What is a Series LLC?
What is the difference between Series LLC vs LLC?
What are the benefits and drawbacks to form an SLLC?
In this article, we will break down the notion of Series LLC so you know all there is to know about it.
We will define Series LLC, look at how it is structure, different types of Series LLCs, their advantages, disadvantages, which states authorize the formation of a Series LLC, how you can form one, compare Series LLC vs LLC and more.
We have a complete overview for you where we get rid of the clutter of information out there and give you the essence of what you should know about Series LLC’s, the good and the bad.
Are you ready?
Let’s get started!
What is a Series LLC
A Series LLC or SLLC is a special form of a limited liability company allowing you to separate your LLC ownership, assets and operations into different compartments or series independent from one another.
Some refer to a Series LLC as Serial LLC.
It all means the same thing.
A Series LLC is a type of LLC able to create mini-LLCs (or mini entities) able to act just like a legally formed LLC.
For example, ABC LLC (Master LLC) can have two series (Child LLC), Series A LLC and Series B LLC representing “mini LLCs” within ABC LLC.
Series A LLC and Series B LLC can own different assets, can have different members, can have different names, can sign contracts, can sue and be sued and can operate different businesses.
What they both have in common is that they are created by ABC LLC, their Master LLC company.
Think of ABC LLC as the parent company and Series A LLC and Series B LLC as the child companies.
This type of LLC structure is fairly new and has been around since 1996 when Delaware enacted laws to create this type of LLC entity.
A series LLC can have as many series as it wants and each series will be considered a separate entity.
The Master LLC and Series LLC can each have a separate business purpose, different commercial interests, different assets, different owners or classes of owners and ownership interests.
A limited liability company is a business entity where the owners of the LLC and are personally shielded from the operations of the business.
To add additional protection to the LLC, a Series LLC is a type of LLC company where each series within the Master LLC shields the assets and operations from other series within the LLC.
It’s like having your LLC create limited liability protection within its own legal entity.
The debts and legal obligations of a Series are enforceable against the assets of that Series only.
The structure of a series LLC is similar to a corporation acting as a parent company to its subsidiaries where you have a level of control while, at the same time, each subsidiary remains an independent business.
Similarly, with a Series LLC, you have a Master LLC or Umbrella LLC at the top of the structure and, below it, you have each LLC series or LLC cells.
Each series to the LLC will have its own assets, its own name, its own members and operate in its own market separate and independent from the other series.
An important aspect of a series limited liability company is that it allows each series to be protected against risk resulting from this parent-subsidiary type of structure.
For example, if an LLC operates its business using three series, the business risk and liability of each series should, in theory, not affect the other LLC cells.
The series LLC setup is similar to a corporation setting up multiple subsidiaries where each subsidiary is an independent business within the group.
Example of a Series LLC structure
Types of Series LLC
There are different types of Series LLC companies you can form.
For example, in Delaware there are two types of SLLC:
Let’s look at what they are.
Protected Series LLC
Protected Series LLCs are the original types of Series LLC first created in Delaware.
A protected series LLC is formed by filing the Delaware LLC articles of formation with the state of Delaware.
The forms are available at Delaware.gov’s website in the section related to Corporate Forms and Certificates for a Limited Liability Company.
The LLC owner will obtain a Certificate of Formation confirming the creation and registration of the LLC.
To create a series, the LLC can amend its operating agreement to create one.
This process is handled internally within the LLC.
Registered Series LLC
The registered series LLC is a newer type of series LLC made available in the state of Delaware.
A registered series LLC is created by filing a Delaware LLC articles of formation in a similar way as a protected series.
To create a series, the registered LLC cannot simply amend its operating agreement like the protected series but rather it must file the necessary paperwork with the state of Delaware to have the series created.
You must complete the LLC Registered Series Formation form to create your registered series.
The Master LLC and each Series LLC will be registered separately.
