The standard LLC is a popular choice for business owners wanting the legal protection and tax advantages of a corporate structure.
But setting up multiple LLCs to hold individual assets or operations can start to create a cumbersome structure that is time consuming to manage.
Enter the Series LLC.
What is a Series LLC?
The Series LLC concept has been around since 1996, when it was first introduced in Delaware.
A range of other states are now offering the series LLC as an option (see below for a list of states that offer the series LLC).
A series LLC is a business entity comprised of a “parent” or “master” LLC with several “child” LLCs underneath it. Each individual child series can enter into contracts, acquire, hold and sell assets, sue, grant liens, and grant security instruments.
More broadly, each of these child LLCs can be thought of as individual cells from the point of view of legal liability and asset protection. So for example, if a lawsuit is brought against one of the child LLCs. The assets in the others are not at risk thanks to the liability shield the series LLC provides.
These characteristics make the series LLC the choice of some investors in rental property as you can hold each property in a separate “child”. Each “child” is known as a “series”.
Using a regular LLC, many investors choose to have one LLC for each rental property, which becomes costly and cumbersome.
By using a series LLC, you can pay one formation fee and one lot of ongoing filing fees for the LLC instead of paying these costs for each individual LLC.
The other big benefit of series LLCs comes about at tax time because you don’t have to file a separate return for each series – instead you just file one return for the series LLC.
(See this detailed article on series LLCs for more information on this business structure._
Series LLC vs Traditional LLC: The Similarities
The process for forming a series LLC is the same as for a traditional LLC. You prepare and file the articles of organisation, and where required, the operating agreement and pay formation fees (having first nominated a registered agent).
Like a regular LLC, a series LLC can have multiple owners (not limited in number) and these owners don’t have to be US citizens.
And like a regular LLC, a series LLC provides liability protection for its owners in terms of their personal assets.
Traditonal LLCs vs Series LLCs: The Differences
From an LLC formation point of view, the main difference in forming a series LLC is the formation document will have to include a statement that the LLC may establish series which are protected from the liabilities of other series and the LLC itself.
As a general rule, a traditional LLC is a lot more limited than a series LLC. The difference elements of a series LLC allow you to:
- Use a single EIN (Employer Identification Number) for the series LLC with the same EIN applying to each cell within it
- File a single tax return (you don’t need to do one for each series)
- Avoid the set-up and filing costs of operating a network of separate LLCs
- Set up an unlimited number of series within the main LLC
Are there Any Downsides to Series LLCs?
The main downside to setting up a series LLC is that they are a comparatively recent phenomenon and state laws are still catching up.
For example, series LLCs are not yet recognized in each state. And in the states that do recognize series LLCs, the rules that dictate how they are treated differ. For this reason, series LLCs may not be the safest bet for entities that do business in different states.
With regular LLCs, they are largely recognized by states outside the state in which they are formed.
The recognition of series LLCs and their liability protection is yet to be extensively tested in court.
Series LLC laws are evolving and legal services provider Wolters Kluwer advises:
“The Series LLC has yet to be vigorously tested in court. This means the extent of the liability protection offered is still somewhat unclear. Those seeking more certainty in terms of risk mitigation may wish to look elsewhere. This is especially true of those who anticipate doing business in states other than the state of formation.”
The tax treatment of each series within the LLC can also differ.
To enhance the chances of your series LLC being recognized and to retain the asset protection advantages expert advise that:
- Separate bank accounts should be maintained for each series
- Contracts and agreements for a particular series should be signed in the name of the series, not the overarching series LLC
- Loans and transactions between the series’ should be conducted at arms length using prevailing prices and rates
- Separate books and financial statements for each series should be maintained and up to date
Which States Offer Series LLCs?
The state of Delaware pioneered the series LLC. Now, all up 18 states now offer series LLC as an option.
- Alabama
- Arkansas
- Delaware
- District of Columbia
- Illinois
- Indiana
- Iowa
- Kansas
- Missouri
- Montana
- Nebraska
- Nevada
- North Dakota
- Oklahoma
- Puerto Rico
- Tennessee
- Texas
- Utah
- Virginia
- Wyoming
How much does a Series LLC cost to form?
The costs to form a series LLC are similar to forming a traditional LLC and can range from $50 to $1000 (plus state formation fees) depending on who you use to do it. Check out our guide to LLC formation costs and ongoing costs in all 50 states.
Are Series LLCs good for rental property investment?
Yes, this is probably the most obvious use of a series LLC. Firstly, I recommend using a limited liability company of one type or the other to hold rental property as opposed to holding it in your own name.
With that said, series LLCs have great appeal for real estate investors who hold multiple properties in the one state.
I do have multiple properties in the one state and would consider the series LLC structure, but Florida doesn’t currently offer it.
So I am stuck with the traditional limited liability company for real estate investments, which means I do incur greater set up and compliance costs in forming multiple LLCs.
How do I form a Series LLC?
It seems that the main national LLC formation providers (ZenBusiness, Incfile and Northwest Registered Agent) don’t offer series LLC formation, so that leaves your accountant or a lawyer as the first port of call for series LLC formations.
The main steps involved as summarized below:
- Choose a state that allows series LLCs as an option, as not all states do.
- Choose a name: Next, choose a name for your series LLC, ensuring that it adheres to the state’s naming requirements and is not already in use by another business.
- File formation documents: File the necessary formation documents with the state’s equivalent organization, such as the Secretary of State or Division of Corporations. These documents usually include articles of organization and a series LLC operating agreement, which should outline the structure and organization of each series and the rules and procedures for managing them.
- Obtain any required licenses and permits: Depending on the nature of your business, you may need to obtain licenses and permits from local or state authorities.
- Create separate series: After forming your series LLC, you can establish distinct series within the LLC. Each series should have a unique name, management structure, and business activities.
- Maintain separate records: It’s important to maintain separate records for each series, including financial records, contracts, and other legal documents.
Final Thoughts on the Series LLC vs Separate LLCs
There is no doubt that the series LLC has a lot of merit as a business entity in some circumstances, particularly for real estate investors operating in a single state.
A series LLC is cheaper, simpler and offers tax advantages as a business structure.
But for liability purposes, the series LLC’s asset protection characteristics have not been as extensively tested as other LLCs and the laws governing compliance, and the tax obligations, for the series LLC are more fluid and varied.
For these reasons, the series LLC is not the right choice for everyone, but the series LLC does offer appeal for some types of business.
