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In the simplest terms, a Series LLC (limited liability Company) is an umbrella that shelters a number of independently operating LLCs under the master LLC. However, this is an extremely new form of business ownership, and not widely adopted throughout the United States. This article highlights the potential uses and risks of using a Series LLC as a prelude to a discussion with your attorney and other financial advisors.
The first state to permit Series LLCs was (not surprisingly) Delaware when it amended its LLC Act in 1996. In the subsequent 19 years, only a dozen states have adopted similar legislation. (In contrast, within 20 years of Wyoming’s ground-breaking LLC Act, all 50 states had adopted LLC legislation.)
States Permitting Series LLCs (as of January 2015)
The lack of widespread adoption coupled with the novelty of the entity structure means that the law regarding Series LLC is extremely unsettled. As one commentator on Texas Series LLC’s observed, “while the LLC is relatively young in the world of legal entities, the series LLC is a virtual newborn.”
Not only do a few states permit them, there is little uniformity among the state laws. Although the basic process involves creating a master LLC and a number of independently operating series LLCs under that master LLC, the states differ widely on what language must be included in the formation documents, how the series LLCs are created, and the degree of sovereignty enjoyed by each series LLC. It is important to know the state-specific requirements for any business type, but it is absolutely critical to know the differences between the state Series LLC statutes and to select the one best suited for your goals.
Operating multiple businesses as a Series LLC enables the owners to
Formation Costs. When the formation paperwork is filed, the organizers elect to be a Series LLC. Once the master LLC is formed, additional LLC’s can be added. How this is done depends entirely upon the governing state law. In many Series LLC states, a series is created via the operating agreement, but in a few another state filing is required. Even in states that require a separate filing, using a Series LLC can greatly reduce formation costs. (Of course, the savings vary based upon the cost of the initial series filings and the fees charged for each additional LLC filing.) This reduction in start-up costs is the one Series LLC benefit that cannot be obtained with far less risk by using traditional LLCs.
For example, a real estate developer has 10 properties and wishes to have them in separate companies. Illinois, which is one of the more expensive states for forming an LLC, charges $500 to form a regular LLC and $750 to form a Series LLC and an additional $50 for a Certificate of Designation for each LLC added to the series. To form 10 separate LLCs, would cost $5,000 while forming a Series LLC would cost only $1,250 (the cost of the Series LLC and 10 Certificates of Designation).
Most—but not all—state Series LLC laws do not treat the individual LLCs as separate filing entities. This means that in these states only the master LLC is considered a “filing entity” for state purposes, such as annual report filings. Bear in mind that this combined treatment generally applies only to secretary of state filings. Most states and the IRS take the position that each series LLC is a separate taxable entity, which makes the administration of multiple series LLCs no easier—and perhaps even trickier—then administering separately formed LLCs.
Asset Protection. Up-front cost savings are not reason to investigate forming a Series LLC. Asset protection is another touted advantage. In theory, the assets in each LLC are insulated from claims made against another LLC. For example, a real estate developer mentioned could put each property, or groups of similar properties, into a separate LLC in the series. If there is a lawsuit is brought against the management of one property, theoretically, the others are protected. However, it is essential to understand that this is nearly all purely theoretical. There is no guarantee that states without a Series LLC law will honor the separate status of each series. And, the impact of the bankruptcy of one series LLC on the others is completely unsettled territory.
Distinct Structures. Finally, each LLC can have different ownership, different allocations of profit and loss, and different management structure. Under proposed IRS regulations, each can elect to be taxed as a corporation, rather than as a partnership. It’s easy to see the allure of the Series LLC for financial and wealth planning. By segregating assets, it’s possible for one generation to pursue conservative wealth-maintaining goals while another aggressively pursues growth goals. This may well be the sweet spot for the Series LLC, although not without risks due to the law of law in the area.
While there may be many upsides to using a Series LLCs, particularly in high-risk industries such as construction or real estate or for financial planning, it must be stressed that this is a very new type of business structure. This means that there are many uncertainties regarding how existing business laws will apply. For example, will states that do not permit Series LLCs accord separate liability to each company? Also, the IRS has not issued final rules regarding taxation which creates another layer of planning uncertainty.
The uncertainties that surround this type of business structure means that forming and operating a Series LLC is not for the risk-adverse. After all, one can accomplish the same result by forming a number of regular LLCs. The formation costs may be dramatically higher, but the risk is far lower. It also means that the business owners will need to seek professional advice from attorneys and accountants prior to the creation and throughout the existence of the master LCC and the series LLCs. If the decision is made to form a Series LLC, it is essential that articles of organization are correctly prepared to the exact specifications of the formation state, whether these documents are created by the owners, the attorneys, or business compliance experts such as CT Corporation.
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