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What is a Series LLC?
Last updated Sunday, April 7, 2024
A series LLC is a unique
form of limited liability company ("LLC") in which the articles of
formation specifically allow for unlimited segregation of membership interests,
assets, and operations into independent series. Each series operates like a
separate entity with a unique name, bank account, and separate books and
records. A series LLC may have different members and managers in each series.
The rights and obligations of these members and managers differ from series to
series. Each series may enter into contracts, sue or be sued, and hold title to
real and personal property.
A Series LLC is
most commonly formed to protect assets. Also, it helps to reduce costs related
to creating numerous LLCs and formation fees. Series LLCs were originally
created for the purpose of streamlining collective investments and structured
financial positions such as ETFs (Exchange-traded Funds) and mutual funds.
Expenses are reduced because only the master LLC needs to be maintained with
the Nevada Secretary of State (SOS), decreasing renewal and formation fees.
Also, the master LLC may only be required to file one income tax return with
the Internal Revenue Service (IRS).
In 2005, Nevada and
many other states added the Series LLC to the list of entity forms. This opened
the opportunity for a Series LLC to enter into contracts, grant security
interests, sue or be sued, and hold title to assets, just like any other type
of entity. A Series LLC can be formed in two ways:
- With a
single member (not recommended).
- With
multiple members.
There are two main
benefits to a Series LLC:
- The
opportunity to form and then renew as only one business rather than
formulating multiple entities.
- Only one tax
return needs to be completed by the master LLC which may include a number
of subsidiary LLCs under its umbrella.
Segregating Assets in a Series
LLC:
An asset may be segregated
within a Series LLC by forming a separate business entity for each asset. The
purpose of segregating the asset is to protect it from liabilities and lawsuits
from other cells. Certain states will allow the master LLC to file the one and
only filing fee for the umbrella LLC. Remember, there is currently very little
legal precedent regarding Series LLCs. Therefore, if you're operating in a
state that doesn't grant this special barrier of protection, you have no
guarantee that your assets will be covered.
For example, if the
master Series LLC is registered in Delaware and the business operates in
Illinois, then any legal proceedings will most likely be subject to Illinois
state law. Certain states may recognize the Series LLC, but they may not
recognize the liability protection between cells. In other words, if you're
operating a Series LLC in a state that doesn't automatically grant liability
protection between cells, then you're taking a massive risk by operating within
that state.
Forming a Series LLC:
Starting a Series
LLC is much easier than you may think. The formulation process is quite similar
to forming a regular LLC. When forming a Series LLC, simply create the same
articles of organization that you would for a standard LLC but include a
provision that authorizes for the formation of cells within the entity. You will need to file articles of formation with the
appropriate governmental entity in a state where series LLCs are permitted. To
be distinguished from a regular LLC, most states require that the articles of
formation specifically state that the LLC is authorized to form series.
You will need an operating agreement for
the master LLC and one for each series you plan to form. A series LLC can
create additional series whenever one is needed. The master LLC operating
agreement generally provides rules for the overall operations of the series
LLC. Likewise, operating agreements for each series provide customized rules
for operations.
One of the benefits of a
series LLC is that you only have to file articles of formation once. After
forming the initial master LLC, each additional series is formed through
internal mechanisms spelled out in the operating agreements. Typically this is
done by amending the master LLC operating agreement and adding an additional
series.
All contracts,
notes, deeds, and agreements are signed under the name of the corresponding
subsidiary LLC. Additionally, each subsidiary name must include the master
LLC's name in the title (e.g. "Sample Company, a Nevada Series LLC").
By doing so, it provides notice and discloses the subsidiary's existence. The
name of each subsidiary should be properly capitalized. There should be no
ownership interest between subsidiaries and no co-mingling of funds. If each
subsidiary is to be respected and treated as a separate company, along with its
own legal identity, then it must act accordingly. As a business entity, series LLCs are very flexible
and simple to use. The series LLC can be used by real estate investors who own
multiple properties. Each series isolates and protects its properties from the
liabilities of the properties in other series. Companies with different profit
centers can use series LLCs to segregate and shield each business operation.
The most important
characteristic of a series LLC is the liability protection that is available to
each series. Assets owned by one series are shielded from the risk of liability
of other series within the same series LLC. A series LLC is similar in concept
to a corporation with several subsidiaries. However, the series LLC concept is
designed to segregate risk within separate entities without the cost of setting
up new entities. To maintain the
liability protection of each series it is important to treat each series as a
separate company. This includes having a separate bank account, maintaining
separate books and records, signing contracts using the name of the series,
documenting all transactions, and keeping adequate amounts of capital on hand
for business purposes.
Nevada
Commercial Registered Agent
Entity # E0502742015-6
NV Business ID NV20151637034
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© 2024 Marc Gohres
Revised April 7, 2024 10:24 AM
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