What is a Series LLC?

            A series LLC is a relatively new and unique form of limited liability company (“LLC”) that has the advantage of allowing for unlimited segregation of assets, interest, and operations into separate and independent series. Through a series LLC’s articles of formation, each series operates like a separate entity with a unique name, bank account(s), records, and members and managers (as desired). The articles of formation can permit the rights and obligations of members and managers to vary by series. The most significant benefit of a series LLC is the liability protection for each series without the cost and paperwork involved in establishing multiple LLCs. Assets owned by one series are generally shielded from liability of other series within the same LLC. This allows an individual or business to segregate risk in separate entities without the cost and paperwork required when establishing new entities (in most states).

            With limited exceptions, discussed below, each series can act similarly to a separate LLC by, for example, entering into contracts and holding title to real and personal property. This article outlines the method to form a series LLC, the benefits and drawbacks of the entity type, and relevant tax issues. Contact a corporate attorney should a series LLC be beneficial for your business or personal endeavors.

States Permitting Series LLC

            In 1996, series LLCs were first created in Delaware. The District of Columbia, Illinois, Iowa, Kansas, Minnesota, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Wisconsin, and Puerto Rico also have laws that permit series LLCs. Some states, notably California, do not allow for series LLCs to be formed, but series LLCs formed in other states can register with California and do business in California.

Who Commonly Uses a Series LLC

            Series LLCs are very flexible and simple to use. For example, they are very frequently used by real estate investors who own multiple properties in that each series can be utilized to isolate and protect properties from the liabilities of the properties in other series. Technology companies (including start-ups), hedge funds, venture capital funds, and entertainment companies frequently use series LLCs to segregate assets. Companies with multiple profit centers can use series LLCs to segregate and shield each business operation. Each series should be treated as a separate company with, for example, separate bank accounts, separate books, financial records, and contracts. A series LLC is ideal for someone who wants to form multiple LLCs into one large conglomerate without changing the function or business operations of each individual entity.

The Benefits of a Series LLC

            An important benefit of a series LLC is that articles of formation need only be filed once, since each additional series is formed through internal mechanisms detailed in operating agreements. Most attorneys will amend the master LLC operating agreement to add an additional series. Each series will have different assets, structures, members, and managers. Most importantly for many businesspeople, liabilities and obligations incurred by one series will not jeopardize assets held by or allocated to other series. Separate liability is a significant benefit because to obtain the same protection without a series LLC structure one would need to establish multiple LLCs, needlessly incurring government fees and legal costs. Some states treat a series as a person such that the series is a legal entity that can enter into contracts, transfer property, and bring a legal action. In sum, series LLCs are beneficial in the following ways:

• Reduced startup cost as there is one filing fee and an attorney can set up the parent and series at less cost than setting up multiple LLCs. For example, a series LLC only pays a single Delaware Franchise Tax payment ($300) regardless of how many series are within the LLC.
• Each series can hold its own assets, conduct its own operations and pursue different business objectives and, most likely, remains insulated from claims of creditors or litigants pursuing the assets of or asserting claims against another series.
• Protection of assets from judgments against assets in other cells.
• Less complex than a parent corporation/subsidiary structure because a series LLC does not have the same complexities of taxes, structure, and formalities.
• Only one state registration resulting in fewer legal costs and registration fees.
• Only one tax return, but the return will be more complex often requiring the assistance of an attorney.

Common Risks and Costs of a Series LLC

            It is uncertain whether courts in non-series LLC states will uphold the separate entity structure. For example, if a series LLC is formed in Delaware but owns property in Ohio, a non-series-LLC state, Ohio may not recognize the series structure for purposes of asset protection. The series LLC has also not been fully tested in bankruptcy. Courts in some states have not yet determined whether an individual series is treated as a person and federal bankruptcy courts are not required to follow state statutes. A handful of states, such as Illinois and Kansas, charge additional fees for each series registered with the state. Finally, the IRS has not issued official rules specific to series LLCs and, since the IRS regards LLCs as pass-through entities, income passed onto an individual through the series LLC is taxed as personal income. In sum, potential drawbacks of series LLCs include:

• Separate bank accounts as each series LLC must have its own bank account separate accounting.
• Uncertainty regarding bankruptcy in the legal system because series LLCs is a new entity structure.
• Untested legal separation of the assets and liabilities of each series as a court in one jurisdiction could determine to not recognize the legal separation afforded by series LLCs.
• Banks are less familiar with series LLCs than other corporate structures, which can complicate account creation and credit facility procurement.

How to Form a Series LLC

            A series LLC is formed in a very similar way to a regular LLC. An attorney will file articles of formation with the appropriate governmental entity in a state where a series LLC is permitted. To distinguished from a regular LLC, most states require that the articles of formation state that the LLC is authorized to form series. Then an attorney will draft and file an operating agreement for the master LLC and each series formed. A series LLC can create additional series whenever needed and most states do not limit the number of series that can exist under a single LLC.