What Is A Series LLC?
First established as a business entity in Delaware in 1996, a series limited liability company is a type of LLC comprised of a master or parent LLC and one or more “series” (or “cells”) that can have their own assets, business objectives, and legal protections separate from the series LLC and each other. The idea is to erect walls between each series to prevent legal actions against one series from being enforceable against the other, which is why the series LLC model is especially attractive to real estate investors with multiple properties.
While there are many useful, money-saving features of the series LLC, keep in mind that the series LLC remains a relatively unfamiliar and untested entity in the business world, and the laws surrounding the series LLC are still evolving (even in Delaware). If you’re thinking of starting a series LLC of your own, it’s important to get clear about which states recognize series LLCs and which don’t, and how the laws surrounding series LLCs continue to develop and change.
Where Can I Form a Series LLC?
Currently, 16 U.S. jurisdictions have statutory laws for the establishment of some version of the series LLC (14 states plus the District of Columbia and Puerto Rico). These include:
- District of Columbia
- Puerto Rico
This doesn’t mean series LLCs have precisely the same definitions, rights, and formation processes from state to state—only that each of these states allows for the formation of series LLCs. Naming requirements, filing requirements, whether the parent LLC and its series are considered to be the same entity or separate entities, and so on, can differ from state to state. California, for its part, doesn’t allow for the formation of series LLCs, but series LLCs formed elsewhere can register as a foreign entity in California and do business as a series LLC.
Depending on the state in which you’re forming your series LLC, the articles of organization or certificate of formation will vary, but you will generally need to include special language addressing your organization’s status as a series LLC. Because your formation document will require special language, you should speak to a qualified lawyer before submitting your formation document to the state.
Why Form A Series LLC?
Sometimes multiple LLCs are formed as holding companies. A holding company does not actively do business. A holding company simply holds something like land or a vehicle, which means it was technically bought by the LLC. People will often form holding companies for their real estate investments and other big expenses for the limited liability protection. If you have invested a lot of money in land, purchasing it under an LLC theoretically protects it should you be sued. The idea is that you as an individual do not own the land—the company does.
However, if you need multiple holding companies for your assets, then forming a series LLC might work better because it can reduce your administrative costs and filing fees. In most states that allow for the formation of series LLCs, you will (usually) avoid paying the same organization fees over and over again, and instead have the ability to form many series under the umbrella of your series LLC for a one-time fee to the state.
Benefits Of Starting A Series LLC
A series LLC is attractive because you essentially get as many smaller companies as you want, often for the price of one. Aside from the reduced start-up costs, each series will typically get treated like its own LLC, which makes the series LLC an excellent asset protection strategy. As with an ordinary LLC, however, there is always the risk that the corporate veil will be pierced and those assets will be at risk in turn. This is particularly true if your series LLC or one of its series does business in a state that doesn’t allow for the establishment of series LLCs.
With series LLCs, there is generally no need for additional administration within each individual series like there would be if you formed many separate LLCs. They are less complex than a corporate business structure, and only one tax return is necessary unless one or more series elects to get taxed as a corporation. The “parent” LLC is responsible for registering with the state for tax purposes, and most states only require the appointment of one registered agent for the entire series LLC and every series within it.
Risks Of Starting A Series LLC
As great as the series LLC seems, there are a number of risks involved because series LLCs have never been definitively tested in a court of law, and even the courts seem to struggle to understand them (for an important example, see Glenn E. Alphonse, Jr. vs. Arch Bay Holdings, LLC Series). Since series LLCs lack a backlog of precedent-setting case law, there are many legal questions that remain unanswered.
Also, depending on the state it might cost more initially to start a series LLC. Take Illinois, for example. To organize a regular Illinois LLC costs $150. An Illinois series LLC is $400, plus $50 to start each series within your series LLC. Whether or not this price difference is good or bad for your series LLC will depend on the number of series you intend to establish in Illinois. The more series you establish, the more money you’ll save because otherwise you would need to pay $150 each time to form independent, traditional LLCs.
Tax And Legal Risks
One of the primary reasons why series LLCs have not become widespread is because of the mystery surrounding their legal status and how they should be taxed. While each state that allows series LLCs has state statutes determining their governance, there’s no saying at this point if that state’s laws would hold up in another state’s court or in federal court. This means that while it may seem that your assets are tucked away safely in one of your series and will remain untouched, another state might not respect that at all and seize your assets anyway!
The IRS has also not determined any permanent rules as of yet for how to tax series LLCs, though it has offered some recent guidance, including a recommendation that series within series LLCs should be treated as separate entities for federal tax purposes. Most states will probably look to the federal tax treatment and emulate it as far as income tax purposes go, but considering the IRS doesn’t have definitive rules considering series LLCs, taxpayers will have to look at cases that deal with entities that are similar to theirs and assume the right and legal way in which their series LLC should be taxed.
Upcoming Changes to the Delaware Series LLC
Delaware remains the nation’s series LLC workshop, so it probably shouldn’t surprise us that on August 1, 2019, several changes are in store for the Delaware series LLC. Among these changes is the introduction of a new type of series in Delaware—the “registered series”—distinguished from the “protected series” (the new term for what Delaware used to call simply “series”).
What is a registered series? Fundamentally, a registered series is the same thing as a protected series, but a registered series must file a Certificate of Registered Series with the Delaware Secretary of State and pay an annual tax. Protected series, on the other hand, can be established simply by amending the series LLC’s operating agreement, which is the current practice in Delaware for what are now called simply “series.”
Introducing the registered series allows series LLCs to form series that are also state-registered entities (or “registered organizations”), a distinction that matters for some business activities (such as perfecting security interests) and for making sure a series qualifies as a “person” as defined by the Delaware Uniform Commercial Code (the UCC). Only time will tell if other states offering series LLCs will continue to follow Delaware’s lead.