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A Series LLC (or “series limited liability company”) is a special type of LLC that segregates business assets, membership interests, and business operations into infinite series or entities.
Each series branches from a master LLC and has its own unique name, bank account, records, and books. Let’s dive in and explore the ins and outs of A Series LLCs to understand better how forming a series LLC benefits your business.
Before we discuss the series LLC in detail, you should know Master LLC from which series LLCs branch off.
What is Master LLC?
Master LLC also known as a parent, or “mothership” LLC is the main LLC with which the series LLC is registered with the state. Only the master LLC’s name is listed on the LLC Certificates of Formation or Articles of Organization
The LLC articles of organization explicitly allow the registering master LLC to designate protected series with unrestricted segregation.
Generally, the master LLC holds no assets and conducts no business activities. The only purpose of the master LLC is to protect the series under its “umbrella”.
In simple words, all the series LLCs are registered under the name of one master LLC which acts as a protective “fence” around its protected series.
What is A Series LLC?
Series LLCs also called “series limited liability companies” or SLLC for short are multiple separate LLCs within a master LLC. Each series LLC has its own asset protection and legal liabilities.
The term “Series” refers to the numerous individual LLCs that form the bigger entity (master LLC). Each Series LLC can be owned by different investors, have its own operating agreement, transact business independently, and even have its own assets and debts.
Moreover, a series LLC can enter into contracts, sue, or be sued separately from the other series LLCs under the same master LLC. The LLC number of LLC members, managers, their rights, and obligations may differ from series to series.
How Series LLC Works?
Unlike a traditional LLC, which is treated as a single entity for tax and legal purposes, a Series LLC is composed of multiple “series” each with its own assets, liabilities, and management.
This structure allows business owners to segregate their assets and limit their liability exposure to different series from one another.
For example, in the given scenario, the courier company, moving services, and car rentals are different series registered under one master LLC. Each series have a different name and may have separate members, assets, management, accounts, etc.
If Instant Car Rental is sued, the assets of the other series (courier and moving company) would not be at risk.
Why Form a Series LLC?
A series LLC was first introduced by Delaware in 1996 and it is quite similar to an S corporation with Q-subs. A series LLC segregates the assets and creates divisions between individual businesses that operate under the umbrella of the same LLC.
Series LLC helps shield members from liability between each individual business venture, while still allowing them to reap the benefits associated with being owned by the same LLC.
Series LLC offers several benefits and risks and depending on your specialized circumstances, you can decide whether creating a series LLC is a good idea or not. Let’s talk about the benefits and risks of series LLCs one by one.
Advantages of A Series LLC
1. Separate Liability Protection
What makes A Series LLC particularly appealing is the fact that each individual LLC within it has its own liability shield – meaning each series is protected from the debts and liabilities of the others. This means that creditors can’t go after all of the assets within your business, they must seek out a particular series to recover their debt.
2. Separate Management
A series LLC is a great way for entrepreneurs to divide the risks and responsibilities when managing multiple lines of business. The segregation also allows members to assign specific roles and responsibilities within each “series” as well as define different management teams, giving them more control over operations.
You can operate multiple businesses under one LLC, especially in states that do not allow a series LLC. However, in such cases, one business is not shielded against the liabilities of the other.
Unlike series LLC, all businesses under one single LLC will be liable for the lawsuit and debts of any single business operating under that LLC.
3. Tax Flexibility
Another advantage to consider when forming an A Series LLC is its flexibility in terms of taxation. Your business can choose how each series will be taxed – meaning it can be taxed as a corporation, partnership, or even an S Corporation.
This allows businesses to use different tax strategies within each series and maximize their profits.
4. Cost-effectiveness
Finally, A Series LLCs are cost-effective. The resources needed to form this type of business structure are minimal compared to the resources that would be required for multiple separate LLCs.
Plus, businesses don’t have to incur the additional costs of setting up separate LLCs and filing taxes for each one.
Risk Associated with Series LLC
The idea of a series LLC may seem downright dreamy for entrepreneurs looking to save on taxes and streamline liability. After all, it combines the benefits of a traditional LLC organization with flexibility and cost savings.
