What is a Series LLC?

For entrepreneurs managing multiple ventures at the same time, traditional LLC structures don’t always offer the flexibility they need. As an alternative, a limited liability company (LLC) may be composed of an individual series of membership interests. This type of entity is referred to as the Delaware Series LLC. Each series is effectively treated as a separate entity, meaning the debts, liabilities, obligations, and expenses of one series cannot be enforced against another series of the LLC or against the LLC as a whole.

Few types of business entities have attracted as much interest from people as the Delaware series LLC. Today, less than half of the U.S. states allow you to form a Series LLC, with Delaware being the first to popularize the entity.

What Is a Series LLC?

A Series LLC is a specialized type of limited liability company that allows a single LLC to establish multiple separate divisions (called series) under one umbrella. Each series can own assets, enter into contracts, and operate independently, while also maintaining liability protection from the others. In theory, this means that if one series faces a lawsuit or debt, the assets held in other series are protected.

The first series LLC was devised by some of Delaware's top lawyers and was formally introduced to the state in 1996. The purpose of the Delaware series LLC is to form a unique entity that consists of separate, individual interests. Under Delaware law, each series can hold its own assets, have its own members, conduct its own operations, and even pursue different business objectives. A Series LLC can streamline operations while still offering a level of asset segregation. However, to achieve these benefits, each series must be properly maintained with separate records and operations.

A good way to visualize a Delaware series LLC is like a honeycomb. It can be illustrated as follows:

Series LLC Taxation

At the federal level, the IRS generally allows each individual series to be treated as a separate entity for tax purposes, even though they exist under one master LLC. This means each series can elect its own classification, such as a disregarded entity or a partnership. This could require separate tax filings for each series, depending on how they’re structured.

At the state level, Delaware generally treats the Series LLC as a single entity for franchise tax purposes. This means you typically pay one annual franchise tax for the master LLC, rather than separate taxes for each individual series. For federal tax purposes, however, the IRS allows each series within a Delaware Series LLC to be treated as a separate entity.

Forming a Series LLC

Forming a Delaware Series LLC starts with creating the “master” LLC through the Delaware Division of Corporations, then creating individual series internally. Here is a short guide on how to complete this process:

1. Name Your LLC
2. Appoint a Registered Agent
3. File the Certificate of Formation
4. Draft the LLC’s Operating Agreement. It must explicitly authorize the creation of series

Once the LLC is formed, you’ll need to create the individual series. All you’ll need to do is amend your LLC Agreement to "establish" the series. There is no additional state filing or fees. These are kept private and do not appear in public records.

Keep in mind that the IRS generally treats each series as a separate entity. As such, you should open separate bank accounts and apply for a separate tax ID number for the Master LLC and each individual series to ensure they are taxed correctly.

Can You Change an LLC to a Series LLC?

If you already have an established LLC, you can convert your LLC into a Series LLC. To accomplish this, here are a few things that will need to be done:

1. Contact Harvard Business Services, Inc. to file an amendment to your Delaware Certificate of Formation to include your company's ability to create different series. Refer to Chapter 18, Section 215 of the Delaware code for more information.
2. Reach out to an attorney familiar with Series LLCs to make any necessary changes to your LLC Operating Agreement.
3. Reach out to an attorney to help keep all assets between each series and maintain records separately.

Where to Form a Series LLC

Not every state recognizes or allows for the formation of a series LLC. The states where you can form a series LLC are Alabama, Arkansas, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Puerto Rico, South Dakota, Tennessee, Texas, Utah, Virginia, and Wyoming. If you don't live in one of these states, you can form a series LLC in Delaware. Before deciding on a Series LLC, double-check that the states you're operating in recognize a Series LLC. Depending on the state's perspective, you may lose liability protections between series and might need to register each series individually.

Do I Need a Series LLC?

When it comes to this type of business entity, it's not a matter of series LLC vs regular LLC, but rather a question of whether or not your LLC would benefit from siloed units within the business. A traditional LLC is the simplest option, and it works well if you’re running a single business or holding a small number of assets. However, if you own multiple properties or business lines, everything sits under one entity, meaning a liability issue could potentially affect all assets.

Forming multiple LLCs offers stronger separation. Each entity stands on its own, so liabilities are clearly isolated. The tradeoff is higher cost and administrative burden, since you’ll need separate filings, fees, tax returns, and compliance for each LLC. A holding company structure provides similar liability protection to multiple LLCs, with a more formal hierarchy. This approach is often preferred for larger or more complex operations, especially when outside investors or financing are involved.

