The business world is not static, constantly in flux and has to respond to the changes. Some of them have affected the limited liability company (LLC) that is one of the most popular and sought-after business structures.
One of the new variations of the LLC has become a series LLC, recognized in 16 states and two territories.
If you have never faced a series LLC before, that’s not a problem. It is a relatively new phenomenon in the American business landscape.
In this article we will try to answer the question: ” Should you form a series LLC instead of a traditional LLC, and what is the difference?”. We will also look at the benefits of the series LLC, as well as the risks and specifics of separate LLC segments within the SLLC.
What Is a Traditional LLC?
Most people have heard about a traditional limited liability company, called an LLC. It is a legal entity formed under state law to conduct business.
An LLC has elements of sole proprietorships, general partnerships, and corporations, combining their best features.
The IRS may treat a limited liability company to be taxed as:
- Sole proprietorship (when it comes to a single-member LLC);
- Partnership (in case of multi-member LLC).
An LLC is a “pass-through” entity by default. This means that all company profits or losses are reported on the personal returns of its members. Such an option is the most popular, because it allows managing profits efficiently, avoiding double taxation.
Nevertheless, due to the freedom to choose the tax treatment, an LLC can be taxed like a corporation if the owners specify it in the documents.
An LLC special approach to financial responsibilities, based on the idea of limited liability, is similar to a corporation. In the event of corporate debts or a lawsuit against the company, the owners get legal protections for their personal assets. Regardless of the financial status of an LLC and the volume of the creditor’s claims, the owners’ private real estate, cars, investments and bank accounts will not be affected.
The flexible structure, as well as the ability to protect personal assets and increase the company’s credibility make a traditional LLC one of the most popular business structures. However, the owners can change it to a series LLC at any time if state law allows it.
What Is a Series LLC?
A series LLC (SLLC) consists of a master LLC and several other limited liability companies. The latter have separate owners and assets, but they are under the control of the head company. In other words, the series is part of the larger company, but each of them is responsible for its own debts and obligations. Such an LLC financially insulated is to protect the other SLLCs in case the assets of one LLC face penalties.
Note that each LLC in the series must have separate assets and bookkeeping from the others. If this condition is violated, the court may disregard the distribution of liability between the subsidiaries.
Generally, a series LLC follows the same rules as a traditional LLC, unless state law provides otherwise.
Thus, the limited liability protections that a standard LLC provides to its owners are exactly the same as those offered by the SLLC. In the event of a lawsuit against one of the subsidiaries, the creditors will be limited to its business assets rather than the personal possessions of the participants.
The series LLC is similar to a corporation since they have the same structure, consisting of several subsidiaries and a master LLC. To be more precise, it resembles a qualified subchapter subsidiaries S corporations. However, it is not an exact match. A series LLC does not require corporate tax rates, and its formation would be much cheaper.
What Are the Advantages and Disadvantages of the Series LLC?
A series LLC separates the liability of each segment as if you are forming several separate LLCs, independent of each other. On the one hand, each subsidiary provides personal asset protection to its owners but, on the other hand, it protects the other series LLCs. If one of the segments is sued, the assets of the others will not be affected.
Affordable, Convenient Formation:
Compared to a traditional LLC, an SLLC has a more convenient formation process and affordable cost. To complete the series LLC formation process you will need to pay one formation fee, unlike a number of standard LLCs.
Due to the small number of requirements, maintaining a series LLC is not difficult. As a rule, there is no requirement for an SLLC to file annual reports, compared to a corporation with subsidiaries or LLCs. In addition, a series LLC is entitled to file one tax return for all its members. This saves a lot of money on tax compliance.
Since a series LLC is a new tendency, at the time of this writing, it is recognized in 16 states and two territories. Furthermore, this business type has the inconsistent legal treatment, which can cause some problems. Each state has taken its own approach to an SLLC, which is often different from that of its neighbors. Especially in Minnesota, North Dakota, and Wisconsin. According to their legislation, the liability of each segment is not shielded from the others, which contradicts the concept of a series LLC.
