You have a lot of business ideas. You’re constantly writing them on diner napkins, post-it notes, and the back of your hands.
And they’re all related. You’ve developed an entire web of ingenious, profitable, on-the-money ideas that play off one another like notes in a symphony. What’s the best way to put them all into action? Should they all be separate businesses?
Enter 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.
If that catches your attention, read on for more information on when and where you can form a series LLC, how they operate, and their benefits and drawbacks.
What Is a Series LLC?
In general, a series LLC is exactly what it sounds like ― 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.
Being a series LLC doesn’t mean a business is any less protected than the master LLC. Each company in the series receives the same limited liability protection, so creditors can only come after your business assets, not personal possessions like cars, a house, bank accounts, etc. And it confines lawsuits to a single LLC, shielding the other series LLCs from creditors who might come after their assets.
Often, LLCs that have different product lines or service types are good candidates to form a series. Let’s say your business sells cleaning products, but you’re looking to branch out into the actual house-cleaning service industry. You can create an additional LLC in the same series to launch your new business venture without affecting your core business. This eliminates the risk involved – if your house-cleaning business fails, it won’t hinder your cleaning product business.
Think of a series LLC like 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 avoid paying corporate tax rates.
Which States Allow Series LLC Formations?
Let’s take a quick jaunt into the history books. Back in 1996, Delaware became a real LLC pioneer when it first introduced the series LLC. Since then, several other states have jumped on the bandwagon and today, you can form a series LLC in 16 of them — plus D.C. and Puerto Rico:
- North Dakota
- District of Columbia
- Puerto Rico
Are you located in one of these states? Then, by all means, form a series LLC if it suits your business model. But if not, you’ll have to stick with a regular LLC or find another business structure that works for you.
Why Should I Form a Series LLC?
We’ve come to the good stuff, the real meat and potatoes of the guide: how a series LLC can benefit you.
There are four main reasons for entrepreneurs to form these structures. If your business could benefit from the following situations (and your state allows it), perhaps it’s time to consider launching a series LLC of your own.
Personal Asset Protection: Lawsuit? Creditors? When it comes to personal possessions, don’t worry. Like a typical LLC, the series LLC shields your personal possessions from a lawsuit against your business. Regardless of which segment of the series LLC is sued, your personal assets will be protected.
Affordable Startup Costs: This is like the satisfaction of cashing in on a “five for $1.00” deal at the supermarket. A series LLC allows you to 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 the same way a regular LLC does. So, if one of your LLCs suffers significant losses, the other parts of your series won’t suffer. Each state, however, has its own interpretation of this aspect, and in a few states (namely Minnesota, North Dakota, and Wisconsin) different segments of the series may indeed share risk.
Easy Ongoing Compliance Requirements: The alternatives – operating several LLCs or a corporation with subsidiaries – require a lot of ongoing maintenance. By comparison, a series LLC requires relatively little effort.
Why Should I NOT Form a Series LLC?
Like any other business type, a series LLC has drawbacks too. You might see them as simple inconveniences, or you might foresee them having a substantial negative impact on your business operations.
Different States, Different Rules: Because it’s only been around for 20 or so years, there aren’t a ton of established precedents for how a series LLC treated as a legal entity. Therefore, each state has its own rules and regulations about formation and compliance, which can lead to some confusion, especially if your company operates in multiple states.
Bankruptcy Confusion: Perhaps the biggest issue with these inconsistent legalities is that some states still aren’t sure how to handle series LLC bankruptcy. Depending on your state of formation, you may be allowed to declare bankruptcy for one LLC without affecting the rest of your series. But in other states, you may need to bankrupt the entire series LLC.
Each LLC Needs a Separate Bank Account: Your bookkeeper would love it if you could lump every series LLC into a common bank account, but unfortunately, you can’t. You’re required to keep each LLC’s finances separate. If you have numerous companies in several states, this can turn into a considerable hassle.
Each LLC Needs a Registered Agent: Your LLC’s registered agent is it’s mediator with the state, handling all your important legal communications. It’s a highly important position, so you want to be considerate about who you choose. In most states, you must designate an agent for every LLC in the series. Even if you use the same person or entity for all of your companies, you’ll still need to pay registered agent fees for each one, which can add up.
Expansion Issues: Your LLC might strike gold and experience huge amounts of success. That’s great! But it presents another potential issue. If you expand to a state that doesn’t recognize series LLCs, you will likely need to form a new type of business or a separate LLC. A few states (like California) don’t recognize series LLCs but will still allow you to expand an existing one there, but these states are few and far between.
How Do I Form a Series LLC?
In most cases, the formation process for series LLCs is exactly the same as normal LLCs. 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.
It’s wise, however, to draw up a separate operating agreement for each LLC in the series, even though this step is not legally required in most states. Your master LLC’s agreement should explain the ownership structure and operational plans for the entire series, just so that there’s no confusion in the future. Then, in each segment’s agreement, you can explain how that portion of the series will function independently of the others.
It’s totally possible to DIY the whole formation process, even for series LLCs. But due to this structure’s increased complexity, 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 and operating agreement, which will give you peace of mind, but at a substantial financial cost.
Series LLCs aren’t the most prevalent business structure out there – they’re only ideal for certain business purposes and fewer than half the states allow them. 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.
If you decide to form a series LLC, whether you hire a service or tackle it yourself, soon you’ll have a whole family of interrelated and (hopefully) successful businesses.