Series LLCs: the Good, the Bad, and the Ugly
WHAT IS A SERIES LLC?
Think of it as a parent company. You file one LLC registration with the State of Texas, then you can create "child” companies under the umbrella of the parent by simply filing an “Assumed Name Certificate” (aka a DBA) for each Series (aka “child company”).
WHAT ARE THE BENEFITS OF USING A SERIES LLC?
LLCs, in general, are valuable for 2 primary reasons:
1. Asset protection. If your business gets into trouble, an LLC helps ensure that the only assets at risk are the assets of the LLC. You personal assets are better protected, and the assets of your other businesses are better protected.
2. Better tax options. With an LLC, you can take advantage of tax classifications and deductions that will help you keep more money in your business.
This brings us to Series LLCs.
Benefit #1: save $275 per series under the parent company
Series LLCs were originally born for the real estate industry. Picture someone, let’s call her Beth, who has multiple rental properties. Before Series LLCs were created, a prudent attorney would recommend that Beth create a separate LLC (at $300 a pop) for each property to make sure that Beth’s multiple properties (aka business assets) are protected if there are legal issues with one property. Remember, separate LLCs mean asset protection for your other businesses.
With a Series LLC, instead of filing a separate LLC registration for each property, Beth can file one Series LLC registration ($300) and then file an Assumed Name Certificate ($25) for each property under the Series.
Benefit #2: taxes for one company instead of a bunch of companies
The other “benefit” is desirable for some, undesirable for others, but it’s worth mentioning regardless.
Back to Beth. If she created a separate LLC for each property, she would have to deal with accounting and taxes for each entity separately. With a Series LLC, she only pays taxes for one company, the parent company. Each Series under the parent company is a separate entity from a liability perspective, but every Series and the parent company are considered one company when it comes to the IRS.
WHAT ARE THE DOWNSIDES OF USING A SERIES LLC?
To be frank, they’re kind of a pain in the butt, and where the courts are concerned, they’re still largely theoretical.
Downside #1: series LLCs are still largely untested in the courts
Let’s face it, the “asset protection” benefit of an LLC only really comes into play when you’re in legal trouble. This means courts and judges. Unfortunately, there is not a lot of case law about Series LLCs. Maybe because the owners of Series LLCs are just such upstanding citizens they never end up in court. But this means that judges don’t have a lot of guidance on how to handle a Series LLC. So the “asset protection” benefit is still largely theoretical.
Downside #2: the naming convention for an Series is a bit longwinded
The best guidance for naming a Series LLC says that it goes something like this:
[name of series], a P.S. of [name of company]
*P.S. stands for Protected Series. The information in this document is for Protected Series. For more information on Protected vs Registered Series, consult with an attorney.
Company name is: Excellent Enterprises LLC
Series name is: My First Series
Full name is: My First Series, a P.S. of Eager Enterprises LLC
And that’s the legal name that would need to go on every contract or binding document.
Downside #3: banking is difficult with a Series LLC
First, many national banks will not accommodate Series LLCs. I’m talking banks like Chase and Bank of America. They won’t open bank accounts for a Series LLC. We’re not entirely sure why. Maybe it’s because they’re untested in the courts. Maybe because they’re still new enough in Texas that banks aren’t sure about the financial governance around them.
Second, the banks that will open a bank account are often unfamiliar with how a Series LLC works, so you may get an account opened for the parent company, but it will likely be difficult to add a Series to the bank account or open a new account for a Series. And your run of the mill banker likely won’t be familiar enough with Series LLCs to do what you need to do.
One question we get a lot on the topic of banking with a Series LLC: why would I need to open another bank account apart from the parent company?
Answer: each Series can have different members from the parent company and the other Series LLCs. If you create a Series LLC with different members, and you want them to be able to make withdrawals or contributions to the funds for that LLC, you’ll need a separate bank account to limit their access to the parent company’s funds.
Downside #4: many professional vendors aren’t sure how to handle Series LLCs
For each Series you create, you may need professional services. And you will likely encounter no shortage of confused expressions when you show them the legal name of a Series LLC. You may have trouble finding an accountant. You may have trouble finding a bookkeeper who can handle the bookkeeping for each Series and the parent company. If your series needs to apply for any licenses or certifications, you may have trouble with the agents handling your applications.
Downside #5: they are not yet recognized in all states
Currently only 14 states allow Series LLCs. So if you’re planning to operate in more than one state, you’ll want to do some research and maybe consult a couple of business attorneys (one for each state) before deciding on a Series LLC.
WHAT DO YOU HAVE TO DO TO MAINTAIN A SERIES LLC?
Your Certificate of Formation and Company Agreement must have specific language in them in order to use your LLC as a Series LLC, so if you want to move forward with a Series LLC, consider speaking to an attorney who can file your registration and prepare your company agreement with the appropriate language or who can amend your LLC registration to include the appropriate language.
Otherwise, each Series functions like an independent LLC meaning:
1. Each Series has its own name, and there are specific rules about the naming of a Series;
2. Each Series can have its own set of members, and they can be the same, have overlap, or be entirely different from the parent company and the other Series;
3. The members of each Series need to agree to a new company agreement, so you’ll want to consult a lawyer for a new company agreement for each Series;
4. Each Series must either have its own bank account or detailed bookkeeping that clearly traces the money in and out of each Series and the parent company.
Essentially, each Series runs like an LLC and will require the same work and almost the same legal costs as an LLC. The only difference is the filing fee ($25 for a Series v $300 for an LLC).
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Author: Ashley Hymel, attorney and cofounder of The Corporate Legal Ltd. Co., published 08 Nov 2023.