Written by: Carolyn Young
Carolyn Young has over 25 years of experience in business in various roles, including bank management, marketing management, and business education.
Reviewed by: Sarah Ruddle
For over 15 years, Sarah Ruddle has been a noteworthy leader in the business and nonprofit world.
Updated on July 18, 2024
A limited liability company (LLC) is a popular business entity for startups, offering personal liability protection and flexibility in terms of organizational structure. If you’re interested in forming an LLC, you might know that there are several different types, including a series LLC and a restricted LLC.
But what do these two LLC variations offer the entrepreneur? Fortunately, this guide lays out the advantages of these two entities to help you decide which is right for you and your business.
An LLC is a popular business structure for startup companies due to its many benefits. An LLC provides personal liability protection, for example, so your assets are not at risk if your business is sued or cannot pay its debts.
Also, an LLC is a “pass-through entity” in taxes, meaning that the LLC itself is not taxed. Instead, income passes through the company to the LLC owners or members, who report it on their tax returns.
LLCs offer flexibility in management, as there are few requirements regarding organizational structure. However, setting up an LLC involves completing paperwork for your state, which carries a fee upon filing the form.
A series LLC is a type of LLC with a structure that’s considerably different from a standard LLC. In a series LLC, the articles of formation allow the membership interests, assets, and operations to be broken into distinct business entities, also called series.
These business entities act independently within the master, or umbrella, LLC and can have different members, managers, rights, and obligations. A series LLC, for instance, could consist of a T-shirt business, a consulting firm, and a coffee shop – each with its members and management structure.
Because each series under the umbrella acts independently, they can hold titles to property, enter into contracts, and sue or be sued individually.
The biggest advantage of a series LLC structure is that each LLC is granted liability protection. In addition, the assets of each series are kept separate from the master LLC’s other entities. This structure is similar to a corporation or holding company with subsidiaries.
Another benefit of a series LLC is that, in most states, only the master LLC needs to file taxes. This greatly reduces paperwork and costs compared to filing taxes for several LLCs. However, it is recommended that you work with a tax professional familiar with the series LLC structure when filing.
Series LLCs allow for growth and expansion into various business lines. In addition, the risk is mitigated by enabling each series to act on its own while still being able to streamline your company under one master LLC.
Even though there are many advantages to forming a series LLC, there are risks to consider. Series LLCs are only allowed in some states. If you form your series LLC in a permitted state and then do business in a state that bars series LLC formation, your assets may not be protected in the event of legal action.
In most states, only the master LLC is required to pay taxes, but that’s not always the case. For example, each series is considered a separate entity in California, responsible for its taxes and annual reports. This is one reason working with a tax professional is so important.
Forming a series LLC is similar to forming a standard LLC. One key difference is that the articles of organization (or whatever the formation document is called in your state) clearly define that the LLC is authorized to form a series.
Although the state doesn’t always require operating agreements, having one for a series LLC is wise. In addition, you should have one for the master LLC and one for each series.
The master LLC operating agreement provides rules for series oversight. In addition, the operating agreements for each series will outline its members and managers and specific rules.
One of the benefits of a series LLC is that you don’t need to file articles of organization each time you add a new series. Instead, when you have a robust operating agreement, you can simply amend your operating agreement to add a new series.
As always, it’s best to consult an attorney when drafting your series LLC documents.
As mentioned above, not all states allow the formation of series LLCs. As of 2024, series LLCs are only permitted in the following:
Federal lawmakers recently created the Uniform Protected Series Act. Once individual states adopt, the complexity and risk associated with series LLCs will be reduced. It will also help promote more widespread use of the series LLC structure.
A restricted LLC is an LLC that is not permitted to be taxed or make member distributions for the first ten years after formation. As a result, members don’t need to worry about being personally liable for assets.
As a result, this variation is most often used by LLC members seeking to transfer assets to another member, as there’s no concern for liability or taxation of the asset.
To form a restricted LLC, you’ll specify this structure in your articles of organization. Crucially, while series LLCs are allowed in several states, restricted LLCs are permitted only in Nevada.
Series LLCs and restricted LLCs serve different purposes and are only possible in certain states. Therefore, when considering these two LLC structures, it’s essential to consider your business needs and goals.
If you’re undecided, we recommend speaking to an attorney or tax adviser to help you choose the structure that will give you and your business the best chance of success.
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