What Is a Series LLC?
As you establish your business entity, you will likely review all the formation options available to you. In some states, this may include the possibility of forming a series LLC. Though it is similar to a traditional LLC in many ways, a series LLC offers a slightly different business structure and several pros and cons that a regular one may not have.
To help you decide whether to form a series LLC, we’ve put together an article detailing the benefits and drawbacks of such a business. We’ve also taken the time to answer some frequently asked questions about series LLCs so you can make an informed decision about your business type.
Understanding Series LLCs
A series LLC is a unique form of traditional limited liability company (LLC) that allows the formation of segregated assets, operations, and membership interests from the overarching LLC into independent series. This means each series that is created operates as a completely separate entity underneath the main LLC.
Every individual series has a unique name, business credit or bank accounts, and records. They may also have different members or managers depending on how you conduct your business operations. It is also important to note that the rights and obligations of members and managers can differ among each individual series, and each series LLC can enter into its own contracts, lawsuits (both suing or being sued), and title agreements for real or personal property.
Similar to a traditional LLC, each series LLC has liability protection. A major benefit of running a series LLC is the fact that each individual series has liability protection from the other series – this means the assets and contracts of one series is safe in the case of an issue with another series in the business. This allows business owners to segregate risks within each separate entity without forming a completely new entity, but by simply establishing another series.
Series LLCs are commonly used by those investing in real estate, as each series can protect the individual’s properties from the liabilities of other properties in the series. A company or business with different profit centers may also use series LLCs to protect each individual business operation and decrease risks.
When setting up and running a series LLC, it is essential to maintain each entity’s operations as a separate company. This means you need separate bank accounts, accounting records, contracts, documents, records, and business funds for each entity. These factors keep each series established as a separate entity and allow it to keep its true liability protection.
The Pros of a Series LLC
There are several pros of a series LLC that you can take advantage of by establishing this unique business entity.
Reduced Startup Costs
Because only one filing fee is required when forming your overarching (sometimes referred to as the parent LLC, with each individual series being ‘child’ LLCs) LLC, a series LLC may have reduced startup costs. There are certain documents required for filing individual LLCs in the series, but any filing fees may be greatly reduced or nonexistent. Speak with a professional or do research on your Secretary of State’s website for more information on this.
Asset Protection
One of the major benefits of starting an LLC is the asset protection compared to other business entity types. With a series LLC, the assets, contracts, and funds of each individual series are protected from the liabilities and judgments against other entities in the series.
Less Complexity and Administration
If you choose to set up separate traditional LLCs, you will likely be on the hook for administration and the complexities of running each LLC. However, a series LLC allows for these administrative and complex tasks to be handled separately, providing you more time to focus on the bigger picture of your business.
Lower Upkeep Costs
Only your overarching, or parent, LLC is registered with the state, meaning that you only need to pay for one set of state registration fees, annual or biennial upkeep costs, and general legal or filing costs. You may also be subject to lower sales tax depending on your state’s regulations.
It is important to note, however, that these lower upkeep costs for your series will only apply if your series entities are all registered in the same state.
Only One Tax Return
Because the parent LLC encompasses all the individual series under it, only the parent LLC is required to file a tax return. The tax return can be a little complicated depending on how many series you have in operation, but it is helpful to only turn in one tax return each year instead of a separate return for each entity.
The Cons of a Series LLC
As with all things, there are some cons associated with a series LLC that are important to know.
Separate Registered Agents
Because each series in your series LLC is treated as a separate entity, it will most likely required each entity to have a separate registered agent appointed. This can mean extra stress when appointing an agent and potential extra costs, as you probably need to employ a registered agent service for each of your series.
Separate Financing and Record Keeping
Each series in your series LLC is treated as a separate entity, and as such, it must have its own bank account, financial sources, and accounting records. Keeping all these separate items, especially in series LLCs that have multiple series, can be a major administrative issue and require extra time or stress to get organized.
Potential for Higher Formation Costs
Although you may only pay one fee for startup costs when forming a series LLC as opposed to the fees associated with creating multiple traditional LLCs, the fee for starting a series LLC may be higher. This depends on the state, of course. You should keep in mind, however, that though there may be a higher formation cost, the cost for adding more series to your LLC is generally low or next to nothing.
