Benefits and Drawbacks of the Series LLC
POR JEAN MURRAY
The series LLC is a relatively new concept in business ownership, but the concept of multiple LLCs under one umbrella LLC has been around for some time.
What is a Series LLC?
An LLC (limited liability company) is a form of business ownership recognized by all U.S. states. An LLC is not a corporation, but it does provide the same liability protection as a corporation since it is separate from its owners (called “members”). An LLC with several members may be taxed as a partnership, with the profits passing through to the partners/members according to their share of the business. LLC’s are popular because they are simpler to form than a corporation while providing comparable liability protection.
[TIP: To form an LLC in most states, you’ll need to file Articles of Organization. A few states require a similar form called a Certificate of Organization.]
The series LLC (SLLC) includes a master or umbrella LLC and other LLCs which are separated from each other for liability purposes (called “cells.” Each cell LLC has assets separate from the others, while the master LLC controls all the LLCs in the series. Each cell LLC has its own owners (members) and is liable only for its own debts and obligations. A series LLC has been compared to a corporation with several subsidiaries.
[NOTE: Real estate investors with multiple properties use a series LLC to keep the liability for each one separate from the others.]
Series LLC in States
A series LLC, like LLCs and other types of businesses, is registered with a state. Some states allow you to form a series LLC and other states don’t.
States have several different ways of forming a series LLC:
To form a series LLC in Illinois, you must use a different form for the Articles of Organization, and the filing fee is more than for a single LLC. After the original Articles of Organization are filed, each individual LLC is formed using a Certificate of Designation for each LLC within the series.3
Delaware was the first state to allow series LLCs, and most of the others have followed its model. Delaware has a registered series LLC entity which can be formed by providing the name of one of the LLCs in the series and the name of the registered series. 4
[IMPORTANT: Other states that have a series LLC option include Alabama, Arkansas, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Puerto Rico, Tennessee, Texas, Utah, Virginia, Wyoming.5 This list may change, and more states may be added, so check with your state to see if the series LLC option is available.]
The state of California does not allow businesses to form a series LLC, but you can form your series in another state and do business in California.6
The Protected Series LLC: A New Type
The Uniform Protected Series Act (UPSA) was created by the Uniform Law commission in 2017 to give more protection to series LLCs in states that adopt this new measure. Prior to this law, series LLCs had a “vertical” liability shield, protecting the umbrella LLC from liability for the actions of one of the series companies. The new law includes a “horizontal” liability shield, protecting each protected series from the debts of any other protected series of the company.
Four states enacted this protected series legislation in 2019: Arkansas, Virginia, Iowa, and Nebraska. Two others introduced protected series legislation in 2020: Tennessee and Colorado. 7
[TIP: To register a series LLC in your state, go to the website of the state business division (usually part of the secretary of state or secretary of commonwealth website) and look for LLC registration. The Series LLC option should be listed if it is allowed in the state.]
Taxes and Series LLCs
Series LLCs are taxed in different ways by states. The IRS has discussed series LLCs, but it has not issued specific rules on this subject. The latest (2009) IRS proposed regulation is that the series LLC be treated as a state entity for tax purposes. 8
Benefits of Series LLC’s
- Reduced startup cost. Only one filing fee is required, and an attorney can set up the parent and cells at less cost than setting up multiple LLCs. There are still some additional documents that must be filed for the individual LLCs in the series.
- Protection of Assets. Assets of each cell are protected from judgments against assets in other cells.
- Less Administration. You can set up as many LLC’s as you want, but each would be separate and would have to be administered separately. A series LLC allows you to save on administrative time and expenses.
- Less Complex than Corporation/Subsidiary Structure. A series LLC doesn’t have the same complexities of taxes, structure, and formalities (corporate records, for example) as a corporation with subsidiaries.
- Lower Sales Tax. Depending on the regulations in your state, the rent paid by one cell to another cell in the series might not be subject to sales tax. Check with your state on this issue.
- Only one state registration. Only the parent LLC must be registered with the state, which means fewer legal costs and registration fees. It also means only one annual or biennial fee is needed for the series. This assumes that all LLCs in the series are registered in the same state.
- Only one tax return. Only the parent LLC is required to file a tax return, which includes all the cell LLCs. Of course, this is going to be a complicated tax return, so you will need a tax preparer who is experienced with this type of return.
Drawbacks of Series LLC’s
- Must have separate registered agents. It’s likely that your state will require you to have a separate registered agent for each LLC in the series, which means additional expense for all of these registered agents.
- Separate bank accounts and accounting. Each LLC in the series must have its own bank account and, since each is producing separate financial statements, each must have separate accounting. If there are several LLCs in the series, this can be a big administrative issue.
- Cost of formation. The cost of forming a series LLC may be higher than the cost of forming a regular LLC. The state of Illinois, for example, charges $600 to form a regular LLC and $850 for a series LLC. But there is no additional cost for adding more LLCs in the series.9
- Bankruptcy questions. Because the series LLC concept is so new, there are many legal questions still to be answered; one is how the individual LLCs might be handled in bankruptcy, or if a bankruptcy court will recognize the separateness of different LLCs within the series.
- Tax issues. How a series LLC pays federal income tax is complicated. Talk to an experienced CPA or tax attorney before you attempt to file tax returns for a series LLC.
Disclaimer: This information isn’t intended to be used as tax or legal advice. Forming a series LLC is a complex process and each situation is different. If you are thinking about forming a series LLC, talk to your tax professional and your attorney.