A limited liability company structure is on the rise now. And most businessmen and entrepreneurs know about its major pluses and minuses. Yet, the same can’t be said about a Series LLC.
A subtype or a variation of a standard company, a Series LLC is an entity with a complex and somewhat tricky concept. However, it has a lot to offer in terms of liability protection to organizations with extended business networks.
In the realia of the modern business environment, it’s definitely worth grasping the strategy behind the Series LLC structure. So, keep on reading to learn all ins and outs.
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Short for a series limited liability company, it is a specific form or type of a standard LLC. It consists of a “master” or “parent” LLC and multiple “daughters”, cells, or series that serve as its branches or autonomous affiliates.
The peculiarity of this structure is that you can set up an unlimited number of branched cells, yet all of them will be established under the master company. At the same time, all those subdivisions are separate from each other and operate as independent entities.
Each cell within a series LLC has:
As such, each series within a bigger cluster functions on its own. And, what’s more important, a Series LLC segregates the liabilities and commitments of each branch. It means that all branches are protected against the risks and debts of each other.
To be clear, a Series LLC is not a bunch of separate limited liability companies. When creating an entity, you’ll register a so-called “master” or “mothership” LLC that will designate the series and work as a protective and limiting screen for them.
Most often than not, a Master company maintains no business activity, owns no assets, and exists just to designate and control its “daughters”. Meanwhile, business assets are distributed between the branches in a smart and protected manner.
As a concept, a Series LLC was initiated and introduced in Delaware back in 1996. So, it’s a relatively new structure making an alternative to holding companies and corporations with subsidiaries.
The whole idea mimics the DE statutory trust law regulating the activity of mutual funds and enabling them to avoid numerous filings with the Securities and Exchange Commission (SEC) for each class of funds.
Instead, the law allows for setting up a single entity that will file with SEC and host multiple funds activities that will function separately.
Delaware was the first to enforce a Series LLC framework in its jurisdiction in 1996. Wisconsin was the next to make the same move only in five years, in 2001. In 2005, Iowa, Oklahoma, Nevada, and Illinois also joined the group.
Notably, similar to common company regulations, Series LLC laws are state-specific which means they vary by state. Thus, in Minnesota, North Dakota, and Wisconsin, cells are not as independent as in other states and are exposed to each other’s liabilities.
In addition, California doesn’t allow for this type of formation, yet it recognizes foreign Series LLCs in its jurisdiction.
Today, many entrepreneurs prefer a Series LLC structure over that of a holding or corporation. Mostly, that’s due to the benefits this structure offers to businesses and their stakeholders. Let’s closely consider pluses to better understand what opportunities you’ll get.
Though relatively easy to organize, a limited liability company comes with certain formalities to follow and rules to observe. Multiple LLCs will bring multiple administrative routines. And a series structure will greatly reduce that hassle.
You won’t have to pass through a filing process filing and complete all appropriate preparations and post-formation steps for multiple companies. You’ll do it for a single entity only avoiding tons of paperwork and the burden of multiple registrations.
Not only will you save time and effort on sticking to numerous legalities but also you will save funds on paying multiple statutory fees.
Though recent regulations tend to impose certain documentary and payment requirements on each cell, the costs and expenses still remain lower than those you’d incur when launching and operating multiple separate entities.
Likewise, you’ll save on paying multiple taxes and levies since those charges will occur for a master company, not for each series.
Flexibility is one of the biggest LLC benefits overall. And with a Series type, you’ll get even more opportunities since that flexibility will work both for a whole cluster and for an individual cell. Thus
Liability and personal asset protection is by far the most valuable LLC advantage. For a Series one, it multiplies.
While company members are individually secured against the entity’s commitments, each cell inside the legal framework of a Series LLC is protected against the debts and liabilities of other cells.
It means the funds and property of one venture cannot be used to settle financial problems or claims against any other venture in a cluster. And each child series is also protected against the liabilities of the master LLC.
A Series LLC is a perfect structure to maintain and promote business growth as well as to explore new business lines while retaining the profitability potential of the whole enterprise.
Company managers and members are free to divide investments and contributions and distribute profits in a way that will allow keeping all child cells afloat or give a boost to a venture that needs more support.
Likewise, should some of the businesses face considerable losses or problems, those won’t impact the efficiency and outcomes of other ventures.
With a lot going for it, a Series LLC has certain risks and uncertainties about it. And you should be aware of them so that they won’t pop up as an unpleasant surprise when you least expect it.
While offering enhanced liability protection inside the cluster, a Series LLC is somewhat dubious in this concern if you decide to expand your activity to other jurisdictions.
Thus, should you plan to set up an affiliate to sell services or products in another state that doesn’t permit series LLCs as legal entities, a liability shield authorized for the funds and property of the cells by the formation state might be nullified.
The whole situation will depend on whether the state you extend or move your business to accepts foreign qualifications for this business form and respects the protective stipulations of the formation jurisdiction.
Series LLCs are complex structures. And the more complicated the legal framework, the more strict and clear legal regulations it requires to work properly. Yet, the legalities related to this form of entity are rather unclear for the moment.
We must admit that now there is little judicial and legal practice related to this type of entity. Neither federal bankruptcy law nor securities law has a consensus on how to treat Series LLCs in case of bankruptcy or security interest issues.
