What Is a Series LLC?

Last updated on: July 21, 2021

Today, an increasing number of businessmen with assets in different economic sectors create series LLCs (Limited Liability Companies). This form of business provides a wide range of benefits to investors and entrepreneurs. A series LLC (or SLLC) is a simplified version of a corporation with subsidiaries, which has its own features. In other words, it’s a regular business LLC set up to hold multiple properties or interests underneath one LLC. Alternatively, it’s nothing more than a series of subsidiary “members, managers, membership interests, or assets” all “covered” by a single, master LLC. 

As you know, doing business is always associated with the risks of non-performance and therefore with debts and litigations. Thus, due to certain LLC advantages, registering a company of this type is most beneficial. Essentially, LLC is a legal entity that combines properties of a partnership, corporation, and sole proprietorship.

In case of any debts or lawsuits against the owner, there’s no threat to the owner’s personal assets. This means that in the event of a lawsuit, creditors will be limited in their claims. Even if the company’s assets are insufficient to meet the claims made against it in full, the creditors will still not be able to claim the owner’s personal assets.

But what if you have several companies? No one needs their business to be affected in any negative way. According to the American Bar Association, Delaware became the first state to acknowledge the legality of the series LLC in 1996. Delaware has always been known for providing a high level of support for various businesses. Even today, the state remains popular for incorporating businesses. 

Initially, the idea was to develop an asset protection method that makes it possible to secure the owner in the event of the above-mentioned case. This method also promotes entrepreneurship because the risks of losing assets in an SLLC are minimized.  

SLLCs are as-yet not really popular in the US but their numbers grow every day.

Today you can set up a series LLC in more than 14 states. For detailed information in each of the states in which the LLC Series is legally approved or recognized, select one of the options below

including Alabama, Illinois, Iowa, Kansas, Missouri, Montana, Nevada, Oklahoma, Tennessee, Texas, Utah, and Washington, D.C. However, you still can’t establish it in California and other states, however, some of them, including CA, recognize SLLCs legally formed in other states. 

An SLLC can be explained as “several company clones under one roof.” But at the same time, if needed, each subsidiary company can have its own property, the owner(s), and managers from the head LLC. This also means that each LLC in a series is only responsible for its own liabilities.  

In the event of such business separation, the owner has more opportunities for its protection. At the legislative level, there are no restrictions on the number of units that can be created within one company. Therefore, the business owner may have as many subsidiaries as needed. As a result, in case of any unfavorable aspects (e.g. lawsuits) in the operation of one subsidiary company, other units will not be affected at all. They will continue to function as usual and freely manage their assets without being liable for the debts and obligations of the “problematic” unit.

What is the difference between an LLC and a Series LLC?

When comparing a series LLC vs LLC, they are both subject to almost identical registration procedures. To form these types of legal entities, you must submit an appropriate application and pay state registration fees. Legislation in most states also additionally requires the filing of an operating agreement. However, some states allow for an oral form of operating agreement, which specifies all the rights and obligations of the founders, the structure, profit distribution, etc. However, the articles of incorporation of the series LLC itself must expressly state that it is authorized to create a series. Subdivisions that are created by the series LLC in its business activities are also referred to as “subsidiaries.” A series LLC may have an unlimited number of subsidiaries.

Both series LLCs and regular business LLCs protect their business owners from liability in terms of their company’s operations. The owners are liable to creditors and are responsible for lawsuits only to the extent of the company’s assets. The assets of the founders are not affected by litigation in any way. In a Series LLC, the assets of its subsidiaries are also separated. This forms an additional guarantee for the owner of the business and makes SLLC-type organizations even more attractive.

The advantage of such companies is also the fact that the number of participants in the company is not limited, as well as there are no restrictions on the participation of individuals, corporations, and organizations registered outside the U.S. Some types of businesses, such as banks and insurance companies, cannot be incorporated in the form of an LLC.

When compared to a regular LLC, a series limited liability company has more advantages, e.g., effective taxation, higher profitability, and greater benefit to the business owner. After all, as mentioned earlier, subsidiaries are created within the company. But each unit has its own property and is responsible only for its own liabilities.

Information about all subsidiaries can be filed on the same tax return, using the same tax identifier. Accordingly, saving several thousand dollars a year on tax preparation is guaranteed. However, it’s still better to keep separate records to avoid confusion in case any lawsuits are filed against a particular subsidiary.

How does a series LLC work?

As mentioned earlier, an SLLC consists of a parent LLC and subsidiaries. All of the latter operate independently of each other – each has its own assets, bank accounts, participants, officers, managers, investment objectives, and scope of activities.

If any legal requirements for incorporation and the manner in which the company operates are not met, each unit within the company is responsible only for its own liabilities. Assets of another subsidiary or series LLC as a whole remain unaffected.

How to account for a series llc?

Each unit operates separately financially and legally as part of the parent (master) LLC. During the incorporation process, all bank accounts, books, records, different participant and officer teams are set out in the operating agreement. Each unit within the parent LLC can conduct its own business independently, including contracting and ownership. The subsidiaries’ assets are completely segregated from each other, which ensures protection for each subsidiary within the master LLC.

Which banks work with SLLCs?

Finding banks for a series LLC and opening an account can take some time. Despite the active development of this type of business, most banks have not yet developed a cohesive mechanism for maintaining accounts for SLLCs .