Each registered entity can even obtain its own good standing certificate whereas a protected series LLC can only get one certificate of goods standing for the parent LLC.
In addition, each series is required to respect the master LLC’s naming convention and contain the master LLC’s name.
Advantages of Series LLC
There are certain advantages to setting up and operating a business under a Series LLC.
One important consideration in forming a Series LLC company is to limit your LLCs business risk and protecting its assets.
If you operate your business under a conventional LLC, all your business assets and operations will be under the same legal entity.
Should a creditor or a third party exercise a legal recourse against your LLC, your LLC’s entire book of business is at risk.
On the other hand, if your LLC is segregated into independent Series, the creditor of one series cannot exercise recourse against another series.
Although there is some legal uncertainty about the effective legal protection offered by Series LLC due to lack of statutory uniformity with the US states, in theory, each Series within an LLC should be legally separate and apart from the other.
Operating under a series setup should effectively shield each series from the business risk of the others.
Set up costs
The Series LLC structure is designed in such a way that the owners of an LLC can run their business using different series without having to set up new legal entities and incur costs associated with the formation of new legal entities.
In some states, all you need to do is to create your Master LLC once and then it can create its own child entities without having to file any additional formation paperwork with the relevant state.
In essence, you need to form your LLC only once with the state.
Once your LLC is formed, each series can be created internally within your LLC by simply amending your operating agreement to add the additional series.
Series LLC entities offer the LLC owners the flexibility to organize their business in a way that makes sense from an ownership perspective, asset allocation and risk exposure.
It’s a flexible type of setup as you can have one LLC structured with multiple series LLCs within it where each series may own a specific property or operate in a specific industry.
For example, an LLC may want to own a real estate property under one series and run its day-to-day business operations in another series.
This setup can be achieved without having to form and maintain a new LLC.
Revenue and expense
You can structure your Series LLC in such a way that the revenues and expenses flow through each Series in a strategic way.
A Series LLC, just like a conventional LLC, offers pass-through taxation.
This means that the revenues of the LLC flow to the members who are taxed on their personal income taxes.
By setting up your Series LLC, you can effectively control the revenue and expense exposure of each Series so you reduce risk.
In some states, operating one master LLC with independent cells can lead to time-saving in the administration of the legal entities.
For example, a Delaware Protected Series LLC does not need to file new articles of formation for each independent series.
In other words, the Master LLC will file its articles of formation once and then can create its own LLCs without state filing, registration and maintenance.
A Series LLC enables you to have different members own distinct LLC series within the Master LLC.
For example, John, Suzanne and Rick own the Master LLC.
They have created two cells LLC Series A where only John and Suzanne are members and LLC Series B where Suzanne and Rick are members only.
A series LLC allows LLC members to custom design the LLC ownership structure adapted to their specific needs.
Disadvantages of Series LLC
Running a series LLC comes with its own disadvantages.
Let’s look at some of the important ones.
There is an element of legal uncertainty in running a Series LLC.
Although more and more people are using a Series LLC to segregate their business into independent operations, the Series LLC legal structure has not been thoroughly tested in court.
In other words, will the courts consider that a series may have some liability towards another series?
Can one series file for bankruptcy without affecting the other series?
Series LLCs are in existence since 1996, some states permit them and some don’t.
What happens if you formed your Series LLC in Delaware, you segregated your business into different series and one of your series conducts business in a state that does not recognize Series LLC structures.
Will the other state accept to shield one Series from the others or Master LLC?
It remains to be seen how case law and statutes evolve over the next few years particularly across the state lines.
Lack of legal uniformity
There is a lack of uniformity in the statutory rights and obligations of Series LLC between states.
For example, the state of Delaware considers that a Protected Series LLC can:
- Allows the Master LLC to create new series without further filings
- Allows each Series to enter into contracts
- Allows each Series to own assets and hold title to assets
- Allows each Series to grant liens and security interests
- Allows each Series to exercise legal recourse in court and be sued
On the other hand, the state of Illinois requires that Series LLCs create their series by filing documents with the state.
