Limited liability companies (LLCs) are an increasingly popular business structure for startups, offering liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes.
The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns. An LLC is created by filing paperwork with your state, and nominal fees are involved.
Some states have created LLC variations that offer added benefits, such as series LLCs and restricted LLCs. Of these two, you might be wondering, which is better? That depends on your business.
What Is a Series LLC?
A series LLC allows members to create, within the articles of organization, a series of members, assets, and operations that are legally separated in terms of obligations, property, and purpose. It’s similar in nature to a parent company, also known as a holding company, with several subsidiaries.
Each series within the series LLC maintains separate accounting. In some states, each series may also need its own registered agent. A registered agent is the person or company that sends and receives official documents for your LLC.
The main benefit of a series LLC is that each series has its own liability. Obligations are separated, and if one series is sued, the other series are unaffected. Series LLCs are most often used for real estate investment companies to separate the properties so that each one has its own liability.
As of early 2022, series LLCs are allowed in Delaware, Illinois, Iowa, Nevada, Oklahoma, Puerto Rico, Tennessee, Texas, and Utah. They are not allowed in California, but if you’ve formed an LLC in another state, you can register your series LLC to do business in California.
What Is a Restricted LLC?
Restricted LLCs are only allowed in Nevada. A restricted LLC is an LLC that cannot make distributions to the members for 10 years after its formation and cannot be taxed for that time period. A restricted LLC is generally used to pass an asset from one family member to another so that the members have no personal liability pertaining to the asset, and to avoid taxation on the asset. The restricted status of the LLC must be specified in the articles of organization.
As you can see, series LLCs and restricted LLCs are very different and serve very different purposes. If one of these seems appropriate for your situation, it’s a good idea to have an attorney involved during the formation of the LLC. You’ll also want to consult your tax advisor.