What Is a Series LLC?
The limited liability company (LLC) is one of the most popular business structures in America, thanks to its flexibility and relatively simple setup. The LLC does have its limits though, especially when it comes to its growth potential compared to a corporation.
If you’re considering starting an LLC ― or if you already operate one ― you might be interested in the series LLC. This relatively recent addition to the American business landscape operates like a simplified version of a corporation with subsidiaries, but the series LLC also has some unique attributes of its own.
In this article, we’ll discuss the details of the series LLC, from why you might want one to where you can form one. Let’s find out if it’s the right business structure for your company!
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.
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.
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 they also avoid paying corporate tax rates.
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 16 states:
- District of Columbia
- North Dakota
- Puerto Rico
Why Should I Form a Series LLC?
There are several potential advantages to the series LLC, but in general we find that there are four main reasons for entrepreneurs to form these structures. If your business could benefit from the following situations, perhaps it’s time to consider launching a series LLC of your own.
- Personal Asset Protection: Just like with a typical LLC, the series LLC shields your personal possessions from a lawsuit against your business. It doesn’t matter which segment of the series LLC is sued ― your personal assets are protected.
- Affordable Startup Costs: With a series LLC, you can effectively form several LLCs for the price of one, as you only need to pay formation fees for the series itself, not for each individual LLC under its umbrella. In addition, corporations have much higher startup costs than a series LLC.
- Insulating Different Parts of Your Business: For the most part, each portion of a series LLC operates exactly the same way a regular LLC does. In this manner, if one of your LLCs suffers significant losses, the other parts of your series are effectively isolated from those losses. However, it should be noted that each state has its own interpretation of this aspect, and in a few states (namely, Minnesota, North Dakota, and Wisconsin) the different segments of the series may indeed share risk.
- Easy Ongoing Compliance Requirements: Compared to maintaining several separate LLCs, or a corporation with subsidiaries, the ongoing compliance needs of a series LLC require relatively little effort.
Why Should I NOT Form a Series LLC?
While there are quite a few advantages of a series LLC, this business structure also has a handful of negative aspects as well. If you think these issues could affect your business, you might want to think twice about forming a series LLC.
- Different States, Different Rules: Seeing as the series LLC has only been around for 20+ years, there isn’t a whole lot of established precedent regarding how it’s treated as a legal entity. Also, each state has its own rules and regulations regarding the formation and ongoing compliance of a series LLC, so it really can get quite confusing.
- Bankruptcy Confusion: One of the biggest issues with the inconsistent legalities of the series LLC is the fact that many states aren’t quite sure how to handle a series LLC declaring bankruptcy. 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.
- Each LLC Needs a Separate Bank Account: With a series LLC, you can’t just lump all of the LLC segments into one bank account. Instead, you’ll need to keep the finances of each LLC distinctly separate from the others, which can be a considerable hassle if you have more than a couple segments in your series.
- Each LLC Needs a Registered Agent: In most states, you will need to designate a registered agent for every segment. While you are allowed to have each LLC in the series elect the same registered agent, this still means that there are some noteworthy ongoing expenses because you’ll likely need to pay registered agent fees for each LLC, even if one registered agent handles all of your segments.
- Expansion Issues: If your series LLC is successful, you may want to expand your business into additional states. There are a few states (like California) that don’t recognize series LLCs but still allow you to expand an existing one into that state, but for the most part you’ll need to form a new type of business ― such as a corporation, or several separate LLCs ― if you want to expand your series LLC into a state that doesn’t recognize them.
How Do I Form a Series LLC?
The typical process for forming a series LLC is exactly the same as the formation process for a normal 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.
Once you’ve done that, it’s advisable to draw up a separate operating agreement for each LLC in the series, although this step is not legally required in most states. In the operating agreement for your umbrella LLC, you should explain the ownership structure and operational plans for the entire series. In each segment’s operating agreement, you can explain how that portion of the series will function independently of the others.
You always have the option of forming your series LLC yourself using the DIY method, but due to the increased complexity of the series LLC, we usually recommend having a professional form your business. You can hire a business attorney to draft and file your series LLC’s articles of organization, which provides a high degree of peace of mind, but can also be prohibitively expensive.
The other option is to enlist the assistance of an online LLC formation service. There are quite a few service providers available that can quickly and correctly form your new series LLC, and they typically cost much less than paying an attorney’s fees. If you’re interested in this option, here are a couple of our favorite LLC service providers:
- IncFile – $49: With IncFile, you’re not only receiving a low rate for LLC formation, but they also include a year of registered agent service. When you consider that they also receive stellar customer feedback, they’re an even stronger option.
- Northwest Registered Agent – $79: Northwest has a similar offering to IncFile, with a year of their premium registered agent bundled in. They’re the only major service provider that locally scans every document they receive as your registered agent, whereas competitors only scan the government forms they’re legally required to scan. They also have highly personalized customer support.
- LegalZoom – $149: Their prices are unimpressive, but they have a ton of brand power and a high customer volume. They also offer a 100% satisfaction guarantee and some of the longest customer support hours in the industry, so LegalZoom’s popularity isn’t a huge surprise despite the high price point.
Less than half of all states recognize the series LLC as a business entity, and even if you’re forming in a state that allows them, the series LLC is only really suitable for a select few business types. However, if your business has several unrelated product lines, or if you want to split off high-risk portions of your business to protect your more reliable pursuits, the series LLC can be a great fit.