The limited liability company (LLC) is one of the most popular American business entities which is easy to form on your own or through a formation service.
However, it’s generally considered to be more of an option for small businesses than large or complicated companies.
The series LLC is one exception to this mindset, as it allows for several separate LLCs to function as one cohesive business. How does the series LLC work, and is it an option for your business?
We hear quite a bit of confusion regarding the series LLC, partially because it’s still a relatively recent addition to the American business landscape. Furthermore, there are still quite a few states that don’t recognize the series LLC.
With this in mind, let’s discuss what exactly the series LLC entails, where you can form one, and why it’s a beneficial business entity.
What Is an LLC?
Before we get too far into the details of the series LLC, let’s quickly address some of the basics of the limited liability company in general.
The LLC is a business owned and operated by one or more people, who are often referred to as “members” of the LLC. The limited liability company is a hybrid business structure that combines the casual flexibility of sole proprietorships and general partnerships with the limited liability protection of a corporation.
The main reason for the LLC’s popularity is because it provides personal asset protection, which means that creditors can only pursue your business assets in a lawsuit against your company, while your car, house, and personal bank accounts remain protected.
In addition, many entrepreneurs save a considerable amount of money on taxes thanks to the LLC’s “pass-through” taxation, which has the LLC owners claim business profits or losses on their personal returns, and there is no corporate-level taxation.
What Is a Series LLC?
A series limited liability company offers its owners the same benefits as the standard LLC, while adding the benefit of keeping several separate branches of your company under one general umbrella.
The series LLC is basically an LLC-based version of a corporation with subsidiaries, except the series LLC has far simpler formation and maintenance, and there’s also none of the “double taxation” that so often applies to a corporation.
If you form a series LLC for your company, you can separate different segments of your business, while still operating all of them as just one company.
One example where this might come in handy is if your business has a handful of different products and services that don’t have anything to do with each other. In this scenario, you can set up separate LLCs to keep them all isolated, while maintaining the series LLC as an umbrella structure.
The biggest benefit of the series LLC is the way this business structure allows each LLC within your series to maintain its own limited liability protections. This means that each LLC in the series is financially independent from the others, and any risk taken by one of the LLCs is not shared by the rest of the company.
For instance, let’s say that your business unveils a new product line. This new product line is a bold, risky venture, and there’s a good chance that it will fail ― or it could be a big success, taking your company to heights you’d never dreamed of previously. Either way, you don’t have to worry about the new product failing and dragging the rest of your business down with it, especially in the case of a lawsuit.
If there’s a flaw in the new product that generates lawsuits against the LLC that houses that product, the other segments of your series LLC are protected against that liability. If you lose or settle the lawsuit, your creditors can only pursue the assets of that particular segment of your series LLC.
Which States Recognize Series LLCs?
We mentioned earlier that not every state accepts the series limited liability company as a business entity, so we should probably discuss where you can form one. The series LLC is recognized by the following 16 states, along with the District of Columbia and Puerto Rico.
- North Dakota
It should also be noted that California does not allow for the formation of series LLCs, but they do permit series LLCs formed in other states to acquire foreign qualifications to legally operate in the state of California. For more information about obtaining foreign qualification, check out our article on foreign LLCs.
One other item we’ll briefly discuss before moving on is that two of the states that allow series LLC formations have some twists in their laws that make the series LLC much less appealing.
Specifically, in North Dakota and Wisconsin, the law does not provide for each LLC in the series to be shielded from liabilities of the other segments. Obviously, this removes one of the biggest advantages of this business entity.
What Are the Advantages of the Series LLC?
Speaking of advantages, the series limited liability company has a few significant benefits for its owners. Not all of these apply to series LLCs in all states (especially North Dakota and Wisconsin), but for most series LLC owners, you can enjoy these advantages:
- Personal Asset Protection: With a series LLC, you can enjoy the same limited liability protection provided by the standard LLC, except that it applies to each segment of your company individually. Regardless of which segment of your series LLC is named in a lawsuit, your personal assets are safe.