Some other states do not consider a Series LLC as a separate legal entity allowing them to separately enter into contracts, sue or be sued.
Due to this lack of uniformity between state laws, you may not effectively benefit from the theoretical value offered by forming a Series LLC which is to shelter each Series from the other.
At this moment, there is no guarantee that the limited liability protection will be extended to every state.
You may also find the reorganization of your series LLC to be potentially challenging.
For instance, in the state of Delaware, the Protected Series:
- Cannot merge with other entities
- Cannot consolidate with other entities
- Cannot be converted into another type of entity
- Cannot get its own certificate of good standing
For a person starting a business with an LLC, these considerations may be less relevant but as you grow, you may find that these limitations affect your ability to scale the business.
Multiple registered agents
Considering a series is considered a separate business in many states, a resulting drawback is that each series must have its own registered agent.
What’s important is to operate each series at arm’s length and as a separate business.
To shield each Series from one another, you must operate each Series as if you are operating an independent business.
For example, Delaware considers that each series within an LLC can sue or be sued.
As a result, you’ll need to designate a registered agent for each of your series enabling the agent to receive legal documents for your series.
At first glance, it appears that setting up a Series LLC may be less costly but that may not be the case in the long run.
Although the initial setup costs may be less than forming multiple LLCs, you have to be mindful of your ongoing costs to avoid surprises.
For example, California requires that each series operating in California be registered with the state as a foreign LLC just like any other LLC.
Right there, you have yourself franchise taxes to pay at $800 per Series registered.
Very quickly, you’ll chip away any initial set up cost savings you benefited from.
Assuming that Series LLCs are automatically cheaper than a conventional LLC may lead you to expensive mistakes.
You may see benefits in creating a Series LLC from a business perspective, however, you must keep in mind that behind the scene, you have the members to manage.
Series LLC can lead to complex business structures and, even worse, internal conflict between business partners.
If each Series is owned by different members, you increase the potential for inner-fighting particularly if one Series is profitable while the other one is not.
You may have some partners dedicating their time and energy to one Series where they have a greater interest and neglecting the other Series.
If the Series is not properly managed, the overall LLC structure can be convoluted and difficult to manage and lead to conflict between members who must act independently but at the same time operate under the Master LLC structure.
States allowing Series LLC
To form a Series LLC, the state laws must allow for it.
The Series LLC is a statutory creation just like a corporation is created by virtue of the law.
The state of Delaware was the first state to take the lead with the creation of Series LLCs by adopting state laws allowing this unique type of LLC to be formed.
Here is a table showing the states where you can form a Series LLC:
|District of Columbia|
For example, the laws of the state of California do not recognize a Series LLC to be formed under California laws.
In other words, you cannot form a Series LLC California.
However, California does recognize the registration of a Series LLC legally formed under the laws of another state, for example, a Series LLC Florida.
California requires that a Series be registered as a foreign LLC just like any other LLCs doing business in California.
How to form a Series LLC
You form a series LLC the same way as you form a conventional LLC.
Articles of formation
You must file your Series LLCs articles of formation with the state permitting the creation of a Series LLC entity.
It’s important to indicate that your LLC’s articles of formation provide for the creation of series within your LLC.
Once you create a Series LLC, you do not have to file articles of formation every time you want to create a series within it.
You can create your LLC series by following the rules adopted in your master operating agreement.
Often times, the creation of a new series within an LLC is achieved through the amendment of the master LLC operating agreement.
You will also need an operating agreement for your series LLC.
Since you will have an LLC along with different series, you will need a Master LLC operating agreement for your registered LLC and a Series LLC operating agreement for each series adapted for the needs of each series.
The master operating agreement will apply to all the series and the series operating agreement will only apply to the specific series in question.
