If you’re wondering which entity type is the right fit for your business, you might consider a series LLC – a unique structure that offers key advantages for business owners.
Series LLCs aren’t for everyone; some risks are involved and critical factors to consider. Read on to learn more about series LLCs and help you decide if it’s the right choice for you.
Series LLCs Explained
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.
Benefits of a Series LLC
The most significant 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.
Risks of a Series 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 own taxes and annual reports. This is one reason working with a tax professional is so important.
How To Form a Series LLC
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. 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.
Which States Allow Series LLCs?
As mentioned above, not all states allow the formation of series LLCs. As of late 2022, series LLCs are only permitted in the following:
- District of Columbia
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.
Series LLCs are perfect for business owners who want to expand and grow without forming new entities. But they’re not allowed in every state and come with some risk.
If you choose to form a series LLC, consult with an attorney or tax professional. Doing so will ensure your formation documents and tax filings are compliant and error-free.