Limited liability companies (LLCs) can be an extremely beneficial business structure for large and small companies alike. They are extremely flexible and offer many of the benefits of corporations without all of the paperwork and other requirements. For these reasons, LLCs are a popular choice for many new business owners.
LLCs also work well for those who want to expand their business by “adding on” other companies or business ventures. While you can accomplish this type of goal by creating a parent company and several subsidiaries, developing a series LLC may also be a helpful means to set up your business as well.
A series LLC is a type of LLC that has a slightly different formation scheme than a traditional LLC. The formation documents, such as the operating agreement and membership admission agreement, will specifically set out that members’ interests can be divided or segregated into an independent series. This type of division can also apply to operations of the business or specific assets. Each series then operates as if it were a separate entity. It will have:
Each series also has slightly different rights and responsibilities for members and managers. Although these individual series can certainly be different, they can overlap a great deal as well.
The main benefit of this type of legal structure is that each individual series is independent of the other, which means that they are insulated from each other’s liabilities and debts. Each section can sue or be sued, as well as hold title to assets or real property.
The concept is very similar to having a parent LLC or corporation with several subsidiaries. However, there are no additional costs to create and maintain a completely separate legal entity. In this way, it offers all of the benefits of an LLC/subsidiary relationship without any of the related costs.
In reviewing the concept of a series LLC, it is easy to see that it has several benefits. Examples of these advantages include the following:
Not everything about a series LLC is a benefit, however. There are some significant disadvantages that you should consider if you are thinking about using this type of structure for your business.
Series LLCs are a creature of state law, like most other business structures. However, they are relatively new, which means that many states treat them differently, and the federal government may treat them differently still.
Perhaps the most important drawback of a series LLC is that many people, including the IRS and lending institutions, do not have much experience with them. They are sometimes unsure how to handle them on even a basic level, such as to open a bank account or process tax returns. The legal questions that surround these relatively new business entities can cause headaches, but they might be worth the time and effort for some business owners.
Not every state permits series LLCs for one reason or another. Delaware was the first state to allow such a structure and indicate that it would provide asset protection among the series within an LLC. This development occurred in 1996, which means that series LLCs are still relatively new compared to other types of business structures. Comparatively, the first corporations in America were developed in the 1790s.
Series LLCs have to be explicitly allowed by state law. The definition of a series should include separate rights and responsibilities, not just that an LLC can have several series of assets. The following states specifically allow for series LLCs:
A few other states use the word 'series,' but there is no limitation on liability if you take a close look at their LLC laws. These states include the following:
These states do recognize that portions of an LLC can have different classes of equity with different rights, but there is no limitation on liability. This limitation is perhaps the most important aspect of a series LLC, so they often are not considered “true” series LLCs.
In some circumstances, it may make sense to use a nearby state’s laws to create a series LLC. Most states do not require that your principal place of business be located in that particular state. Whether this idea will work for you will depend on the unique facts of your business.
Forming a series LLC is much like creating a traditional LLC; you will need to file specific paperwork with your Secretary of State. Each state is slightly different in what they will require, however, so it is essential to check the requirements set out by the Secretary of State in the state in which you are choosing to form your LLC.
You may have heard that a subsidiary corporate setup is much like a pyramid. A series LLC structure looks more like a puzzle. They are connected, but they generally do not overlap. Although there is one larger LLC, none of the series are connected or dependent on one another. They do occasionally share resources, but they all have separate books and records, accounting, and other necessities.
To correctly (and legally) form an LLC, you must meet particular requirements that spell out this relationship among the various series in the LLC. As an example, consider the criteria that Delaware uses for creating a series LLC:
In Delaware, there is a $90 fee to create your LLC. Costs will vary by state.
You can also change, add, or take out a series by amending your operating agreement in the future.
Some states will also allow you to convert an existing LLC to a series LLC without having to start from scratch. Depending on where you formed your LLC, you may be able to file a simple document to amend your formation document. In Delaware, for example, it is referred to as a certificate of amendment for limited liability company. In Illinois, it is called a restated articles of organization.
In most situations, you can simply enter language into the amendment section of these documents that authorizes the LLC to create a series within itself. You should also specify that none of these series are liable for the debts or obligations of another series. Keep in mind that if your LLC was originally created in a state that does not allow series LLCs, you cannot covert it to a series LLC.
You should also amend your operating agreement to reflect how each series will be structured and managed, as well as who will be responsible for those obligations. Although you do not need to file your operating agreement in most states, it is a good idea to amend this document to reflect what is actually happening within your business.
Once you have completed the conversion process, you may need to change names on any titles held by the LLC. For example, if the LLC is holding a rental property, and you want Series B to own that property, you should change the title to “Series B of Your Business, LLC,” or whatever name you are using for that particular series.
Remember that each series can and should hold its own assets to get the full benefit of asset protection offered by this structure. You will also need to separate books and records and create a bank account for each series as well.
If you are considering starting a series LLC or converting your prior LLC to a series LLC, LegalNature provides legal documents to help you get this process started. Browse through our business formation documents now.
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