What is a Series LLC?
A series LLC is a unique form of limited liability company (“LLC”) in which the articles of formation specifically allow for unlimited segregation of membership interests, assets, and operations into independent series. Each series operates like a separate entity with a unique name, bank account, and separate books and records. A series LLC may have different members and managers in each series. The rights and obligations of these members and managers differ from series to series. Each series may enter into contracts, sue or be sued, and hold title to real and personal property.
The most important characteristic of a series LLC is the liability protection that is available to each series. Assets owned by one series are shielded from the risk of liability of other series within the same series LLC. A series LLC is similar in concept to a corporation with several subsidiaries. However, the series LLC concept is designed to segregate risk within separate entities without the cost of setting up new entities.
States Permitting Series LLC
The series LLC is a creation of the state. Only in certain states are series LLCs allowed to be formed. Delaware was the first state to enact legislation authorizing the creation of series LLCs. Several states have followed suit including Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah and Puerto Rico. Some states, like California, do not allow for series LLCs to be formed under state law but series LLCs formed in other states can register with the state and do business in the state.
Forming a Series LLC
The series LLC is formed in much the same way as a regular LLC. You will need to file articles of formation with the appropriate governmental entity in a state where series LLCs are permitted. To be distinguished from a regular LLC, most states require that the articles of formation specifically state that the LLC is authorized to form series. Next, you will need an operating agreement for the master LLC and one for each series you plan to form. A series LLC can create additional series whenever one is needed.
The master LLC operating agreement generally provides rules for the overall operations of the series LLC. Likewise, operating agreements for each series provide customized rules for operations. One of the benefits of a series LLC is that you only have to file articles of formation once. After forming the initial master LLC, each additional series is formed through internal mechanisms spelled out in the operating agreements. Typically this is done by amending the master LLC operating agreement and adding an additional series.
Using a Series LLC
As a business entity, series LLCs are very flexible and simple to use. The series LLC can be used by real estate investors who own multiple properties. Each series isolates and protects its properties from the liabilities of the properties in other series. Companies with different profit centers can use series LLCs to segregate and shield each business operation.
To maintain the liability protection of each series it is important to treat each series as a separate company. This includes having a separate bank account, maintaining separate books and records, signing contracts using the name of the series, documenting all transactions, and keeping adequate amounts of capital on hand for business purposes.