A Series LLC sits somewhere in between. It provides liability separation like multiple LLCs, but with fewer filings and potentially lower costs. However, not all states recognize Series LLCs, and legal complexities could offset some of the benefits. In general, a Series LLC may make sense if you want scalability and asset segregation with less administrative overhead. Still, for the sake of clarity, many business owners prefer separate LLCs.

Pros & Cons of a Series LLC

While a Series LLC offers several benefits, there are some drawbacks associated with it as well. Before deciding to form a Delaware Series LLC, let’s review some of the most important complexities associated with this type of entity.

Pros:

• Low start-up cost: Only one LLC needs to be formed with the state of Delaware. Each individual series within the LLC is then formed internally via the series LLC's Operating Agreement.
• One Franchise Tax payment: No matter how many series are in your series LLC, the single entity owes just one annual Franchise Tax payment of $300 to the state of Delaware. If you were to form individual LLCs instead, you would need to pay a Franchise Tax of $300 for each LLC.
• One Registered Agent Fee: The state of Delaware requires that all Delaware companies maintain a Delaware Registered Agent. (Please visit our Registered Agent page for more information.) Since the series LLC is one entity, only one annual Registered Agent Fee is due. If you were to form multiple LLCs, you would need to pay a Registered Agent Fee for each LLC.
• Legal separation: Each series is typically supposed to be treated as a separate entity with its own assets, members and operations. The debts, liabilities and obligations of one typically cannot be enforced against another series, or the series LLC as a whole. Therefore, if one series is involved in a legal dispute, the others can typically keep operating.

Cons:

• It's legally untested: A Series LLC's unique structure has not been tested in court. Even if each series maintained separate records, assets and liabilities, a court in another jurisdiction could decide to ignore the legal separation granted by Delaware law.
• Uncertain taxes in other jurisdictions: Some states charge annual fees for each series within the LLC when the series LLC operates as a foreign LLC in their jurisdiction. California, for example, charges $800 per series for foreign series LLCs.
• Difficulty obtaining separate EINs: Since each series is separate from the others, series LLC owners typically want to obtain a Federal Tax ID Number (also known as an EIN) for each series. However, clients have reported difficulty in doing so.
• Banks can't comprehend it: Many banks are unfamiliar with the series LLC and therefore often have difficulty understanding that each series can open its own bank account. Combining their assets into a single account can also undermine the legal separation.
• Attorneys and accountants are unfamiliar with it: Many attorneys and accountants are also unfamiliar with the Series LLC and cannot offer adequate counsel.
• Many states do not recognize the series LLC: Many states don't recognize a series LLC and treat it as an individual LLC.
• The IRS has not determined how it should be taxed: The United States federal tax treatment afforded to individual series is uncertain. Essentially, the IRS does not know how to tax each individual series LLC, often making it difficult to file yearly income taxes.

Series LLC FAQs

Do Series LLCs need a registered agent?

Yes. Just like any other LLC, your Delaware Series Limited Liability Company will also need a Registered Agent. However, a common misconception is that each series will need to have its own Registered Agent. A single Registered Agent can represent the entire company. Harvard Business Services, Inc. can act as the Delaware Registered Agent for your series LLC.

Do I need an operating agreement for a Series LLC?

A well-drafted operating agreement is recommended and can be crucial for the Series LLC. It will be in the company's best interest to define structure and rules for creating and managing series. It's also important to specify the rights and obligations of members and managers for each series. Members can participate in multiple series, with varying ownership percentages and roles for each one, depending on the terms set in the operating agreement.

Can a Series LLC be an S-Corp?

Yes, a series LLC can be taxed as an S corporation. You can apply for S-corp tax status by filing Form 2553 with the IRS. You can learn more about Delaware S-Corp Tax Status on our website.

Does Delaware require franchise tax reports for each series of a Series LLC?

Delaware does not require a franchise tax report for each series of a Series LLC. A Series LLC in Delaware is treated as a single entity, so you only have to pay one Franchise Tax of $300 per year, due every year on June 1st, instead of each individual series of a Series LLC paying $300 per year.

Form a Series LLC Today

If you have more questions about the Delaware series LLC, please contact us via live chat, telephone (800-345-7400), or email.

We are a document filing specialist and business formation company. We are neither attorneys nor accountants, and this information should not be considered legal or accounting advice.

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Recorded in December, 2020