How to structure a Series LLC
You want to ensure that there is a clear separation in your business operations to avoid comingling the affairs of different series.
By running each Series at arm’s length, you are effectively drawing a barrier between your Series making it legally clear that each Series should be treated separately thereby providing shelter and liability protection to one another.
To structure your LLC, you must answer the following questions:
- Who will own each series?
- What asset will each series own?
- What aspect of the business is managed by the series?
By answering these questions, you can structure your LLC in a way that makes sense.
LLC Series ownership
You can create your LLC series in such a way that all members of the Master LLC remain the owners of each LLC Series.
For example, if your Master LLC is owned by five partners, you can mirror the ownership structure for each Series you create.
This type of ownership structure allows the same partners to equally share the profits and losses among all the LLC series formed.
You can also design different members per Series or design any variation of ownership that makes sense to you and your business.
In this scenario, the LLC Series will share revenue and profits with its own members and the members of the other Series or Master LLC would not have any interest in that revenue or loos.
LLC Series assets
Another way you can structure your Series LLC is to allocate different assets to each series.
For example, if you operate a real estate brokerage business, you may want to have a Series dedicated to your brokerage services business and have assets related to that and another Series for your own real estate investment venture.
This way, your investment assets are in a separate series while your operating assets are in another series.
LLC Series business operations
It’s important to operate each series of an LLC as a separate business entity.
For example, if you have an LLC with two series (Series 1 and Series 2), you should make sure that you:
- Operate each series using its own fictitious name (or DBA)
- Open a separate bank account for each
- Keep a separate book of your business
- Create your financial statement separately
- Loans between each series to be adequately recorded and documented
- Any transaction between the series should be done at fair market values
Series LLC vs LLC
A conventional LLC and a Series LLC share similarities but also have differences.
Let’s look at what’s common and what’s different in LLC vs Series LLC.
A traditional LLC and a Series LLC are formed in the same way.
Both an LLC and Series LLC are formed by filing articles of formation with the state.
The articles of formation of the Series LLC will have the additional notation indicating that you are creating a Series LLC instead of an ordinary LLC.
Many states require that LLCs adopt operating agreements.
This does not change for Series LLC vs LLC.
Both of them need to adopt operating agreements.
As such, the Master LLC will adopt a master operating agreement applicable to the Master LLC and all series and each series will adopt series operating agreements for the specific operations of the series.
An important difference between a regular LLC and a Series LLC is how the assets, operations and members are structured.
In a conventional LLC, you will have your members owning the LLC and the LLC owning all its assets and running its entire business operating under the same LLC.
On the other hand, with a Series LLC, you have one Master LLC (like a parent company) and each series (subsidiary or child companies) where each series can have different members, own different assets, different names and operations.
This means that a Series LLC will have multiple “mini LLCs” within it.
A traditional LLC is not authorized to establish Series while a Series LLC is able to create “compartments” within the same legal entity allowing each of its Series to operate just like an LLC.
Series LLC FAQ
What type of business can be structured as a series LLC?
The segregation of assets, owners and operations can be beneficial for many types of businesses.
The following businesses can consider the formation of a series LLC:
- Real estate investment company where each property is purchased under a separate series
- Businesses having separate seasonal operations such as a company handling lawnmowing operations in the summer and snow removal services in the winter
- Business owners operating in multiple business segments such as development services and consulting services
- Businesses with different product lines
- Businesses in different markets or geographical locations
- Businesses looking to have an entirely different branding strategy
- A business looking to do a joint venture without putting the entire LLC at risk
Can I change my LLC to a Series LLC?
Yes, you can.
Many states allow you to change your traditional LLC to a Series LLC by filing an amendment to your articles of organization or a similar process.
What are the risks of a Series LLC?
