The limited liability company (LLC) is still a relatively recent development in the American business landscape, and as such, there are still some variations of the LLC popping up across the country.
One of the recent LLC innovations is the series LLC, which is still only recognized in 16 states and two territories.
The series LLC is a string of separate LLC segments that are unified under one overarching parent or umbrella LLC. Because the series LLC is such a recent development, we get lots of questions from our readers about how exactly the series LLC functions.
Where is the series LLC recognized? Why would you form a series LLC instead of a traditional LLC? What benefits does the series LLC have, and what are its risks or dangers?
In this guide, we’ll answer all of these questions and more, as we dive into the world of series LLCs.
What Is a Traditional LLC?
A traditional limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds.
LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
In short, LLCs are so popular because they provide a variety of legal protections for your business, while also enhancing your company’s credibility.
What Is a Series LLC?
In general, a series LLC is exactly what it sounds like ― it’s a collection of LLCs that operate under the umbrella of a master LLC.
While each LLC in the series is part of the larger company, this business structure also keeps each LLC financially insulated from the others. In theory, this means that a lawsuit against one of the LLCs should have no effect on the others in the series.
Each LLC in a series has the same limited liability protections that a standard LLC has, meaning that if you’re sued, creditors can only come after your business assets rather than pursuing your personal possessions.
While a series LLC does still protect your personal car, house, bank accounts, etc., it also protects the other LLCs in the series from the lawsuit. In other words, creditors can only pursue the assets of one LLC, rather than the entire series.
In general, a series LLC is quite similar to a corporation that has several subsidiaries ― or more specifically, an S corporation with qualified subchapter subsidiaries. The difference is that the series LLC is considerably less expensive to start, and is also avoids paying corporate tax rates.
What Are the Advantages and Disadvantages of the Series LLC?
Asset Protection: The most significant advantage of the series LLC is the way it separates the liability of each segment from the others. The series LLC provides personal asset protection for each LLC in the series, and each one is only responsible for its own liability, just like if you formed several standalone LLCs. If one of your segments is sued, the other segments in your series are shielded from the liabilities of that lawsuit.
Affordable, Convenient Formation: While forming several separate LLCs would require you to pay formation fees for each one — not to mention going through the formation process several times — the series LLC formation process is simple and streamlined, and you’ll only need to pay one formation fee.
Simple Maintenance: Similarly to the convenient formation process, there isn’t much hassle to maintaining a series LLC either. When you compare the maintenance requirements for a series LLC to maintaining several separate LLCs — or, for that matter, a corporation with subsidiaries — the series LLC requires significantly less effort when it comes to annual reports and other requirements.
Inconsistent Legality: The series LLC is only recognized in 16 states and two territories, but that’s just the tip of the iceberg when it comes to the inconsistent legal treatment of this business type. Each of these states has its own version of the series LLC, and in three states — Minnesota, North Dakota, and Wisconsin — the liability of each segment is not shielded from the others, therefore undermining the entire point of forming a series LLC to begin with.
In addition, there is some confusion regarding how bankruptcy should be treated for series LLCs. Depending on your state of formation, you may be allowed to declare bankruptcy for one LLC without affecting the rest of your series, or you may need to bankrupt the entire series LLC.
Uncertain Court Treatment: Because the series LLC is still a rather recent addition to the American business landscape, in some ways it remains to be seen how this entity type will be treated by the courts. Because there simply hasn’t been much time to establish legal precedent, we can’t be certain how a court will adjudicate cases involving series LLCs. As you can imagine, uncertainty in a court of law is never ideal.
Difficulty With Business Expansion: If you want to expand a series LLC into additional states, what happens if those states don’t recognize the series LLC? There are a few states (like California) that don’t allow the formation of a domestic series LLC, but do allow series LLCs from other states to register as foreign entities in that state. However, these exceptions are few and far between. In many states, you will have to form a different entity entirely — like multiple LLCs or a corporation with subsidiaries — to expand your business into new markets.
Multiple Bank Accounts and Registered Agents: A key component of keeping your segments shielded from each other for liability purposes is that you’ll need a bank account and a registered agent for each LLC in the series. After all, keeping your business and personal finances separate is a major aspect of maintaining a traditional LLC’s corporate veil, so it makes sense that you’d need to take similar steps to keep the finances of each segment of a series LLC separated as well.
What Businesses Should Consider a Series LLC?
One of the most common reasons for starting a series LLC is to separate different product lines or service types.
For example, if your business sells cleaning products, but you’re looking to branch out into the actual house-cleaning service industry as well, you can create an additional LLC in the same series to launch your new business venture without affecting your core business. In this way, if your house-cleaning business fails, your original cleaning supplies sales business will not share in the risk.
Another common example is that of a real estate rental business. If you own multiple properties, it’s a good idea to insulate each property from the liability of each other property. That way, if a tenant at one of your properties sues you, only the assets of that one LLC segment would be at risk, while the rest of your properties would theoretically be shielded from the lawsuit.
Which States Allow Series LLC Formations?
The first state to introduce the series LLC was Delaware, back in 1996. In the years since, several other states and territories have adopted the series LLC business structure, and today it’s available in the following jurisdictions:
- District of Columbia
- North Dakota
- Puerto Rico
How Can I Form a Series or Traditional LLC?
The typical process for forming a series LLC is exactly the same as the formation process for a traditional LLC.
The only difference is that you’ll need to indicate in your articles of organization that you intend for the business to be a series LLC. Overall though, our preference is to get assistance in the business formation process.
For a series LLC, we recommend working with an attorney since the nature of this setup is much more complicated and should be set up specifically to your situation.
For traditional LLCs, you can use a reliable yet cheap LLC formation service. These companies provide convenience and peace of mind that you don’t get from the DIY route, and they’re also much cheaper than hiring a lawyer to form your business. If you want to take a look at the top options, head on over to our guide to the 7 top-rated LLC services available.
In addition, we’ll briefly break down our top three options on this page. These are, in our opinion, the best LLC formation services:
- ZenBusiness ($39): ZenBusiness truly has it all. They provide complete LLC formation service along with a full year of registered agent service for one incredibly low rate, and they also have stellar customer feedback. It’s hard to go wrong with an offer like this.
- Northwest Registered Agent ($79): Northwest is a bit more expensive than ZenBusiness, but their industry-best registered agent service (included at no extra charge) includes local scanning of every document they receive on your behalf. They also have the best customer support available for LLC formation services. If you’re looking for more of a premium service, Northwest is an excellent choice.
- IncFile (FREE): IncFile has an LLC formation package that is free of charge, as long as you pay your own state fee. That’s obviously an enticing offer, especially when you consider that they also provide a year of registered agent. Throw in their strong customer feedback, and IncFile is an excellent choice for LLC formations.
There are many aspects of the series LLC that we really appreciate.
We just wish more states recognized it, and also that the legalities around series LLCs were a little bit clearer than they are. As it stands, the series LLC is an excellent option for businesses that want to maintain several separate LLCs under one umbrella LLC, but only in a select few states.
For everyone else, the traditional LLC is your only option, unless you would rather form a corporation with subsidiaries. Forming multiple LLCs isn’t the end of the world, it’s just that it is considerably more hassle in several different ways compared to the convenience of a series LLC.
We hope this article helped you develop your understanding of the differences between the series LLC and the traditional LLC!