A series LLC is a unique form of limited liability company (“LLC”) in which the articles of formation specifically allow for unlimited segregation of membership interests, assets, and operations into independent ‘‘Protected Series’’
What is a Series LLC?
A series LLC is a unique form of limited liability company (“LLC”) in which the articles of formation specifically allow for unlimited segregation of membership interests, assets, and operations into independent ‘‘Protected Series’’ within the master Series LLC:
- Each Protected Series operates like a separate entity with a unique name, bank account, and separate books and records.
- A Series LLC may have different members and managers in each Protected Series.
- The rights and obligations of these members and managers may differ from series to series.
- Each Protected Series may enter into contracts, sue or be sued, and hold title to real and personal property.
- Each Protected Series may have different business purposes.
- The LLC itself may have no financial interest with respect to one or more or even all of the Protected Series within it.
The most important characteristic is the liability protection that is available to each series. A Series LLC provides “internal shields” whereby the obligations of one series are not the obligation of any other series or of the master LLC and assets owned by one series are protected from the risk of liability of other series within the same Series LLC.
Five Documents Required for Organizing a Business
Forming a Series LLC
The Series LLC is a creation of the state. Only in certain states are Series LLCs allowed to be formed. Currently, they are: Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah and Puerto Rico.
- There is real debate about the extent to which a Series LLC is entitled to protection under the Full Faith and Credit Clause of the U.S. Constitution. In other words, do the liability protections between the series apply? This is a critical factor when considering the use of a Series LLC.
- This issue is especially concerning in the large majority of the states that don’t have any sort of statutory recognition of these entities.
- Some states, like California, do not allow for Series LLCs to be formed under state law but series LLCs formed in other states can register with the state and do business in the state.
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The series LLC is formed in much the same way as a regular LLC:
- File articles of formation with the appropriate governmental entity in a state where Series LLCs are permitted.
- To be distinguished from a regular LLC, most states require that the articles of formation specifically state that the LLC is authorized to form series.
- One of the benefits is that you only have to file articles of formation once.
The master LLC operating agreement generally provides rules for the overall operations of the series LLC. These are the “default” rules if no specific rules are filed for the Protected Series LLCs
- Construct an operating agreement for the master Series LLC and one for each series unless you desire the same rules throughout the series. Operating agreements for each series provide customized rules for operations.
- A series LLC can create additional series whenever one is needed.
- After forming the initial master LLC, each additional series is formed through internal mechanisms spelled out in the operating agreements.
- Typically this is done by amending the master LLC operating agreement and adding an additional series.
Using a Series LLC
As a business entity, Series LLCs are very flexible and simple to use. (Most widely cited use of Series LLC is by real estate investors who own multiple properties.)
- Each series isolates and protects its properties from the liabilities of the properties in other series. Companies with different profit centers can use series LLCs to segregate and shield each business operation.
- To maintain the liability protection of each series it is important to treat each series as a separate company. This includes having a separate bank account, maintaining separate books and records, signing contracts using the name of the series, documenting all transactions, and keeping adequate amounts of capital on hand for business purposes.
Tax Issues
The Internal Revenue Service is still developing national standards and rules. However, each state establishes the tax provisions applicable to their state.
- Often, this is in the form of an opinion letter which is not the same as a statute when it comes to enforceability.
- Tennessee has taken the position that each series in a series LLC is a separate entity and therefore must file its own tax return and pay its own LLC annual tax and fee. This mitigates much of the potential benefit of consolidating financial operations.
- At this time, most state legislatures seem to be waiting on the Treasury to finalize their proposed regulations.
Keep Your Focus on Operations, Not Taxes
Bottom Line:
Basically, a Series LLC is similar in concept to a corporation with several subsidiaries. However, it is designed to segregate risk within separate entities without the cost of setting up new entities.
- The potential lower cost of set-up appears to be the major drawing point to a Series LLC.
- If there is no real cost savings because of filing requirements, it is not clear that a Series LLC is worthwhile, particularly given that its status in other non-participating states may be unclear.
- It could be risky to use these entities in states that don’t have a statute that speaks to their status under that particular state’s laws.
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NOTE: This article may discuss issues for which legal advice should be considered prior to a decision or agreement with a third party. It should be noted that the author is not an attorney, and FundingSage is not a law firm. FundingSage’s employees and affiliates do not provide legal advice. We recommend you seek the services of an attorney if legal advice is required.
