, these savings are still quite meaningful in certain contexts.
As an example, mutual fund managers find establishing a fund in a series is faster and more affordable when those funds are established as distinct entities.
Holding companies also favor series LLCs as they own yet do not operate a portfolio business. The holding company is empowered to use the series LLC to hold distinct businesses beneath the overarching structure of the initial LLC to reduce the risk of the company’s hard-earned assets being subjected to garnishment or forfeiture as a result of a lawsuit or an unpaid debt stemming from the operations of a distinct business within the series.
Investors who own multiple real estate properties also use series LLCs. The individual properties are tied to distinct series in the series LLC. This setup ensures that if one property is subjected to a lawsuit, be it a personal injury lawsuit or a lawsuit stemming from the discovery of a danger/hazard on the property, the series’ assets tied to the investor’s other properties will not be used to cover the financial burden of costs related to litigation.
Series LLCs Are Still Evolving
The identity of series LLCs is taking shape with each passing year. The benefits of series LLCs as defined above certainly have broad appeal yet every business owner, fund manager and real estate investor should understand LLCs are a relatively new business structure.
The business and legal communities are still in the process of fully defining series LLCs, meaning there is some room for interpretation in the context of the law.
Those looking to establish and operate a series LLC outside of the state in which their business is based are advised to consult with an experienced business law attorney for ongoing guidance.
The laws pertaining to series LLCs in one state are quite different from those in other states. However, the sharpest minds in the legal and business communities agree that series LLCs are highly effective at mitigating legal liability, simplifying business operations and protecting the assets specific to distinct businesses.
It is quite possible the theoretical benefits of series LLCs as detailed above will be reaffirmed or weakened as series LLC litigation plays out in the years and decades ahead.
Recognize the fact that series LLCs are dynamic rather than static, account for that inherent risk when planning your business, fund or investment portfolio, and move forward accordingly.