Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
If you want comprehensive protection from company liabilities, you may want to set up a series LLC.
A series LLC (SLLC) is a type of limited company with a structure consisting of a master or parent LLC and smaller entities known as series. The whole idea of this company model is to create a stable business structure that protects itself from liability risks.
This is a detailed guide on forming a series LLC and why it is advisable to go this route to avoid legal and financial pitfalls.
What Is a Series LLC?
An LLC or Limited Liability Company safeguards company owners from business-related liabilities.
A series LLC differs slightly from a standard LLC in that it enables you to establish unlimited business entities with company assets and keep each one of them legally separate.
So, any other entity within a series LLC cannot be accountable for the liabilities and debts of different entities within a larger organization.
The Transformation of Limited Liability Entities
In the late ’70s, Delaware spearheaded several new limited liability entities. This era gave rise to limited liability partnerships and limited liability companies.
In 1996 the Delaware LLC Act amendment paved the way for the series LLC.
Series LLCs was a breakthrough in the business world. You could create mini LLCs with separate assets shielded from other liabilities for the first time in history.
Since the mid-’90s, only a couple of states have fully endorsed the formation of series LLCs. The main reason for the apprehension is the lack of sufficient tax laws to support the model.
Legislation has also been slow because most courts have difficulty interpreting the statutes necessary for final judgment.
Where You Can Form a Series LLC
Delaware is credited for being the first state to pioneer the series LLC. The pro-business state is famous for being an entity formation hub.
Not all jurisdictions in the United States allow series LLCs. The states that followed Delaware’s lead and allowed series LLCs include Nevada, Illinois, Iowa, Oklahoma, Tennessee, Texas, and Utah. Puerto Rico also allows series LLCs.
Note that setting up a series LLC differs from one state to another, but the process is pretty similar across the board.
How to Form a Series LLC
There are plenty of requirements and approvals required before you can successfully initiate a series LLC.
The following four steps will summarize the main processes, including the official requirements that should get you started.
Give Your Series LLC a Name
The rules of naming your series LLC may vary, so you need to confirm your state’s directives.
These general rules apply during the naming process to avoid the risk of legal confusion.
- The large umbrella entity (parent LLC) name should reflect its status as the larger organization.
- The smaller entities’ (child series) names should include the name of the parent LLC.
- Some states require the series name to include the term protected series or P.S. in short. For instance, if the parent LLC is Portmore Holdings LLC and one of the entities is 2022X, the series name should read “Portmore Holdings LLC Series 2022X P.S.” Some states only require the word “series” and others don’t require you to use the word “series” at all in the name of the various child – or cell – entities. Some businesses that don’t want a long and complicated name might choose to create a DBA for their child series cells.
This naming format is accepted in most states and is likely to be permitted in regions that eventually implement the Series Act when it is confirmed.
Find a Registered Agent
A registered agent is an entity that handles legal documents on behalf of its clients. The agent will receive and send documents to you, including document filings and legal summons.
Each series LLC must appoint a registered agent. The agent should be authorized to work in your state or have an affiliate already established in your area. Plenty of registered agent services can fill this role for you.
File Official Documents with the State
Once you have decided to formalize your series LLC, it must be made official.
Most states require you to file a Certificate of Formation or Articles of Organization with the Secretary of State’s office or equivalent government agency.
The prerequisites vary from one region to another, but some of the minimum requirements include the series LLC Name, your registered agent’s details, and verified signatures.
If you’re presenting the Articles of Organization, ensure that it includes a stipulation allowing your series LLC to institute series.
In some states, you can establish a series of entities by amending your current operating agreements. If this provision is not available, you will have to register each series separately.
Create a Series LLC Operating Agreement
An operating agreement is a governing document that describes the detailed characteristics of the parent LLC and the child series.
The document outlines the new LLC’s ownership structure and members’ roles.
A well-written operating agreement assures all the involved parties that all the series are secure. Be sure to check your state’s requirements for creating an operating agreement.
Note that this is not a state obligation but is a valuable corporate document that outlines the corporate structure.
If you want help setting up a series LLC, you can view our recommendations for the best LLC services.
Advantages of Setting up a Series LLC
A series LLC is an excellent option, especially when your business involves external partnerships. But that is not the only reason why you should choose this route. Consider the following other benefits.
Protection
The most significant benefit of a series LLC is the protection of child series assets from the liabilities of the parent LLC and other child series it offers.
