A series LLC, a relatively recently authorized form of LLC, is composed of a master LLC which houses a series of LLCs. Each series within the series LLC typically has separate owners, assets, and liabilities. Similar to a corporate/subsidiaries business model, series LLCs may potentially offer asset-protection benefits, but they avoid the complexities of corporate taxes, structure, and other required formalities.
This type of entity is well suited for certain businesses that may benefit from its relative simplicity, reduced costs, and increased asset protection. But especially because of its newness, there are also some uncertainties associated with the series LLC.
Potential Benefits of the Series LLC:
- Simplicity
Reduced Administration ~ Although each series must be administered separately, series LLCs have the potential to save time and administration costs.
- Reduced Costs
One Registration ~ Each of the individual series is formed and governed by the master LLC’s operating agreement. In most states, only the master LLC must be registered with the state, which means reduced fees.
Potential Sales Tax Savings ~ Some states may not require sales tax to be paid on rent that one series pays to another series.
- Asset Protection
Mixed Signals ~ Under most series LLC statutes, each series is protected from judgments against assets in other series under the master LLC. But it’s not clear that this protection will be respected in bankruptcy proceedings or in states that don’t recognize series LLCs.
Potential Downsides of the Series LLC:
- Some Additional Costs
Registered Agent ~ Many states require a separate registered agent for each series in the series LLC, which may mean additional expenses.
Formation Cost ~ The up-front registration fee for a series LLC may be higher than the registration fee of a regular LLC. In some cases, it may be less expensive to register multiple single-member LLCs rather than a series LLC with multiple series.
- Governance Issues
Overlap Jeopardy ~ The operations may not be as streamlined as anticipated. The records of each series must be maintained separately, and each series must have its own separate bank accounts. Can administrative functions among the series overlap without jeopardizing the limited liability? Can the ownership or management overlap? Does inadequate capitalization of one series impact the other series in the series LLC? At this point, these types of questions remain unanswered.
- Liability Questions
Bankruptcy Issues ~ Federal bankruptcy laws do not yet address series LLC issues. Can an individual series within a series LLC file for bankruptcy? Are the assets of the non-filing series and the master LLC protected from the filing series? At this time, there are no clear answers to these and other bankruptcy-related questions.
Choice-of-Law Issues ~ If a series LLC gets sued by a third party in a state that doesn’t authorize series LLCs, the assets of each series and the master LLC may be at risk. For LLCs that operate in states with and without series LLC statutes, this may make a series LLCs much less attractive.
The series LLC is potentially a star on the rise and is definitely worth watching. If your business is particularly well suited to this compartmentalized approach and you live in one of the states that currently authorizes series LLCs, you may want to talk with your business planning team about this type of business entity.
We work with business owners to ensure they’re up to date with the latest business planning and operations strategies. Contact our office today so we can evaluate your current and future business asset protection needs.
