What Is a Series Limited Liability Company? [Pros & Cons]
Last Updated: February 2, 2023
There are many types of companies that you can form or be part of. For example, Limited Liability Companies (LLCs) have become very popular. A series LLC takes a step ahead and combines an LLC with an umbrella company. But what is a series LLC? Which states permit the formation of such a company? And what are the pros and cons of a series LLC?
What Is a Series LLC?
Before understanding what a series LLC is, it’s first essential to understand what a Limited Liability Company (LLC) is. As the name suggests, this type of company limits the owners’ liability and creates a separate identity by and for itself. Thus, the owners or partners, for example, are not obliged to pay from their personal assets in case the company falls into debt.
A series LLC (SLLC) goes further in limiting the liabilities of the partners. The members can form several series of companies and allocate their assets to them, which prevents them from becoming liable and distributes the assets among companies.
What is a series limited liability company can be answered by way of example. Suppose you have a company called Doughnut. As a series LLC, you can form a company named Doughnut A, Doughnut B, etc. These are also referred to as a ‘child’ series, and the LLC becomes the parent company. You typically allocate different assets to each series, thereby separating them. If Doughnut A goes into debt, Doughnut B will not have any legal obligations to pay for it. Each series will be a separate entity of its own.
|NOTE: The state of Delaware was the first state to permit the operation of an LLC in its state. It’s also one of the best states to form an SLLC.|
States That Allow Series LLC
While some states are the best states to form an LLC, not all states permit a series LLC to operate in their state. It should be noted, however, that you can start your LLC in one state and continue your business in another. (California is an example of one such state.)
There are 14 states in the US that permit series LLCs to operate in their state:
- District of Columbia (DC)
|NOTE: A child series in Colombia, Illinois, Iowa, and Kansas should include the name of the master (parent) series.|
|An LLC series company is similar to an LLC, as well as an umbrella company.|
|Such a series company allows members to form different series, thereby separating and protecting the assets.|
|If one series goes into debt, it will not affect the assets of another series, as it is a different business entity.|
|Fourteen states grant the formation of such a company.|
The Best Fit for an SLLC
Series limited liability companies are suitable for real estate investors and entrepreneurs who wish to segregate their assets while maintaining their rights over them. It’s also applicable for those who want to minimize the risk associated with their business. (To date, there aren’t many notable SLLCs on the market.)
|NOTE: Real estate investors prefer an SLLC because it provides flexible opportunities to invest more.|
Establishing a Series Limited Liability Company
The step-by-step process of establishing a series LLC is similar to that of the formation of an LLC, with a few differences.
Pick a Name
Picking the name of your LLC is one of the first steps you need to follow to create your own company.
Appoint a Registered Agent
An LLC (or any other type of company) is required to appoint a registered agent. You should choose only the best-registered agent, as they help, for example, notify you if your company is involved in a lawsuit. You must also appoint different registered agents in the various states that you work in.
File Articles of Organization
Like an LLC, a series limited liability company also needs to file the Articles of Organization, which establish the company’s rights, obligations, powers, duties, and regulations. But, again, formalities may vary in forming a series company—each state has a different set of regulations.
Create an Operating Agreement
The master LLC operating agreement highlights the internal operations of the company. You only need to file it once to establish the working of your LLC. A series LLC operating agreement will also permit LLC members to understand their specific roles in the company.
Apply for an EIN
An Employment Registration Number (EIN) should not be confused with TIN. The IRS uses an EIN for tax preparation purposes. You’re only assigned this number once, which remains with the company through its operation.
|NOTE: You can seek the help of an LLC service to guide you through the entire process.|
Series LLC vs LLC
While there are significant differences between the two, there are also similarities. Both companies provide liability protection to the owners. In case of financial adversities, the owner’s personal property cannot be seized, nor will they be asked to make payments on behalf of the company.
The process of establishing both companies is also similar. Both require Articles of Formation, an operating agreement, and articles of organization.
What are the differences between an LLC vs series LLC? First, a series LLC is less expensive than a regular LLC company. Second, it is also more tax-efficient because—despite having many series—you file a combined tax for the entire company. Thus, it saves costs and all the extra annual state fees that come with paying taxes.
Moreover, a series LLC provides better protection of assets as it segregates them into different series. Even if one series goes into debt, another’s assets would not be affected.
Pros and Cons of Series LLCs
Let’s go over some advantages and disadvantages.
- They provide better protection of assets as they are distributed amongst different child series.
- They help investors—especially real estate investors—as they diversify, manage, and protect investments.
- Although child series are separate legal entities and have separate bank account, you don’t need to file taxes separately. Only one tax return has to be filed for an LLC.
- An SLLC is less expensive than an LLC. An SLLC is a more affordable option, with less paperwork and fewer legal contracts.
- Each series has separate managers and members, which helps provide a good working environment and delegate authority.
- An SLLC provides different profit centers for the owners. More series means more opportunities to profit.
- Child companies can also enter into contracts with other companies, sell or acquire assets, and even sue.
- There are only 14 states that permit an SLLC to operate in their state. Your business may not be protected in states where SLLCs aren’t recognized.
- An SLLC is a relatively new concept, and there aren’t many cases that can be used as a series LLC example in court. In the case of lawsuits, there are no previous cases that lawyers or you can look for guidance.
- While you can file for taxes collectively, each LLC has to have a separate bank account and accounting, which puts an unnecessary workload on the firm’s financial management.
- While the assets of each series are separated, it’s not clear if child LLCs are protected against bankruptcy.
- While you must appoint a different registered agent for each state you work in, you must also appoint another registered agent for each series.
|NOTE: Tax management is a significant drawback that prevents people from starting an SLLC. But you can seek the help of business tax software to manage your taxes effectively.|
A series LLC definition includes an understanding of LLC companies. Both companies limit the liability of the owners. An SLLC takes a step further by allowing owners to divide the assets among different series, thereby diversifying their investments. The process of establishing an SLLC is similar to that of an LLC. As SLLCs are still being adopted, you should seek the help of a lawyer or accountant to form an SLLC.
While there may be many series in an SLLC, you can file a combined tax for the entire company, which saves on cost, and fees, and it’s easier to calculate than filing for taxes separately.
You should consider the pros and cons of an SLLC. The pros include fewer costs, protection of assets, diversification of investments, and a good working environment. But a significant con is that only 14 states permit such companies to operate in their state.
What is a Series LLC and a typical LLC? A significant difference between the two is the distribution of assets. In an SLLC, assets are divided among different series, whereas they are accumulated within a single company in an LLC.