Understanding the Series LLC

Do you wish to operate multiple business ventures? The series LLC may be just what you are looking for.

In our previous blog post, we discussed the power of the LLC. This business entity is known for being one of the most flexible business structures among business owners. To reiterate some of the information shared regarding this business structure, an LLC or a limited liability company is an entity that has the qualities of a corporation and benefits of sole proprietorship. The key component of this type of business structure is the liability protections that it affords its members and other agents operating under the business. In this blog post, we will discuss another business structure gaining traction in the business world – the series llc. The liability protections are the same, the difference is this structure allows you create other business ventures under your LLC, without any additional filing fees or formation documents. .

A series LLC is a business structure that is controlled by a principal or master LLC (parent company). under this major LLC are other LLC business structures called series. This is a more condensed definition that is much easier to understand for the purpose of informing individuals who are pursuing certain business structures, such as a Series LLC.  However, even after you read this blog, we encourage you to hire a knowledgeable business attorney to assist you with forming your company.

LLC vs Series LLC

As you may already know, there are differences between an LLC and a series LLC. When you are comparing and contrasting these two distinct business structures, a prospective business owner must decide which of these entities will benefit the future success of his or her business, and also how this certain business structure will benefit an owner in personal ways. When it comes to comparing these structures, what is similar is the personal liability protections that are given to them. Having a liability protections is what makes the limited liability business structure so attractive to many business owners. The last thing you would like as a business owner is a lawsuit on your hands. As we have previously discussed in other blogs, having the possibility of being sued is perhaps the most unfortunate and inconvenient of circumstances. Having this problem on your shoulders can interfere with your everyday business activities and can also have a profound personal effect on your estate. Thankfully, both of these business structures have these essential liability protections.

What makes the LLC and series LLC different from each other is the ability to separate your assets (and liabilities) from each venture operating under the parent company. For example, if you are a business owner who is in charge of certain commercial properties, and if you are sued for endangering the safety of clientele for example, then the possibility of these assets to be at risk dramatically increases. This is especially true if all assets are under one LLC. Remember, you the owner, won’t held responsible (granted the incident isn’t related o fraud or misuse of funds). The LLC will. Therefore, those business assets can be at risk. Here is where the power of the series LLC comes. You can create a series LLC, and under the principal LLC, you can separate each asset. If you are sued, individuals or other entities can only go after the assets of that particular commercial property that caused them harm. The other properties, or assets, are their own LLC. Therefore, the other assets are protected from a lawsuit.

Holding Company vs Series LLC

A holding company and a series LLC both are structures that are popular due to the ability to protect and separate assets. For corporations, it has been the go-to choice. There is a certain disadvantage that might change the perspective of many future business owners. Although a holding company has the benefit of separating and protecting assets, the separations aspect of a holding company can become complicated. Let us explain: A holding company is created by establishing a parent company, and below the parent company, you will have its subsidiaries. These subsidiaries are completely separate legal entities that are owned, not by the parent company in many cases, but other entities as well. The holding company structure is traditionally maintained through the creation of separate business structures, such as other LLCs and corporations. This means a lot of paperwork! In order to operate under a successful holding business structure, you must make sure that all administration and operation duties where followed thoroughly. Because all entities were separate from each other, they had to require separate administrative duties. This can become a bigger hassle if there are international business operations. Holding companies take seriously the aspect of separations of assets. When it comes to the series LLC, the administrative duties are, fortunately, more manageable to perform.

Who might consider forming a Series LLC?

Let’s provide a quick example that illustrates how impactful a series LLC can be.

Michael has recently established a series LLC business. He now owns 4 homes. How did he decide to establish a series LLC? A business law attorney gave him the guidance he needed to come to the conclusion that he needed to establish a series LLC. See, Michael had an associate that experienced the loss of his assets, and that included 2 rental properties. A renter and his family experienced physical injury when it was discovered that air filters were not working properly and were not up to date. Their physical injuries came in the form of breathing problems. This renter sued Michael’s associate, and because his associate had both of his rental properties under one LLC business, Michael’s associated assets were gone. His business assets were gone because of the severity of the damages that were inflicted on the tenants.

This means the two properties that Michael’s associate had to be sold in order to follow through the financial compensation that was ordered because of the lawsuit. Michael did not want to experience this. His attorney recommended him to create a series LLC, where his 4 homes will be separate LLCs. Michael decides to place his 4 homes in the market as properties for rent. Because his commercial business is a series LLC, he will not worry about experiencing the same fate that his associate had. He will also make sure to follow all regulations that are needed to be met in order to avoid any potential lawsuits. Even if there is a possibility of a tenant suing him, the tenant can only go after the property in which the damage was created. Michael was thinking about creating a series LLC business, but he needed the advice of an attorney to confirm that he was right in creating this business structure.

