Organizing as a Series LLC: Creation and Advantages Explained

What is a Series LLC?

A Series limited liability company (“LLC”) is a relatively new form of LLC that may be formed under the laws of select states.  Unlike a conventional LLC, a Series LLC includes multiple, potentially unlimited, liability sub-units, operating individually as independent LLCs under a single organizational umbrella.  

Doing Business in California

Commonly, California entrepreneurs owning multiple and/or related businesses organize as Series LLCs in Delaware.  This is because California law does not allow for a Series LLC to be formed in California.  However, a Series LLC that is formed under the laws of another state such as Delaware may still register with the California Secretary of State and transact business in California.

California entrepreneurs may also file a Fictitious Name Statement (sometimes called a doing-business-as filing or DBA) in jurisdictions where the series will operate, such that the name of the individual series will include the word “series” in order to indicate the series is a separate cell of the larger Series LLC.

Taxation

The Internal Revenue Service has treated units of a Series LLC as separate tax entities in one private letter ruling.  

For those Series LLCs operating in California, the California Franchise Tax Board may treat each unit as a separate entity for filing and tax purposes as long as the following features exist:
 

• Each unit has its own owners (members) and may be managed separately from the master LLC and other units.
• Each unit must maintain separate books and records.
• As with a regularly formed LLC, the owners (members) of each unit are not financially responsible for the unit’s debts and obligations.
• A unit may conduct part of the business of the master LLC, or may conduct a wholly different business.
• Each unit has its own assets and liabilities. The members of each unit are treated under the laws of the state where the master LLC is formed as owning an interest in only that unit, and have no rights as members of one unit in the assets or income of any other unit.
• Each unit is liable only for its own debts and obligations. In general, creditors of one unit may only make claims against the assets of that unit.

In that case, the same filing guidelines and estimated taxes that apply to a regular LLC operating in California, will apply to each unit of a Series LLC. [1]

Benefits

Legally, creation of a Series LLC is comparable to separately incorporating several different LLCs in that it provides the opportunity to segregate liability, control, and profit-sharing within each entity.  In other words, each series owns its own assets (and debts), has its own members and/or managers, conducts its own operations, and may pursue different business objectives.  If there is a claim or debt against one of the series, all of the other series remain insulated from that claim or debt.

Additionally, it is very easy to create a new unit under a Series LLC.  When formed in Delaware, the owner of a Series LLC does not have to pursue an in-state filing in order to add a separate series.  S/he can simply turn to the Series LLC’s Operating Agreement for instruction on how a new series may be created.  Oftentimes, the Operating Agreement dictates that the creation of a series can be effectuated through the drafting and adoption of a concise resolution, amendment or written consent by the appropriate member(s) or manager(s) of the Series LLC.  While the consent does not need to be filed with any authority, it is nonetheless important to obtain, as it may be requested by parties, such as banks or lenders, as evidence the series has been validly created under the applicable governing documents.

Third, in Delaware, regardless of how many sub-units or series are contained in the Delaware series LLC, there is just one Delaware Registered Agent Fee and just one Delaware annual Franchise Tax payment of $300.

Finally, when a Series LLC owns real estate used in its operations, the entity may avoid paying sales tax due on rent paid by the operating entity to the real estate series.

Smith Shapourian & Mignano, PC is available to answer any questions or concerns you may have regarding creation and management of a Series LLC.  Please contact us for a consultation.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.​

[1] See https://www.ftb.ca.gov/businesses/structures/series-limited-liability-company.shtml.