Series LLC

A series LLC is a type of limited liability company (LLC) that allows the creation of separate series or cells within the LLC. Each series or cell can have its own assets, liabilities, and business purpose, and can be treated as a separate entity for tax and liability purposes.

Each series is recognized as a legal entity in the state that it is formed. This means that the series LLC is able to conduct business and enter into contracts in its own name. This can be useful for individuals or businesses that want to manage multiple businesses or investments within a single LLC structure and want to isolate the assets and liabilities of each series or cell.

Since most Series LLCs are formed for their asset protection features, let’s jump to that topic.

Here is an example of how a series LLC can protect assets:

Imagine that you own a series LLC with three separate series or cells: a real estate series, a stock portfolio series, and a small business series. Each series has its own assets and liabilities.

If the small business series incurs debt or is sued, the assets of the real estate series and the stock portfolio series will not be at risk. The creditor or plaintiff will only be able to go after the assets of the small business series to satisfy the debt or judgment. The assets of the other series will be protected from any liability arising from the small business series.

This can be a useful way to protect your assets if you own multiple businesses or investments within a single LLC structure, as it allows you to isolate the assets and liabilities of each series or cell.

Features of the Series LLC

Here are some key features of a series LLC:

  1. Separate series or cells: A series LLC allows the creation of separate series or cells within the LLC, each with its own assets, liabilities, and members.
  2. Limited liability: As with any LLC, the members of a series LLC have limited liability for the debts and obligations of the LLC. This means that the members are not personally responsible for the debts or obligations of the LLC beyond their investment in the LLC.
  3. Flexibility: A series LLC allows for flexibility in managing and operating each series or cell. For example, you can set different management structures or membership interests for each series or cell.
  4. Asset protection: A series LLC can help protect the assets of each series or cell from the liabilities of the other series or cells.
  5. Tax treatment: The tax treatment of a series LLC depends on the state in which it is formed and the specific tax laws of that state. In some states, each series or cell of a series LLC is treated as a separate entity for tax purposes, while in others, the entire series LLC is treated as a single entity. It’s important to consult with a tax professional to determine the tax treatment of a series LLC in your state.
  6. Formation: To form a series LLC, you will need to complete the necessary paperwork and file it with the appropriate state agency, typically the secretary of state. You will also need to draft and adopt an operating agreement, which outlines the terms and conditions of the LLC and the rights and responsibilities of the members.

Potential Benefits of the Series LLC

There are several potential benefits to forming a series LLC, including:

  • Asset protection: A series LLC can help protect the assets of each series or cell from the liabilities of the other series or cells. This can be particularly useful for individuals or businesses that want to manage multiple investments or businesses within a single LLC structure.
  • Simplicity: A series LLC can be a simpler and more cost-effective way to manage multiple businesses or investments than setting up separate LLCs for each one.
  • Flexibility: A series LLC allows for flexibility in managing and operating each series or cell. For example, you can set different management structures or membership interests for each series or cell.

It’s worth noting that the concept of a series LLC is not recognized in all states, and the specific rules and requirements for forming and operating a series LLC can vary from state to state. It’s important to understand the laws and regulations in your state before forming a series LLC.

Potential Drawbacks of the Series LLC

While a series LLC can offer several benefits, there are also some potential drawbacks to consider:

  1. Limited recognition: Series LLCs are not recognized in all states, and the legal treatment of series LLCs may vary from state to state. This can make it more challenging to form and operate a series LLC in certain states, and it may also affect the liability protection and tax treatment of the LLC. As of 2023, the following states allow for the formation of series LLCs: Alabama, Delaware, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Montana, Nevada, Oklahoma, Tennessee, Texas, Utah, Wyoming, and Virginia.
  2. Complexity: A series LLC can be more complex to set up and operate than a traditional LLC. For example, you will need to draft and adopt an operating agreement for each series or cell, and you may need to keep separate records and file separate tax returns for each series or cell.
  3. Lack of precedent: Because series LLCs are a relatively new type of business entity, there is limited precedent and legal guidance on how they should be treated in different situations. This can make it more difficult to predict how a series LLC will be treated in legal disputes or other matters.
  4. Cost: Forming and operating a series LLC can be more expensive than a traditional LLC, due to the added complexity and potential need for legal and tax advice.

How to Form a Series LLC

To form a series LLC, you will need to follow the steps below:

  1. Choose a state: Choose a state that recognizes series LLCs and has laws that are favorable to your business or investment needs.
  2. Choose a name: Choose a unique name for your series LLC that is not already in use by another business in your state. You may need to check with your state’s secretary of state or business registration agency to see if the name you want is available.
  3. File articles of organization: File articles of organization with the appropriate state agency, typically the secretary of state. The articles of organization should include the name and address of the series LLC, the name and address of the registered agent, and the purpose of the LLC.
  4. Draft and adopt an operating agreement: Draft and adopt an operating agreement for your series LLC. The operating agreement should outline the terms and conditions of the LLC, the rights and responsibilities of the members, and the management structure of the LLC.
  5. File any required documents: Depending on the state in which you are forming your series LLC, you may need to file additional documents, such as a certificate of formation or a statement of qualification. You may also need to pay filing fees and obtain any necessary licenses or permits.
  6. Comply with ongoing reporting requirements: Once your series LLC is formed, you will need to comply with any ongoing reporting requirements in your state, such as filing annual reports or paying annual fees.

There are numerous other considerations and nuances to these rules. Please give us a call to discuss your business to ensure that you are following all of the necessary steps to form your series LLC and to get more information on the specific requirements in your state.