Many investors use this form of corporate protection to manage their wealth by allocating investments to different child series depending on risks and returns.
Administration
When you form a series LLC, you get to save a lot on paperwork and other bureaucratic processes. It’s way more economical than setting up several standard LLCs.
Generally, a series LLC is a more straightforward and less expensive option than starting a corporation with various subsidiaries.
Flexibility
Each child series can handle contracts, buy and sell assets, grant liens, and sue.
Businesses with more than one profit center can protect their assets while separating business operations.
Multiple Uses
Every series that you add can be tied to a unique business purpose. For instance, one series could be for real estate investment, another for a retail enterprise, and the third for passive investments.
More series can be added over time for different objectives. Each one has its independent assets, members, and business purposes.
Note that banking and insurance services cannot be operated from a series.
Gray Areas Still Exist
The Series Act has not been finalized, so the following unresolved issues may be causes of concern.
Tax Regime
Currently, child series are not liable to pay taxes, and instead, all the tax issues are handled by the parent LLC. This tax treatment may change in the future with new laws and regulations, but for now, it stands.
Interstate Laws
The states that allow the formation of series LLCs are far fewer than those that do not acknowledge them.
States can impose their laws and handle series LLCs unfairly since there may be no legal recourse. An ideal situation would be to have uniform rules across all states to prevent biases.
If you’re running a series entity in a state that does not accept series LLC, your assets won’t be afforded the full liability protection you deserve.
Bankruptcy
Courts have difficulty determining whether each series should have separate bankruptcy counsels. Or should liabilities and assets be consolidated with other series for the series LLC to be treated as one entity?
How Series LLC Taxes Work
Currently, the tax structure for series LLC is not uniform at federal and state levels.
Despite state statutes affirming that series can operate as separate legal entities, the ruling is not binding.
Federal governments may categorize individual series as partnerships instead of allowing entities to choose the tax classification that meets their requirements.
In 2010, the IRS revealed proposed regulations to ensure each series is treated as a separate entity for federal tax obligations.
Under this proposed law, each series would need a federal Employer Identification Number (EIN) to file its tax return according to the appropriate tax classification.
However, many unresolved tax and legal issues would still exist even if these proposals were implemented.
Series LLC vs. LLC
A limited liability company (LLC) is the standard method that investors and entrepreneurs use to file business entities. The limited liability offers protection from lawsuits and incurred debts.
The series LLC is like a corporate umbrella with a master or parent LLC and smaller LLCs.
The series LLC allows you to create as many separate entities under the parent LLC with individual liability protection.
If you’re an investor, it is essential to have some form of asset protection, and the series LLC offers additional flexibility over the standard LLC.
Series LLC vs. Professional LLC
Professional LLCs (PLLCs) are similar to conventional LLCs, but only licensed professionals can create PLLCs.
Practitioners such as physicians, lawyers, and architects file PLLC documents to the state licensing board for approval before presenting them to the state’s Secretary of State.
Any investors or entrepreneurs interested in creating a business entity that protects their liability can form a series LLC without professional vetting like PLLCs.
Fund managers initially used series LLCs to maximize their liability protection and reduce administrative hassles.
Startups, real estate developers, and other investors can use series LLCs to separate liabilities and reduce tax filing processes.
Frequently Asked Questions
Can an LLC be changed to a Series LLC?
Most states that accept series LLCs allow you to amend the operating agreement enabling an existing LLC to become a series LLC.
How much does it cost to form a Series LLC?
There is no standard figure, but the costs range from $50 to $1000.
Is a Series LLC the only form of liability protection?
This depends on your preferred level of protection. For some investors, the series LLC is for asset-holding purposes while other businesses are handled directly.
For higher liability protection, you could opt to set up shell companies.
Do you have to file multiple tax returns for Series LLC?
Typically, series LLCs file only one tax return because all the income and losses from other series go through the parent LLC.
Can a Series LLC Grow?
Like a parent with several kids, a series LLC can have multiple offshoots. A series LLC can grow and become a worthy investment if nurtured well.
The Last Word
Forming a series LLC is a lengthy process, but it can save you from legal or financial woes that could cost you much more in the long run.
Follow all the regulations carefully during the formation stages so that you don’t have to go through many hassles when adding new series to a parent LLC.
If you’ve read through this article and are still unsure which LLC is appropriate for you, seek a qualified business consultant who can guide you.
Filed under: Advice Columns
