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A Series LLC is a unique form of the Limited Liability Company (LLC) entity in which the articles of formation specifically allow for unlimited segregation of membership interests, assets, and operations into independent Series. Each Series operates like a separate entity with a unique name, bank account, and separate books and records.
Many business owners are familiar with the traditional LLC, but a large number are unfamiliar with the Series LLC. This type of LLC can help organizations protect their assets from liability, and in many cases, can do so with less expense and more flexibility than other structures that mitigate liability risk, like the holding company or parent-subsidiary structures.
While the Series LLC is a complex legal entity—which is associated with a number of risks and complicated rules—more states are adopting Series LLC laws. As these laws evolve and the business community becomes more comfortable with the concept, the Series LLC may become a more popular option that entrepreneurs choose to use.
Back in 1996, the Series LLC was first introduced by the state of Delaware. The notion was borrowed from Delaware’s statutory trust law where one investment company could be formed as a trust with separate Series. Each Series could have its own portfolio with different investors and investment strategies. When the Series LLC became an option, it allowed mutual funds to use the LLC—a more flexible option than the statutory trust. Today, a Series LLC can be used for many purposes beyond setting up mutual funds.
A Series LLC may have different members and managers in each Series. The rights and obligations of these members and managers differ from Series to Series. Each Series may enter into contracts, sue or be sued, and hold title to real and personal property.
The most important piece of the Series LLC is the liability protection that is available to each series. Assets owned by one series are shielded from the risk of liability of other series within the same Series LLC. A Series LLC is similar to a corporation with several subsidiaries. However, the Series LLC is designed to segregate risk within separate LLCs—without the cost of creating new entities.
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Forming a Series LLC
The Series LLC is formed in the same way as a typical LLC. Business owners must file articles of formation with the appropriate governmental entity in a state where Series LLCs are permitted. To be distinguished from a regular LLC, most states require that the articles of formation specifically state that the LLC is authorized to form Series. Next, you will need an operating agreement for the master LLC and one for each Series you plan to form. A Series LLC can create additional Series whenever one is needed.
The master LLC operating agreement generally provides rules for the overall operations of the Series LLC. Likewise, operating agreements for each Series provide customized rules for operations. One of the benefits of a Series LLC is that you only have to file articles of formation once. After forming the initial master LLC, each additional Series is formed through internal mechanisms explained in the operating agreements. Typically, this happens by amending the master LLC operating agreement and adding an additional Series.
Using a Series LLC
As a business entity, Series LLCs are very flexible and simple to use. For example, real estate investors who own multiple properties commonly use the Series LLC. Each Series isolates and protects its properties from the liabilities of the properties in other Series. Companies with different profit centers can use Series LLCs to segregate and shield each business operation.
To maintain the liability protection of each series, it is important to treat each series as a separate company. This includes having a separate bank account, maintaining separate books and records, signing contracts using the name of the Series, documenting all transactions, and keeping adequate amounts of capital on hand for business purposes.
Be aware that there are unresolved tax issues regarding Series LLCs, primarily regarding whether each Series is a separate entity for tax purposes. For example, the California Franchise Tax Board has taken the position that each series in a Series LLC is a separate entity and therefore, must file its own federal income tax return and pay its own LLC annual tax and fee—if it is registered to do business in California.
A Series LLC consists of the “parent” or “umbrella” LLC, with one or more series that are established under the parent. Each series has characteristics that are separate from the Series LLC itself and every other series. Each series can have its own assets, members, managers, purpose, and investment objectives. And if certain statutory requirements are met, the debts, liabilities and obligations of one series are enforceable only against the assets of that series and not against the assets of any other series or the Series LLC. As such, each series basically functions like a separate entity within the Series LLC.
The Series LLC is a creation of state law and can only be formed in a state that authorizes the formation of a Series LLC, but not all states do. The jurisdictions that authorize Series LLC formation include the following:
- Alabama
- Arkansas
- Delaware
- District of Columbia
- Illinois
- Indiana
- Iowa
- Kansas
- Missouri
- Montana
- Nebraska
- Nevada
- North Dakota
- Oklahoma
- Puerto Rico
- Tennessee
- Texas
- Utah
- Virginia
- Wyoming
Additionally, California and other states do not allow Series LLC formation – but do recognize Series LLCs formed in another state. Such foreign LLCs can register and do business within these states.
There is no question that Series LLCs provide many interesting benefits and protections. However, most business owners who want to segregate their assets in order to provide a liability shield will still find the process of using separate and distinct LLCs to be the safer and simpler option. But as the laws evolve and the business and legal communities feel comfortable with the concept, the Series LLC may become a much more popular option.
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