There are two types of accounting used for SLLCs, a master account for a master LLC and an individual account for each subsidiary within it.  For the company owner, it’s best to work with a bank that can file the activities of both the series LLC and each unit within it separately. This greatly helps simplify the management process and tax calculations. However, many banks keep records only for the main LLC, which creates inconvenience for the business owner in the event of litigation.

Why Should I Form a Series LLC?

A series LLC is a structure that is often less expensive to form and easier to manage than several stand-alone companies (if properly formed). You can form a series LLC to successfully divide business assets and responsibility for investments/debts in different departments of the company. Just like any asset protection tool, an SLLC has its advantages and disadvantages.

The advantages of SLLCs are as follows:

  • Cost savings in terms of company incorporation and management. One of the initial advantages of using series LLCs instead of separate business LLCs was the cost savings during the formation process. However, recently, there has been a trend in state law that requires filing and payment of fees to form each subsidiary. Of course, formation costs vary from state to state, and today, it’s less cost-effective than it was in the initial stages of the Series LLC development. However, obtaining regulatory approvals for subsidiaries within the main company is still faster.
  • Flexibility. One of the main advantages of the SLLC over other business entities is that it has a really flexible structure, providing its participants with many options in terms of management and financial rights distribution both in a master LLC and in each subsidiary within it.
  • Holding capabilities. The parent company manages all of the subsidiaries while reducing the risk of using the assets of one business to pay off debts or liabilities incurred by another subsidiary.

Why Should I NOT Form a Series LLC?

While a Series LLC has distinct advantages in most scenarios, there are certain risks, gaps, and conflicts in the law that you should be aware of before deciding to incorporate. At the initial stage, it’s highly important to get advice from a competent accountant, registration authority, and a lawyer. This is especially true if you plan to operate in more than one state because their legislation may have differences. 

Some of the disadvantages that call into question the need to register this particular form of a legal entity are as follows:

Registration cost. It may seem that registering a serial LLC is cheaper but in practice, this is not the case. After all, legal reforms have led to additional fees for each subsidiary created within the main company.

The legal aspect of operations. Series LLC registration is not legally mandated by all states. Many states do not recognize legally registered companies formed in different states, which means these companies are deprived of the guarantees, for the sake of which they were initially created. Moreover, practical difficulties in terms of potential litigation and the resolution of jurisdiction and competence issues also take place.    

Lack of case law in matters related to series LLCs. The American Bar Association does not support the formation of SLLCs. This is due to the lack of a unified approach in certain SLLC creation/existence aspects in different states, which prevents the accumulation of case law. And we all know that the Anglo-Saxon law system is a pivotal one.

Separate bank accounts and accounting. Each subsidiary of a series LLC must have its own bank account and manage separate accounting.

The need for a registered agent. Each SLLC must have a registered agent that will act as an intermediary between the state and the business owner in each segment of the business. Such a position is mandatory, and, consequently, the cost of its administration increases accordingly.

How do I form an Series LLC?

Any U.S. citizen may register a Series LLC. It can be done in a state that supports this business form. The most popular states that support SLLCs are Texas, Nevada, and Delaware. Each of these states is attractive to entrepreneurs and each has certain advantages in terms of taxation, judicial protection, or registration procedures.

For example, a major advantage to forming a series LLC in Texas is that there is no management fee. However, the incorporation process requires more paperwork compared to other states.

Unlike Texas, SLLCs formed in Nevada have even more advantages in terms of tax benefits and security measures. However, they are purely operational and can do little to fully protect the owner from lawsuits. 

Now, when it comes to legal defense, Delaware looks most appealing. Judges presiding over the Chancery Court specialize in commercial law and have been known to render fair solutions. However, having proper legal support to maintain all the records that reflect the company’s activities correctly is highly important.

The choice of the best state to form a series LLC directly depends on the company’s functional purpose and desired bonuses. Thus, even California residents, despite the lack of regulations in the state law, can register a series LLC in Texas or Nevada. Registration requires preparation of incorporation documents, an agreement that explains the ownership structure of the SLLC, plans for the master LLC and each of its subsidiaries), and registration fee payment. At this stage, it’s best to use lawyer services, which results in extra financial costs.

Conclusion

Today there are many examples of a series LLC in the U.S., however, this business structure has legislative support in less than half of the states. Therefore, citizens often have to register companies in neighboring states. At this point, the IRS sees the Series LLC as one large organization. Accordingly, at the federal level, the IRS treats the SLLC as a single legal entity and it is the main (parent) LLC that appears on tax returns. However, each subsidiary in the structure acts as a separate legal entity. Each of them has features that are different from the main LLC and other subsidiaries within the master entity. All subsidiaries operate independently of each other. Each of them has its own assets, accounts, members, officers, managers, investment objectives, and scope of activities.

There are only a few steps to registering an SLLC, which is submitting articles of incorporation, a series LLC operating agreement, and paying the registration fee. Once that is done, you can enjoy all the benefits of your new company.

Creating a series LLC is a good way to divide business assets and share responsibility for investments and debts in different areas or divisions of the company in case of debt and litigation.

Senior Business Tax Writer, etc
Jean Wilson Murray
https://bestllcservices.co/
(323) 789-5289
Senior Business Tax Writer, etc
Jean Wilson Murray

In this IncFile vs ZenBusiness review, we're going to compare two of the most popular LLC formation services based on pricing, features, and drawing out differences and similarities to let you see which is most suitable for you and your business.

You can learn more about @Mike here.

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