What Is a Series LLC?

The Basics of a Series LLC

A series LLC is a type of LLC that has a slightly different formation scheme than a traditional LLC. The formation documents, such as the operating agreement and membership admission agreement, will specifically set out that members’ interests can be divided or segregated into an independent series. This type of division can also apply to operations of the business or specific assets. Each series then operates as if it were a separate entity. It will have:

• a unique name,
• separate books and records,
• separate bank accounts, and
• different members or managers.

Each series also has slightly different rights and responsibilities for members and managers. Although these individual series can certainly be different, they can overlap a great deal as well.

The main benefit of this type of legal structure is that each individual series is independent of the other, which means that they are insulated from each other’s liabilities and debts. Each section can sue or be sued, as well as hold title to assets or real property.

The concept is very similar to having a parent LLC or corporation with several subsidiaries. However, there are no additional costs to create and maintain a completely separate legal entity. In this way, it offers all of the benefits of an LLC/subsidiary relationship without any of the related costs.

The Benefits and Drawbacks of a Series LLC

In reviewing the concept of a series LLC, it is easy to see that it has several benefits. Examples of these advantages include the following:

• Decreased startup costs – Because a series LLC only requires that you use one large LLC, there are no separate filing fees or administrative costs for each individual LLC.
• Asset protection – Perhaps the most significant benefit of a series LLC is the asset protection that it offers between the different series.
• Less administrative hassle and complexities – Because you are only administering one LLC, you can avoid costs and filing requirements compared to having several businesses that would be linked together. It is also much easier to manage at tax time as well.
• Less sales tax imposed – If you have several different entities, you might have to pay sales tax on each one. In some states, however, you may not have to pay sales tax more than once, even if you have several series within the LLC.
• Only one tax return – Instead of doing several separate tax returns for each business that you run, you might be able to do just one tax return for your one large LLC. Although it takes less time and effort than doing several corporate or LLC returns, these filings are still somewhat complicated so you may want to consult a professional.

Not everything about a series LLC is a benefit, however. There are some significant disadvantages that you should consider if you are thinking about using this type of structure for your business.

• Several registered agents – Most states require that you have a separate registered agent for each series in your LLC. In this way, those who want to communicate with that particular series or initiate a lawsuit will have a specific individual who represents that series to send notices and other information to. Having a registered agent for each series comes at an added cost to the LLC as a whole. However, separate registered agents would still be something that you would have if you owned several distinct legal entities. That means that this expense is not really all that different from what you would you pay in a subsidiary relationship.
• Separate bank accounts and accounting – Because each series must operate independently of one another, they also must have different bank accounts and books and records. Keeping track of all of this information, plus paying bank fees, can become costly. It can also be complicated to manage as well.
• Cost of formation – In some states, creating a series LLC is slightly more expensive than developing a traditional LLC. The price is generally only a few hundred dollars more, and there is usually no additional cost for adding each series to the LLC. As a result, this type of cost may not be a deal breaker for many business owners.
• Bankruptcy concerns – Should one series in the LLC fail, it is unclear how that must be handled. In a traditional subsidiary or stand-alone company, the business could file bankruptcy with little question. However, it is unclear whether just one series in the LLC could file bankruptcy on its own at this time.

Series LLCs are a creature of state law, like most other business structures. However, they are relatively new, which means that many states treat them differently, and the federal government may treat them differently still.

Perhaps the most important drawback of a series LLC is that many people, including the IRS and lending institutions, do not have much experience with them. They are sometimes unsure how to handle them on even a basic level, such as to open a bank account or process tax returns. The legal questions that surround these relatively new business entities can cause headaches, but they might be worth the time and effort for some business owners.

Which States Allow for Series LLCs?

Not every state permits series LLCs for one reason or another. Delaware was the first state to allow such a structure and indicate that it would provide asset protection among the series within an LLC. This development occurred in 1996, which means that series LLCs are still relatively new compared to other types of business structures. Comparatively, the first corporations in America were developed in the 1790s.

Series LLCs have to be explicitly allowed by state law. The definition of a series should include separate rights and responsibilities, not just that an LLC can have several series of assets. The following states specifically allow for series LLCs:

• Alabama
• Delaware
• District of Columbia
• Illinois
• Iowa
• Kansas
• Missouri
• Montana
• Nevada
• Oklahoma
• Tennessee
• Texas
• Utah

A few other states use the word 'series,' but there is no limitation on liability if you take a close look at their LLC laws. These states include the following:

• Minnesota
• North Dakota
• Wisconsin

These states do recognize that portions of an LLC can have different classes of equity with different rights, but there is no limitation on liability. This limitation is perhaps the most important aspect of a series LLC, so they often are not considered “true” series LLCs.

In some circumstances, it may make sense to use a nearby state’s laws to create a series LLC. Most states do not require that your principal place of business be located in that particular state. Whether this idea will work for you will depend on the unique facts of your business.

Requirements to Create a Series LLC

Forming a series LLC is much like creating a traditional LLC; you will need to file specific paperwork with your Secretary of State. Each state is slightly different in what they will require, however, so it is essential to check the requirements set out by the Secretary of State in the state in which you are choosing to form your LLC.

You may have heard that a subsidiary corporate setup is much like a pyramid. A series LLC structure looks more like a puzzle. They are connected, but they generally do not overlap. Although there is one larger LLC, none of the series are connected or dependent on one another. They do occasionally share resources, but they all have separate books and records, accounting, and other necessities.

To correctly (and legally) form an LLC, you must meet particular requirements that spell out this relationship among the various series in the LLC. As an example, consider the criteria that Delaware uses for creating a series LLC:

• Certificate of formation – The certificate of formation for a series LLC is the same as a traditional LLC in Delaware. However, you must also include a statement that your LLC is going to be a series LLC under Delaware law. Each series will not need to file a new certificate of formation in Delaware, but check with your Secretary of State to ensure that there is no such requirement in your state.
• Operating agreement – A series LLC operating agreement must meet all of the requirements of a traditional LLC operating agreement. You must also include a description of how each series will be laid out. You should list the managers and members of each series and set out what type of tax structure each series will use. Keep in mind that each series will need to apply for an Employer Identification Number (EIN) of its own as well.

In Delaware, there is a $90 fee to create your LLC. Costs will vary by state.

You can also change, add, or take out a series by amending your operating agreement in the future.

Converting an LLC to a Series LLC

Some states will also allow you to convert an existing LLC to a series LLC without having to start from scratch. Depending on where you formed your LLC, you may be able to file a simple document to amend your formation document. In Delaware, for example, it is referred to as a certificate of amendment for limited liability company. In Illinois, it is called a restated articles of organization.

In most situations, you can simply enter language into the amendment section of these documents that authorizes the LLC to create a series within itself. You should also specify that none of these series are liable for the debts or obligations of another series. Keep in mind that if your LLC was originally created in a state that does not allow series LLCs, you cannot covert it to a series LLC.

You should also amend your operating agreement to reflect how each series will be structured and managed, as well as who will be responsible for those obligations. Although you do not need to file your operating agreement in most states, it is a good idea to amend this document to reflect what is actually happening within your business.