What is a Series LLC?

Under Delaware law, 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?

When it comes to this type of business entity, it's not a matter of series LLC vs LLC, but rather a question of whether or not your LLC would benefit from siloed units within the business. The Delaware series LLC is a collection of individual series—this notion has been likened to a honeycomb. It can be illustrated as follows:

What Is a Delaware Series LLC Used For?

A Delaware Series LLC is highly versatile and is used in various industries. Real estate investors and property managers often default to Series LLCs so that each property can be placed into a separate series to isolate liabilities. This means that if one property faces a lawsuit, creditors cannot access the assets of other properties. This also works for franchise operations, as a Series LLC will provide liability protection and operational independence to each location. 

Do Series LLCs Need a Registered Agent?

What States Allow Series LLCs?

Not every state recognizes or allows for the formation of a series LLC. The state where you 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 the 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 an operating agreement for a Series LLC?

How to Form a Series LLC in Delaware

Can you Change an LLC to a Series LLC?

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 Delaware code for more information.

2. Next, many of our clients will reach out to an attorney familiar with Series LLCs to make any necessary changes to your LLC Operating Agreement.

3. Finally, clients will often reach out to an attorney to help keep all assets between each series and maintain records separately.

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 Each Series of a Series LLC Need its Own EIN?

Does Delaware Require Franchise Tax Reports for Each Series of a Series LLC?

What Are the Pros and Cons of Forming a Delaware Series LLC?

Pros:

• Low start-up cost: Only one LLC needs to be formed with the state of Delaware. The series within the LLC are 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.

[Please note: As of August 2019, Delaware has amended its Series LLC law. All information in this article pertains to what is now known as a Protected Series LLC, as opposed to the newly introduced Registered Series LLC.]

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.

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

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Recorded in December, 2020