While a series LLC can bring those advantages, it’s important to be aware of the disadvantages that go along with such an arrangement.
1. Tax Complication
One risk is having complicated tax laws in certain jurisdictions—making it difficult to predict how the series LLC will be treated by the IRS or state tax authorities.
Many tax professionals are still learning how to correctly file taxes for members of series LLCs which can lead to grave complications and potential IRS penalties if filed incorrectly.
2. Uncertainty in Legal Situations
In case any of your series LLC encounters a legal issue, you can’t be sure what will happen. It is because series LLC is a relatively new concept and there haven’t been many court cases. So, it is difficult to predict what might happen in certain legal situations.
Moreover, it is still not yet clear whether the series LLC are protected in case of the federal bankruptcy court or not.
Which States Allow Series LLC
Please refer to the following list to whether your state allows to form series LLC or not:
| Alabama Arkansas Delaware District of Columbia Illinois Indiana Iowa | Kansas Missouri Montana Nebraska Nevada North Dakota Oklahoma | Puerto Rico Tennessee Texas Utah Virginia (effective 2020) Wyoming |
How to Form Series LLC
Forming a series LLC is Just like starting a traditional LLC involving 6 crucial steps as listed below:
- Select a State: Check if your state allows you to create a series LLC
- Name your LLC (or reserve a name): Decide a unique and professional name for the master LLC. You can also reserve the name if you need some time before filing with the state. You may also file a DBA in specialized circumstances.
- Choose a Registered Agent: You can choose a registered agent by yourself or hire registered agent services.
- File the Articles of Organization (certificate of formation): Articles of Organization are the legal document that is filed with the state to officially register your LLC. You must include the clause that this LLC will have series LLCs under its umbrella.
- Draft an Operating Agreement: An Operating Agreement outlines the capital contributions, profit and loss distribution, management structure, roles and responsibilities, LLC dissolution, and more to run your LLC smoothly.
- Get an EIN: Employer Identification Number (EIN) also known as a Tax ID number is used to identify your business for tax purposes.
Once your master LLC is registered you can create as many series as you want. You don’t need to register them separately.
If you are not confident that you can create an LLC on your own, you may hire professional LLC formation services such as ZenBusiness which creates your LLC for $0.
Conclusion
As you can see, there are several benefits to consider when it comes to forming a Series LLC. From asset protection and flexibility in terms of taxation to cost-effectiveness, this type of business structure can be a great choice for business owners looking for multiple lines of business.
However, whether forming a series LLC is beneficial for you or not depends on your special circumstances. Please consult a legal advisor and decide accordingly.
Frequently Asked Questions (FAQs)
Does California Allow Series LLCs?
No, California statute does not allow to form Series LLC. However, if you have formed a series LLC in another state, California allows you to register your foreign Series as a foreign LLC.
Please note that each individual series in California is required to pay an $800 annual tax. California courts do not grant individual protection to a series LLC.
What is the difference between an LLC and a Series LLC?
An LLC or traditional LLC is a single company registered with the state by filing certificates of formation. On the other hand, a series LLC consists of a master LLC having one or more individual series LLCs under its umbrella.
Each series is protected from losses, debts, and liabilities suffered by the other individual series or the master LLC. Our article What is an LLC will help you learn more about traditional LLC.
How do I use a Series LLC for real estate?
To place each investment property into an individual series, many real estate investors use a series LLC structure. The segregation of each asset shields each investment property from any lawsuits or losses incurred by a specific property.
If you are planning to set up a series LLC for your real estate business, read our complete guide.
How much does a Series LLC cost?
The cost of forming a Series LLC is the same as Starting an LLC. In both cases, you just need to pay the articles of organization fee which can vary between $50-$1000. There are some ongoing costs related to LLC annual report and taxes. Read our article Cost to form an LLC to learn more about series LLC formation costs.
Aisha Noreen is an owner of a small business with more than 9 years of experience in the marketing industry. With the wisdom of an old soul, she always seeks innovation and mind-blowing ROI techniques. Her unique approach helped many small businesses thrive and she can surprise you in many ways as well. Believe it or not, her energy, passion, and creativity are contagious enough to transform your business and take it to another level.