Bankruptcy and Tax Issues
The concept of a series LLC is unique and may come with several legal questions to be answered. This includes dealing with bankruptcy or filing federal income taxes. While a series LLC only needs to file one tax return, it can be complicated depending on the business type and the number of separate series entities involved. It is essential to speak with an experienced CPA or tax attorney before filing your federal and state tax returns to ensure you are meeting all requirements.
Series LLC FAQs
The answers to these frequently asked questions may help you further understand the purpose of a series LLC and decide whether you would like to start one.
How Do You Start a Series LLC?
The process of starting a series LLC is very similar to that of a traditional LLC. You need to file paperwork with your Secretary of State’s office that includes Articles of Organization and you must appoint a registered agent to your business, in addition to choosing a unique business name. The difference is in the information that is required on your Articles of Organization and the fact that each series LLC needs its own unique name and registered agent.
It is important to check with all state rules and regulations when establishing your series LLC to ensure that you meet all the requirements and get your business set up as smoothly as possible.
Which States Allow Series LLCs?
Only certain states allow the formation of series LLCs, though certain states recognize the presence of series LLCs. We list these below.
States Where Series LLCs Are Allowed
These states allow the direct formation of some types of series LLC. Check with the state directly for specific rules and establishment regulations.
- Alabama
- Arkansas
- Delaware
- District of Columbia
- Illinois
- Indiana
- Iowa
- Kansas
- Missouri
- Montana
- Nebraska
- Nevada
- North Dakota
- Oklahoma
- South Dakota
- Tennessee
- Texas
- Virginia
- Utah
- Wisconsin
- Wyoming
- Puerto Rico
States That Recognized Series LLCs
These states recognize a series entity that wants to expand into the state. It is important to check each state’s rules before trying to establish some of your series LLCs there.
- California – It is important to note that California does not allow for the formation of series LLCs domestically, but they will allow a series LLC to operate in the state if they register as a foreign LLC.
- Alabama
- Delaware
- District of Columbia
- Illinois
- Indiana
- Iowa
- Kansas
- Missouri
- Montana
- Nevada
- Oklahoma
- Tennessee
- Texas
- Utah
- Wyoming
Can You Convert a Traditional LLC to a Series LLC?
In states that allow the formation of series LLCs, you can convert a traditional LLC to a series format. If you want to undertake this, you must check with your state’s rules and regulations and you may want to consult with a tax professional beforehand to make sure you understand all the requirements, risks, and benefits of this process.
What Is the Parent LLC?
The parent LLC, also sometimes referred to as the master LLC, is the main LLC in a series that each separate series entity is connected to. The parent LLC is protected from the liabilities and judgments against the individual series and file one tax return that includes every series underneath it.
What Is the Difference Between Series LLCs and Traditional LLCs?
The difference between series LLCs and traditional LLCs has to do with the liability protection of the structure. Series LLCs have individual series underneath one overarching parent LLC; the parent LLC and each individual series is liability protected from the judgments or liabilities of the others.
With a traditional LLC, the business and its assets are directly liable for any judgment or ruling against it. You can read more about these differences here.
How Much Does It Cost to Form a Series?
How much it costs to form your series LLC depends on your state and the specifics of your business startup. Costs can range from $50 to $1000 depending on each state and its requirements.
How Are Series LLCs Taxed?
Your series LLC must file one federal tax return and a state tax return (depending on your state of operations) that includes each separate series entity on it. And, as each series needs to have separate finances and accounting records, this process can be a little confusing. You can read more about the specifics of series LLC taxes here, and should consult with an experienced tax professional before putting together your tax returns each year to ensure that you are meeting all the requirements and avoiding major tax penalties or fines.
The Best Business Entity For You
While series LLCs can provide a number of benefits to you and your business operations, they are not the correct choice for everybody. It is important to weigh the pros and cons of each business type before deciding which to establish to make the right decision for you and your business needs.
If you are in a state where series LLCs are allowed and decided to form this unique entity type, remember to carefully review all state formation rules and regulations to ensure you get your business established as smoothly as possible. This will enable you to receive the maximum benefits from your series LLC.