Since its introduction in 1977, the limited liability company (LLC) has become a popular entity choice for new businesses.
That’s because the LLC is a hybrid business type, which combines the flexibility of a sole proprietorship with the personal asset protection of a corporation.
At first, the LLC was best for owners of one standalone business — if you wanted to operate more than one related business entity, you’d have to restructure as a corporation with subsidiaries, or create entirely new LLCs. To eliminate these problems, the state of Delaware created a solution in 1996, which they called the “series LLC.”
In this guide, we’ll cover the essentials of what a series LLC is, along with some pros and cons to this relatively new structure.
What a Series LLC Is
A series LLC is similar to the concept of a corporation with subsidiary corporations, but it’s not exactly the same.
The series LLC is a “family” of LLCs governed by an overarching parent LLC, also known as a master LLC. Within this family, each individual LLC acts as a separate business. Each segment of the series is run as if it were an individual, autonomous LLC, but they all still operate under the same umbrella.
The primary advantage of a series LLC is that the assets of each LLC within the series are protected from the other segments. If one LLC is sued or goes delinquent on a debt, the assets of the other cells cannot be taken as payment.
How does this work in practice? One example of a business forming a series LLC would be if the company wants to establish a new product line, without threatening the liability of the rest of the business. In this scenario, the company could establish a series LLC, keeping the different product lines separate. That way, if the new product fails to make the hoped-for impact in the marketplace, the debts incurred will not threaten the rest of the segments in the series.
For instance, a food business might create a series LLC to separate its different operations: an LLC for its sandwich shop, an LLC for its pastry shop, and an LLC for its cafe. They’re all the same company, technically — the owners and operating agreement are the same from one shop to another. But if the cafe is sued for an outbreak of food poisoning, only the cafe is held liable, while the pastry and sandwich shops wouldn’t have to pay up.
How a Series LLC Works
The process to create a series LLC starts out the same as any other LLC: the LLC’s owners file the articles of organization with the Secretary of State. Some states include a section to designate this new LLC as a series, but not all do.
To help clarify the way the business is run, the LLC’s operating agreement should define the LLC as a series. It also establishes how the series is created, including how the parent LLC rules the others, the relationship between LLCs in the series, ownership of each, how to add or remove cells in the series, and more. In a way, the operating agreement is the road map for the business.
Once a new LLC is established within the series, it operates as if it were a separate business, which includes getting its own business bank account and maintaining detailed records.
Who Can Form a Series LLC
Standard LLCs are available in every state, but series LLCs are not. The following states allow for the creation of series LLCs:
- Alabama
- Delaware
- Illinois
- Indiana
- Iowa
- Kansas
- Missouri
- Montana
- Nevada
- North Dakota
- Oklahoma
- Tennessee
- Texas
- Utah
- Wisconsin
- Wyoming
There are also a few states that don’t allow entrepreneurs to form a series LLC, but that do allow series LLCs formed elsewhere to operate within the state using a foreign qualification. For example, the state of California doesn’t allow for the formation of domestic series LLCs, but they do permit foreign series LLCs.
Finally, the states of North Dakota and Wisconsin have some special rules that really hamstring the series LLC’s chances of success. Most importantly, these states do not allow each segment in the series to be independent from the others for liability purposes, which severely undermines the entire point of forming one.
Pros & Cons of the Series LLC
Just like there are positives and negatives to a standard LLC or a corporation, a series LLC has several pros and cons. In this section, we’ll cover these factors so you can decide if a series LLC is right for you.
Pros:
Since only the master LLC is on file with the state, a series LLC can be cheaper to establish than running separate LLCs. Of course, this all depends on the state’s fees for series LLCs. Similarly, a series LLC allows you to run separate business operations without the hassle of actually administering multiple businesses. Less paperwork is always an advantage.
As we alluded to earlier, in most states, the assets of each cell in a series LLC are protected from the liability of the others. This format would make it possible to separate a riskier section of your business from the rest. That way, if the risky section encounters trouble, it doesn’t mean the entire business is ruined as it could be in an ordinary LLC.
Ongoing maintenance issues are far simpler with a series LLC as well, compared to operating several separate LLCs. Only the master LLC files and pays fees for an annual report, there aren’t multiple entities to deal with come tax time, etc.
Cons:
The primary drawback of a series LLC is that it is a new, largely untested entity type. The American Bar Association does not endorse it, either. It remains to be seen how the courts will treat lawsuits involving series LLCs, because there isn’t much precedent regarding how a series LLC functions legally.
Another disadvantage is simply that not all states endorse series LLCs. This can make it complicated or even impossible to operate across state lines, and since most series LLCs are larger businesses to begin with, this could create problems.
Keeping each cell of the series distinct also requires meticulous record-keeping. Any overlap between the series should be avoided, because failing to do so could cost you the limited liability protection between cells.
Finally, there are some administrative hassles involved with a series LLC. For one, you’ll need to maintain separate bank accounts for each segment of the series, and you’ll need multiple registered agents in some states as well.
Conclusion
Establishing a series LLC is a relatively simple process, but running one has its complexities. It’s not recognized in all states, and because it hasn’t been around for very long, there’s still some ambiguity regarding how courts will treat a series LLC when it comes to liability issues.
However, if you’re operating a business in a state where the series LLC is allowed, there are some unique advantages to forming one.