The LLC is a popular but recent development in the business landscape. Few people realize there are some variations of LLC types across the country. One of the recent inventions is the series LLC (which is only recognized in 22 places). The series LLC is a variety of separate LLC segments that are unified under one parent or LLC umbrella. Because the series is such a recent development, it can be hard to know exactly how everything works. Let’s break down everything you need to know.
A traditional limited liability company (LLC) mixes several elements; they’re effectively a combination of sole proprietorships, partnerships, and corporations, giving you the best of all worlds. LLCs are usually taxed similarly to general partnerships and sole proprietorships, where losses and gains are declared on personal tax returns; the LLC does not owe income taxes. Corporations are taxed at a business level, LLCs can elect to be taxed like a corporation (an S-corporation), but most LLCs choose not to.
In an LLC, the owners (or LLC members) aren’t typically personally liable for the business’s finances; if someone sues your LLC, your assets aren’t at risk.
LLCs are simple to set up and provide a variety of legal protections for you and your business.
Simply, a series limited liability company is just that – a collection of LLCs operating under the umbrella of a parent LLC. While each LLC is part of a larger company, the business structure isolates each LLC financially, like individual links in a chain. This means that a lawsuit against one should have no impact on the others. Each LLC has the same limited liability protection as a standard LLC. Creditors can only claim business assets, keeping your house, car, bank account, etc., safe.
A series LLC does the same, but it also theoretically isolates the other LLCs in the series, meaning creditors can’t claim LLC B’s assets in a claim against LLC A. However, the series LLC is very new, and in some states (currently Wisconsin, North Dakota, and Minnesota), series LLCs are forced to share liability across all segments (which somewhat undermines their purpose). A series LLC generally has similarities to a corporation with several subsidiaries. Series LLC avoids paying corporate tax rates, though.
Series LLC advantages and disadvantages
Asset protection: The best advantage offered by the series LLC is liability protection; except for three states, the LLC provides personal asset protection for each LLC, like several standalone LLCs. If one of your LLCs is sued, the other segments are (theoretically) shielded from any liability in the lawsuit.
Convenience: Forming an LLC is another way to achieve similar status, but you’d need to pay formation fees every time – plus go through the formation process each time. The series LLC is more streamlined and convenient.
Simplicity: The formation process is very simple; there’s a little hassle in maintaining the LLC series regarding annual reports and other legal requirements, especially when compared to running multiple LLCs or a corporation.
Inconsistent legality: The series LLC is recognized in less than half of US states, and each state has its own version. In three states – Minnesota, North Dakota, and Wisconsin, the liability of each segment isn’t protected, which undermines the best part of forming a series LLC to start with.
Bankruptcy offers another inconsistency; in some states, you can declare bankruptcy for one LLC without affecting the others in the series, but in some states, you’ll need to bankrupt all LLCs.
Legal inconsistencies: Since it’s such a recent invention, the series LLC hasn’t been around long enough to establish a binding legal precedent, so you can’t be certain how a judge will treat you in the case of a dispute. Legal uncertainty isn’t ideal.
Expansion issues: If you want to expand into other states, you may have some issues if the state doesn’t recognize the legal status of a series LLC. You should seek legal advice before expanding.
Registered agents and business bank accounts: A crucial component of keeping your segments separate is needing a bank account and registered agent for every LLC in the series. Keeping your business and personal finances separate is a huge factor in maintaining a normal LLC; you need to take similar steps to maintain separate finances of each segment in a series LLC. You may require the assistance of professionals to set up a workable system.
Who should consider a series LLC?
Many business owners looking to launch different service types or product lines consider a series LLC; for example, if you’re offering cleaning products and house-cleaning or makeup artistry alongside salon services.
You can create an additional LLC within the same series to launch a new venture without risking your core business if your side business fails. Another great example is the real estate investment business; when owning multiple properties, it’s a good idea to insulate each property from the others. That way, if a tenant sues you, only the assets of one LLC segment would be at risk, while the rest would typically be exempt from the lawsuit.
Series LLC or LLC?
Forming a single LLC is straightforward and uncomplicated; while there are some requirements, millions of people have formed an LLC in the USA over the last 30 years. Still, the real work begins when the business is launched. Multiple LLCs or series LLCs can be harder to run. There are pros and cons associated with each option.
Most businesses form as one LLC, but one option is to create a DBA (Doing Business As) or even several DBAs.
- You can have one LLC with multiple DBAs under one company.
- A DBA identifies your company and offers stronger branding.
- A single LLC is usually easier to manage long term.
- A DBA does not constitute a formal business structure or entity and is more of an extension.
- Since it’s not a separate LLC, there is no defense from liability.
Where can I form a series LLC?
Before you can choose this business structure for your startup, you need to be sure it’s legal.
Delaware was the first state to introduce the series LLC in 1996; in the years since multiple other states and territories have also adopted this business structure. It’s currently available in the following jurisdictions:
- District of Columbia
- North Dakota
- Puerto Rico
- South Dakota
Forming a traditional LLC or Series LLC
The process of forming each LLC type is identical, though you may need to indicate in your articles of organization you intend for the company to be a series LLC. Other jurisdictions have an entirely different formation document with other special requirements.
You should consider working with a professional for a series LLC since the setup is more complex. You can also use an LLC formation service for a traditional LLC for peace of mind. It’s often cheaper than the cost of a business attorney. Entrepreneurs should consult state laws and the secretary of state before deciding on whether to have a series LLC structure or a regular LLC as the laws vary by state.
The series LLC is a great idea that offers key unique benefits. It’s an excellent option for businesses looking to maintain several separate LLC segments under one parent LLC, but it’s only an option in around 22 jurisdictions. For every other location, your only option is to form a corporation with subsidiaries or a traditional LLC with DBA. Forming multiple LLCs is another option, but it comes with plenty of hassle. Several states such as California, Tennessee, etc, don’t recognize this type of business.