Business Succession

The Pros and Cons Of Series LLCs

Every business owner knows that at some point in the lifetime of their business, they must make a decision as to the proper type of formation. However, what many business owners fail to recognize is that this is an ongoing consideration that must be revisited time and time again during the lifespan of a business. Aside from S Corporations, as your business grows and expands over time, one such option you may need to examine is whether or not a Series LLC is appropriate for your business.

What Is A Series LLC?

A Series LLC is a relatively new form of a limited liability company that may be an appropriate business formation for certain small business owners: specifically, those who may need segregated membership/ownership interests with separate rights, duties, obligations and liabilities into independent series. Each of these “series” operates as if it is a separate entity- even going so far as being able to have a unique name, bank account, and separate books and records.

In an attempt to “illustrate” a Series LLC vs. a regular LLC: Think of a“regular LLC” as a book; a novel, etc- something bound into one piece of literature. On the other hand, think of a “Series LLC” as a group of smaller pieces of literature, such as magazines. The magazines may be collectively owned by the same person, but each magazine (visually speaking) is separate from one another.

At the time of writing this article, Oklahoma is one of approximately 18 states that allows the formations of series LLCs.

Who is a series LLC suitable for?

Business owners who own multiple properties or similar businesses, such as real estate owners who own multiple properties, or oil and gas operators who own multiple companies. In other words, companies with different profit centers who want to shield each business entity or operation from the other.

You must respect the formation requirements of LLCs to have a series LLC

While series LLCs are relatively simple to use, it’s absolutely essential that the business owner treat each “series” as a separate company; meaning,  signing contracts using the name of that specific series, maintaining separate bank accounts, books and records, etc. Business owners must always respect the corporate formalities of their business formation to maintain liability protection; for more on this topic, you may find this post helpful.

Pros of a Series LLC

  • Each series of the series LLC bestows liability protection for each respective series, meaning the assets of each series are shielded from one another (akin to a corporation with subsidiaries).
  • This may be seen as either a pro or a con of a series LLC, but this entity allows for different members and/or managers in each series, which again means that that person may enter into contracts on behalf of the series
  • The series LLC segregates risk of each entity from one another without having to form an entirely new entity

Cons of a Series LLC

  • Because each series may have different managers and members, they may sue or be sued, and operate independently. Again, this can be viewed as a pro or a con.
  • If your business operations straddle multiple states, you will have to take extra precautions to ensure that that other state recognizes series LLCs. For examples, states such as California don’t allow for the formation of a series LLC, but do allow them to do business in that state.
  • Different states may require a series LLC to disclose certain things on behalf of the company, and may also require that contracts, deeds, notes and other documents be signed in the name of the company and the liable series.
    There are some unresolved tax issues regarding series LLCs, which again depends on your state of business formation and business dealings. It is highly advisable that you reach out to a licensed tax advisor if tax-related questions arise in relation to Series LLCs. (If you need assistance in finding a trusted tax advisor, reach out to our team, and we will assist in making an introduction).

How do you form a Series LLC?

  • In the same way you form an LLC, you will need to file articles of formation (organization), and specifically state that you are forming a series LLC. Most importantly, you will need an operating agreement for the LLC, and one for each of the series LLC. This operating agreement will once again be providing the contractual rules for the operations of the company, and is absolutely critical for any LLC in existence.
  • While each of these individual LLC operating agreements will define the rules for the respective LLC, you will only need to file articles of formation one time. Each LLC following the formation of the first, “branching” from that original LLC will typically be formed by amending the original “master” operating agreement.

In conclusion, at the end of the day, you as a business owner must never lose sight of the fact that your ultimate focus must be on actively mitigating the liability that your business encounters. This is what separates the professionals from the amateurs. Forming a series LLC may be a secure way to protect your business by separating out your liability. Email us at hello@paigehulse.com, or drop us a note below if this sounds like a way you could increase protection for your own business.

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