The biggest problem is whether a venture should be considered as a single entity or if each cell could act separately.
When forming a legal entity, you should thoroughly observe the state rules and regulations to rip all the benefits offered by its structure. The same is true for a Series LLC. Yet, you should be even twice more attentive since even minor negligence might cause serious problems.
Besides, to efficiently manage multiple assets, property items, and funds, they should be accounted for separately, despite the fact that a Series LLC is most often treated as a single entity by law.
Likewise, taxes have a lot of nuances about them and need scrutiny to get the hang of and not to get into trouble.
Though you won’t have to set up several separate entities and avoid paying multiple formation fees, you’ll have overall higher operating costs on your plate.
Since most states will require you to open a separate bank account, designate an individual registered agent, and maintain separate books for each cell in a cluster, your total annual operating costs will be very similar to those of running a few independent entities.
LLC laws are state-specific irrespective of the company type you form. Though today, only 20 states have Series LLC laws in place, those regulations also vary from one state to another.
Recently, the Uniform Protected Series Act has been adopted across the state permitting Series LLCs to reduce the associated risks and complexities.
When it comes to Series LLCs, there are three basic registration and formation procedures you’ll come across in different states:
At the same time, similar to standard limited liability companies, there are a few key basic steps you need to make when establishing a Series LLC to make the whole process smooth and quick.
Naming rules for Series LLCs might slightly vary by state, yet, two major points are as follows:
When naming a parent entity, you’ll have to stick to the same rules that are stipulated for standard limited liability companies:
Like with any other LLC, to make sure your desired company name is available in the state, you should do a name search before filing. If you submit formation paperwork with a name that breaks any of the above rules, your application will be rejected.
The names of sub-LLCs should embrace a parent company name and be different from each other. This way, investors and creditors will easily distinguish between subsidiary cells and quickly detect the master entity.
In most states, registered legal entities are required to have a registered agent in place to receive service of process and other legal documents on their behalf.
Normally, any adult person or entity entitled to operate in the jurisdiction could serve as a registered agent. The major requirement is to have a physical address in the state of formation.
Many states permitting Series LLCs require that each subsidiary has a separate registered agent so that regulatory authorities and other official organizations could contact the desired series directly.
A major official document of an LLC is the Articles of Organization (Certificate of Formation). It is normally approved and registered by the Secretary of State and covers common company info that will further be entered into state records.
Additionally, the statute of a Series LLC should state that the company has the right to establish multiple cells. Some jurisdictions might have a separate form of formation docs for this type of entity.
As we’ve already mentioned, each “daughter” cell in a cluster functions pretty much as an independent entity. However, to enforce this status for a cell, you should:
Rules for establishing a cell differ by state. So, don’t neglect to check the general Series LLC guidelines valid in the state of formation. And the best option is to consult with an attorney to observe all important details.
While the key goal of a Series LLC is to enhance independence and liability protection for each subsidiary in a business cluster, there are certain processes and procedures you need to accomplish to operate the conglomerate lawfully and efficiently.
This document is a vital operational tool for any limited liability company. It works to outline ongoing managing and controlling rules and prevent any disagreements and misunderstandings between the co-owners on this concern.
While the Articles of Formation are filed only for a Master entity, there should be an Operating Agreement in place both for a parent company and for each cell you introduce.
Thus, the Master LLC’s agreement will stipulate operating rules and regulations for the whole cluster while separate series agreements will customize individual instructions for each cell. Those are rules related to the series:
At a federal level, a Series LLC should file a single federal tax return for a parent company and all cells. At the same time, the IRS has issued private guidance stipulating that each series in a cluster can be treated as a separate entity for tax purposes.
This IRS guidance is not adopted yet, so there is a great bit of confusion about how to treat Series LLC cells and whether they are entitled to choose their tax status individually.
Meanwhile, each state might have its own local taxation regulations for Series LLCs. For instance, in California, you’ll be required to pay a franchise tax for each daughter cell. Hence, check with your local authorities for any specific tax directions.
Basically, if you already have an operating standard LLC, you can convert it into a Series LLC without the need to start a new venture. Some states will let you simply amend your existing formation documents.
Via an amendment, you’ll be able to authorize your LLC to establish a series and specify liability independence for each of the cells in action.
Likewise, you’ll have to make the appropriate changes in your Operating Agreement to reflect the series management and membership structure.
The only thing to keep in mind is that conversion is possible only in a state that allows for Series LLC formation.
With all the benefits and complexities to it, a Series LLC structure delivers a great deal of flexibility for those ventures with multiple business lines that seek to shield each facet from the risks of the others.
The two most common reasons for a Series LLC establishment by companies with similar business activities yet separate profit centers are:
Here are a few examples of businesses that will benefit from this type of entity:
Basically, any company that strives to explore and maintain several business lines in the same sector while keeping their assets apart and insulated can take the advantage of the Series LLC framework.
A Series LLC is a new legal framework that has a number of benefits to it from the business point of few. It offers great potential in certain business situations and scenarios making multiple associated assets management a lot easier and more efficient.
However, taking into account the fact that this structure hasn’t been tested enough in courts yet, it should be treated with caution and close attention, especially when you plan to operate your Series LLC beyond your formation state.