- Isolated Risk: Except in North Dakota and Wisconsin, the assets of each LLC in the series are shielded from the liability of each other segment. If one of the LLCs in your series is successfully sued, only that segment is liable for the damages, while the rest of the series is insulated from the risk.
- Low Formation Costs: As opposed to forming separate LLCs for each part of your company, or forming a corporation and subsidiaries, the series LLC is a simple and affordable option for most entrepreneurs.
- Simple Maintenance and Administrative Tasks: The most popular alternative to the series LLC is forming a corporation and subsidiaries. By comparison, it is much easier to maintain a series LLC, because the ongoing compliance requirements are considerably less complex, and there are very few administrative tasks involved.
What Are the Disadvantages of the Series LLC?
While there are some serious advantages that come with the series limited liability company, there are also some noteworthy drawbacks. Before you start your series LLC, make sure that none of the following disadvantages outweigh the advantages for your business.
- Most States Don’t Recognize Them: The series LLC is not recognized as a legitimate business entity in 34 states, and two other states (North Dakota and Wisconsin) have laws that significantly hamstring the series LLC’s effectiveness. While this might not be an issue if you’re located in one of the 14 states that recognizes the series LLC with its risk isolation qualities intact, it could turn into a serious issue if you want to expand your business into other states.
- Inconsistent Legal Treatment: Even in states that do accept the series LLC, there are different rules and regulations regarding how they function as legal entities. It’s also a relatively new addition to the American business landscape, and there isn’t much legal precedent for how court systems should treat the series LLC.
- Inconsistent Bankruptcy Procedures: Simply put, the bankruptcy procedure for series LLCs is a mess. In some states, you’ll need to declare bankruptcy for your entire series LLC. In others, you’re allowed to declare bankruptcy for individual segments on their own. There’s just no consistency in this regard.
- Multiple Registered Agents: In some states, you can’t just designate one registered agent for your entire series LLC. Instead, you have to designate a registered agent for each one of the LLCs in the series, which can be a significant expense if you’re paying registered agent fees for every segment of your series.
- Multiple Bank Accounts: If you want to keep each segment shielded from the liability of the other segments, you’ll need to open a separate bank account for each one. The assets of each LLC in your series will need to be isolated from the rest of the segments if you want to maintain the risk isolation of the series LLC. This also helps keep your personal liability protection intact.
How to Form a Series LLC
If you’ve decided that the series limited liability company seems like the right choice for your business, it’s time to discuss the process for forming one. For the most part, the formation process for a series LLC is quite similar to the standard LLC.
You’ll start by preparing the articles of organization, which is a simple document including some important details about your business, like your street address and the identity of your registered agent. One difference between the series LLC’s formation and that of a standard LLC is including a designation in the articles of organization that the business will be a series.
While it isn’t a legal requirement in most states, you should absolutely create an operating agreement for your parent LLC, along with separate operating agreements for each segment in your series. Your parent LLC’s operating agreement should describe how the series is structured and operated, while the operating agreements for each segment should describe how that specific LLC functions as part of the whole.
The DIY route isn’t terribly complicated for a series LLC, although it definitely requires more time and effort than a standard LLC formation does. Many entrepreneurs choose to hire a business attorney to form their series LLC, which provides excellent reassurance that your formation is handled correctly, but can be prohibitively expensive for some startups with tight budgetary restraints.
The series limited liability company has only been around for a couple decades, and it’s still only available in about ⅓ of all states. In states where the series LLC is recognized, it can be a great way to separate different segments of your business, while still keeping everything under one roof.
Of course, there are plenty of disadvantages to this business entity as well, mostly revolving around the lack of consistent treatment from state to state. In general though, if you want to form a parent company with several segments under its umbrella, the series LLC is a strong option to form this type of business entity.
We hope this article helped you improve your understanding of the series limited liability company, and we appreciate you taking the time to learn about the American business landscape with us!