Benefits

The benefits of establishing a series LLC have an incredible impact on the business and its owner. As we have discussed in this blog, one of the benefits of having a series LLC includes a more manageable administration of a business. It is less complex than to operate a corporation or any other similar business structure such as a subsidiary. We know how important it is to have a manageable administration. It saves business owners time and operating costs in the long run. Speaking of operating costs, it can save on your investment expenses when establishing this structure. Establishing a series LLC has a reduced startup cost in comparison to other structures. Perhaps the most important benefit in creating a series LLC is the protection and separation of assets. If you are sued, individuals or other entities can not go after your assets that belong to other cells of your series LLC. In a regular LLC, you may have to create other separate LLCs to have the same benefits, but that means you will have different tax returns, different financial accounts, and extra administrative work. Regarding taxation, another benefit of creating a series LLC is that the principal LLC is only required to provide a tax return, and that includes your LLCs from other cells. We understand that dealing with taxation responsibilities can be a daunting task. To ensure that you are taking responsibility of your taxation needs, consult with a professional that has series LLC business tax expertise.

Drawbacks

Although a business owner can file one single tax return under the principal LLC, there must be separate accounting for each different cell that is part of the series. That is why it is very important for a business owner to consult with a tax professional that has a significant amount of experience in administering series LLC tax returns. Having multiple cells can mean many hours spent in making sure you have the most accurate financial statements to help you have an accurate tax return. Another drawback that should be discussed regarding this business structure is that it may be difficult to create a series LLC if your state does not allow for prospective business owners to create this structure. The states that do allow for such business structures to be established include Delaware, Illinois, Montana, Nevada, and Texas. Your series LLC business can provide services to clients/customers from other states, but if a state does not allow for individuals to create a series LLC, an incredibly high operating charge can be placed on the series LLC business owner from a different state. Lastly, the topic of bankruptcy comes into play. Many courts may not know how to establish certain proceedings when dealing with multiple LLCs because of how new the series LLC structure is. This can result in the courts not being able to understand how to manage each and every individual LLC that is part of the overall series LLC. A court must understand this business structure in order to provide a positive outcome for the individual or entity that is seeking bankruptcy relief.

Forming a Series LLC in Texas

According to Texas law, a series LLC is defined as an LLC entity that states in its governing documents that managers, members, assets, and membership interests have rights, liabilities and other privileges that are separate from the principal LLC. Certain privileges that traditional LLC has can be also found within a series LLC structure. These include the ability of joining a contract, sue a company or an individual but also be sued, take control of a title, give assets interests or liens. If you would like to form a series LLC in the state of Texas, the law states that you should consult with an attorney. We highly recommend that you seek legal counsel that has the expertise and the knowledge necessary to help you establish this form of business structure. The Secretary of State does not specify a certain certificate of formation. Certain series of LLCs are permitted to use specialized names, structures, and assets through a single filing. Under Texas law, specifically, the Texas Comptroller will treat a series LLC as a single entity. You will have to register your business with the Secretary of State as a single entity but you will only need to file with this office once. An annual fee must be paid to a registered agent if you wish to operate your series LLC in Texas.

Next Steps…

If you are looking for a business structure that gives you the ability to have multiple assets under one single organization then consider forming a series LLC. This structure is perfect for business owners who have multiple business dealings and ventures. Business owners that have multiple enterprises may face different obstacles that other business owners that only operate one enterprise. For the business owners that have just one business, it is already a challenge to manage employees, administration duties such as legal and accounting, as well as everyday operating responsibilities. For a business owner that has multiple enterprises, this challenge can increase. It takes an incredible ability, personality and intellect to be able to have a variety of businesses. You may think that you can administer all of your businesses, like in the case of other business owners of this nature, but there is an easier way. For those who are embarking on multiple business ventures, consider establishing a series LLC. You will gain liability protection not only for yourself, but it will protect your other business ventures in a way that will help you gain peace of mind.

If you are looking to establish a series LLC, we would like for you to speak to one of our representatives from the Law Office of Yates and Associates. We will discuss in further detail and establish whether you should choose to create this form of business structure. Contact us to get started in your journey in becoming a business owner. 

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