Overview of a Series LLC
A Series Limited Liability Company (series LLC) is a relatively new form of LLC. In it, a master LLC can provide for separate sub-units (series) LLCs. These series LLCs operate independently of the master LLC. Currently, not all states permit formation of series LLCs, but some states will recognize them and allow the company to conduct business under state laws (under certain conditions).

An interested owner can form a series LLC in much the same way as a regular LLC. First, the owner will file articles of incorporation with their appropriate state office. At the time of this writing, approximately 13 states permit formation of a series LLC. Generally, the articles must specify that the LCC is authorized to form series LLCs. (Each state has its own requirements so check with a qualified attorney in your state for more information.) Once the articles are filed, an operating agreement specifying the master LLC and the number of series LLCs is completed. The operating agreement for the master LLC should set out conditions and mechanisms for the formation and use of series LLCs. The series LLCs should have their own operating agreements as well. Down the road, the master LLC’s operating agreement can be amended to form additional or remove a series LLC.

Benefits and Applications
There are many ways a series LLC can be used by a savvy business owner. A property owner with multiple investment or rental properties could form a master LLC and then put each property or group properties together in separate, series LLCs. A business owner with multiple businesses can accomplish something very similar.

There are numerous benefits to this strategy. First, each series LLC is liable only for its own debts and obligations. Therefore, creditors cannot attack the master LLC or other series LLCs in order to collect debts of the troubled series LLC. Second, business operations of a series LLC can and should be kept separate from the master or other series LLCs. This allows the series LLC to be independent and conduct wholly different business from the master LLC.

The taxation of series LLCs is unsettled. Each state and the IRS may treat a series LLC differently, so be sure to check with a knowledgeable attorney in your area. In California for example, each series LLC operating in California will owe the annual franchise fee, and the state will tax income from the series LLCs conducting business in California.

Series LLC Best Practices
Taking the following steps are good ways to minimize the chances of one series LLC being held liable for actions of another:

– All contracts should be signed in the name of the series. For instance, a real estate LCC should sign documents “Global Properties, LCC, California Properties Series.”
– Each series should file its own fictitious business name statement in each county where it owns property or conducts business. Again, the series should sign or title legal documents with both the master LLC’s name and the series LLC’s name.
– Separate bank accounts should be maintained for each series LLC, and each series LLC should be properly capitalized.
– Transactions between series LLCs that are formed under the same master LLC should be conducted at “arm’s length.” Furthermore, all transactions, such as loans, should be properly documented in writing.
– As a good rule of thumb, in order to benefit from protections that corporate formation provides, each series should be run independently of the others.

Series LLCs provide the potential for business owners to recognize the benefits of an LLC without the hassle or expense of creating numerous, separate LLCs. Be sure to check out Part II of this post where we walk through an example of a series LLC in action.