Series LLC entities do come with some risks and uncertainties, here are the main ones:
- Not all states allow the formation of series LLC
- There are not enough case laws and precedent to have comfort that the assets of each series are effectively protected from the assets held by other series
- The legislation is evolving on this matter
- It is not yet clear whether or not a series can benefit from bankruptcy protection
- You must keep a close eye on the regulation evolution
- You may have to pay more in ongoing costs to keep different registered agents
- You may need to register your Series in other states incurring additional fees
In what state can I form a Series LLC?
You can form a Series LLC in Alabama, Arkansas, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Wisconsin, Wyoming and Virginia.
Can a Series LLC be used in real estate?
Yes, a series LLC can be used in real estate to protect your properties against creditors of the business or other properties.
For example, a real estate investor may purchase one property under one series and another property in another series.
This way, the creditors of one Series do not have access to the property held by the other Series of the LLC.
How much does a Series LLC cost?
You can expect the formation of a Series LLC to cost you anywhere between $500 to $1,000 depending on the state that may be slightly less than an LLC cost in some states.
For example, you’ll need to pay for filing your articles of organization along with any other state fees like franchise fees.
In the state of Delaware, if you create a Protected Series LLC, you’ll need to pay $300 for the Master Series LLC and no other fees for each Series under that Master LLC.
If you create a Registered Series LLC, you’ll need to pay $300 for the Master Series LLC and then $75 for each Series registered under that Master LLC.
If you are looking for a Nevada Series LLC, expect to pay $75 for filing your Articles of Organization.
What are the benefits of a Series LLC?
Series LLC allows you to have your limited liability company’s assets and business operations separated in logical compartments allowing it to streamline each line of business but also limit the liability of the entire LLCs assets or the assets of each series from risk.
To illustrate what is the benefit of a Series LLC, let’s look at an example.
John is a handyman and has a company that offers renovation services and home building services.
He can separate these two lines of business into two separate LLC series or cells in a master LLC.
One series will operate the renovation business and the other series will operate the home construction business.
If John wishes to add another line of business like consulting services, he has the option of forming a third series to operate the consulting operations.
What is the difference between an LLC and a Series LLC?
An LLC and Series LLC differ in the following ways:
- An LLC cannot create subdivisions, cells or series whereas a Series LLC allows you to create divide your LLC into separate businesses under your main LLC umbrella
- An LLC can only have one ownership structure while a Series LLC can have different members a Series
- An LLC will have all its assets and obligations under the same legal entity while a Series LLC can separate its assets into different Series
How are series LLCs taxed?
Generally, the Master LLC files taxes for the entire LLC and Series within its structure.
As a result, the Series does not need to pay their taxes independently from Master LLC.
However, you must consult an accountant or tax specialist with regards to your series LLC taxes.
For example, the state of California as taken the position that each series, being a separate business entity, must file its own taxes separate and apart from the Master LLC and the other series.
Other states may not have adopted this position.
The tax treatment of Series LLCs is yet to be resolve and your best strategy is to make sure you know what to expect, best to verify with an expert.
What is a Master LLC?
A Master LLC is what is commonly referred to as the officially registered Series LLC able to create an unlimited number of Series beneath its structure.
The Master LLC is sometimes referred to as Umbrella LLC, Main LLC or Container LLC.
The Master LLC is the parent LLC able to create Series either by amending its operating agreement or by registering the Series with the state as required by law.
The Master LLC will have a master operating agreement applicable to the entire group while each Series will its own operating agreement applicable strictly to it.
Do I need a Series LLC?
A Series LLC can be an ideal business set up for real estate investors, taxicab companies, trucking companies, franchisees, a manufacturing company, service companies and more.
Using a Series LLC, you can structure your business operations in such a way that you offer liability protection to different segments of your business.
Whether you segment your business by product line, by markets, by asset-type, it’s all up to you.
If you run a trucking company, for example, you may want to operate your fleet of trucks under one Series, operate your manufacturing business under another Series and own your retail stores in a third Series.
Effectively, you are shielding some parts of your business from other parts of your business.