The issue of bankruptcy for series LLCs and its legislative regulation is a pressing one. In some states a declaration of bankruptcy for one LLC will have no effect on a series. But in others, it may bankrupt the entire series LLC without exception.
Uncertain Court Treatment:
As with state law, judicial legislation has not taken into account an SLLC yet. Because forming a series LLC is a relatively new concept, there simply hasn’t been much time to establish legal precedent.
Difficulty With Business Expansion:
For the reason that not all states recognize this type of business, sometimes it is not possible to expand a series LLC. Instead, you will need to form a different entity entirely, a separate LLC or corporation. In other states, such as California, the law is not so strict. Although formation of a domestic series LLC is prohibited there, foreign SLLCs can obtain foreign qualification.
Multiple Bank Accounts and Registered Agents:
The restrictions associated with maintaining a traditional LLC’s corporate veil also apply to a series LLC. First of all, this is reflected in the asset separation requirements. You will need to open a bank account for each LLC in the series.
You must also remember to hire a registered agent for each LLC operating under the same corporate umbrella.
What Businesses Should Consider a Series LLC?
There are many reasons to start a series LLC.
For example, to separate different product lines or
service types, so that the new line of business does not mix with others. This not only saves money and time with its simplified process of creation, but also protects other businesses from possible risks.
The benefits of an SLLC are often used in a real estate rental business. The separation of each of the properties into a subsidiary LLC will limit the creditors’ claims, avoiding serious financial losses.
Which States Allow Series LLC Formations?
Since Delaware was the first state that launched the series LLC business structure in 1996, it has been used in several other states and territories. Nowadays, an SLLC is recognized in:
- District of Columbia;
- North Dakota;
- Puerto Rico;
Although they all accept the SLLC, laws in these states often differ. For example, Wisconsin and North Dakota have no limited liability among companies. Therefore, it is better to get more information in advance about the regulation of a series LLC by contacting the Secretary of State’s office or a state agency.
How Can I Form a Series or Traditional LLC?
The process of forming a series limited liability company is the same as the procedure for a traditional LLC. To register, you must file the Articles of Organization. Some states use a special designator to indicate that the business to be a series LLC. In other states you may be required to include such a clause in the Articles of Organization or Operating Agreement.
If you want to save time and effort or you just don’t like the paperwork, then you can entrust the business formation process to professionals.
Unlike the formation process for a traditional LLC, forming a series LLC is more complicated, so hiring a lawyer to form your business will be the best option. An experienced and qualified attorney will consult you on the specifics of the SLLC regulation to make sure that this type of business is right for you. Moreover, the assistance of an attorney is essential in drafting the documents. It will not only help to avoid the most common difficulties, but also guarantee a high level of service.
If you prefer to form a traditional LLC, think about working with one of the online professional companies. Their services are much cheaper than hiring an attorney, which saves you up to several hundred dollars without significant losses.
The variety of LLC services can be confusing. If you don’t know where to start, check out the 7 top-rated LLC services in the industry. You can also take a look at the top 3 LLC formation services, which we’ll discuss below.
If you are looking for a reliable and cheap LLC formation service, ZenBusiness is definitely worth considering. For only $39, they will fully form your LLC, as well as provide a full year of registered agent service.
Northwest Registered Agent ($225)
Even though their prices are a bit more expensive, Northwest stands out from most competitors. Their customer support is considered the best in the industry because it combines a high degree of professionalism with a personal approach to each customer.
It is also the only registered agent service that offers full local scanning of every document they receive on your behalf.
Their start-up package costs $0+state fee and includes 1 year of registered agent service. If you just want to form an LLC and are not interested in purchasing additional features, this is the best choice.
To summarize, we have covered the differences between the series LLC and the traditional LLC, as well as outlined the main pros and cons of both options.
A series LLC does have a number of advantages, but today the possibilities of its formation are seriously limited in practice. It is an excellent option for businesses interested in combining separate LLCs under one company, but only in those states where the idea of an SLLC is recognized.
In all other cases it makes more sense either to form a corporation with subsidiaries, or to register independent LLCs. Although the option of forming multiple LLCs is inferior to the convenience of a series LLC, it is a worthy alternative.