Editor’s note: At this time, ZenBusiness does not help with series LLC formations, but we hope this article will provide useful information for anyone thinking about starting one.
A series LLC is a relatively new business structure, introduced by the state of Delaware in 1996. In the years since, several other states have adopted their own series legislation, but it’s not a widespread entity classification. What is a series LLC? How do you form one? Where can you form one?
What is a series LLC?
A series LLC is a unique type of limited liability company (LLC) that allows one overarching LLC (usually called a parent LLC, master LLC, or umbrella LLC) to form smaller, separate series LLCs. In many ways, a series LLC acts much like a large corporation with subsidiaries or a holding company.
Often, creating a series LLC is more affordable and flexible than forming multiple distinct LLCs.
How to: Series LLC Formation
Starting a series LLC varies a little bit from one state to the next, but most states follow the same basic procedures. These steps are the basic framework you can expect, but we highly recommend consulting your state’s unique statutes for precise requirements. You may also want to enlist the services of a business lawyer.
Step 1: Determine eligibility
Determine if the series LLC is valid in your state. Series limited liability companies are actually a relatively new business structure. And while more and more states have introduced legislation to allow domestic series LLCs, not all states do. Before you get too deep into the process, you should check that a series LLC is allowed in your state.
States That Allow Series LLCs
The following states and jurisdictions allow for the formation of a series LLC: Alabama, Arkansas, the District of Columbia, Delaware, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, South Dakota, Tennessee, Texas, Virginia, Utah, and Wyoming. Puerto Rico also allows them.
A few states, however, may allow a foreign series LLC to do business in their state but won’t allow the creation of a domestic series LLC. California is the most notable example of this.
Step 2: Appoint a registered agent for your series LLC
Choose who will serve as your registered agent. A registered agent is an individual or business entity that accepts service of process and some other official state communications on your behalf. While this role sounds simple, it’s vital. Generally, we recommend hiring a service to fill this role since the registered agent must be present at their listed address during all regular business hours.
When you appoint your agent, be sure to clarify that you’ll be forming a series LLC. They may want to discuss terms and fees for representing the series. Read more on if each segment of a series LLC needs a registered agent.
Step 3: Choose a name for your series LLC
Decide what you’ll call your series LLC. When picking a name, there are several guidelines to keep in mind (most of which vary by state). For starters, your name should be “distinguishable” from the names of other businesses in your state — our business name search tool makes this step easy. You’ll also need to include a designator like “LLC” in your company’s name (different states allow different designators). Some states might even require you to include “series” in your name.
Many states have other restrictions, such as prohibited words, limitations on what characters you can use, and more. We recommend consulting your state’s guidelines for detailed naming rules.
Deciding on Your Naming Structure
In many states, Series LLCs are required to set up a naming structure for their series. Often, each individual series must contain the name of the parent LLC plus an additional component to differentiate it from other members of the LLC. For example, a Series LLC with different restaurants might use “Alicia’s Kitchen” as the name of the parent LLC. Her other locations might take regional tags like “Alicia’s Kitchen North” and “Alicia’s Kitchen South.”
There are lots of naming structure options available to you. But it’s important to pick one at the outset so you can maintain some brand consistency.
Step 4: File your Articles of Organization
Draft and submit your formation documents. Now that you’ve picked an agent and decided on your naming structure, you’re ready to file your formation paperwork. In many states, this document is referred to as the “Articles of Organization,” but this varies; the “Certificate of Formation” is another common title. Some states even have a specific formation document for series LLC.
No matter what the title of the form is, you can expect to provide a lot of basic information about your LLC. In your series LLC purpose statement (or in an additional provision that you add yourself) you should state that the LLC is authorized to create series, too.
Step 5: Draft a series LLC operating agreement
Create an operating agreement for the series LLC. An operating agreement acts like a constitution or charter for an LLC; it governs exactly how the business will be run. It defines the management structure, the distributive share of profits for each member, the taxation structure of the business, how to add or remove members, dissolution, and much more.
But for series LLCs, the operating agreement becomes even more important. Not only does the agreement dictate how each individual series operates, but it also defines the LLC’s overarching organization and the relationship between the parent LLC and each individual series. For example, a good limited liability company agreement typically establishes limited liability between each series and clearly defines the jurisdiction of each. This agreement might also describe the differences between memberships for each series.
Our guided operating agreement template can help take some of the guesswork out of this process.
Does a single-member LLC need an operating agreement as a series LLC?
A single-member LLC’s operating agreement is still vital, even though it doesn’t govern the relationships of multiple members. The operating agreement still defines the future of the business, detailing who will have title to assets of the LLC if the owner is incapacitated. And more importantly, it maintains the owner’s personal liability protection by clearly delineating the separation between the single member and the business itself.
And as a series LLC, the SMLLC operating agreement takes on additional importance because it will clearly define the business activity of each series and how they’ll keep assets separate.
Step 6: Establish a parent LLC
Designate which LLC in the series will be the parent LLC. Which LLC will be the parent LLC that governs all the LLCs under it? If you didn’t already designate this in your Articles of Organization, now’s the time to do so.
No matter what state you’re in, you’ll need to include this information in the series LLC’s operating agreement. You may have to designate this in another form, such as the formation documents or an additional filing. The specifics of this process vary from state to state.
Step 7: Add additional series
Add distinct series to the business. Once the parent LLC is set, you’re ready to assign new individual series to it. The exact method you’ll use to do this depends on your state, though. In some states, you’ll accomplish this by amending your Articles of Organization. Other states require a specific form to add a new series, often called the Certificate of Designation.
Please bear in mind that you will need to repeat the paperwork process anytime you add a new registered series to the business.
Step 8: Obtain an EIN for each series
Register for an employer identification number for each individual series. An essential aspect of running a series LLC is keeping the finances of each series separate. To do that, each series needs to have its own bank account. And to get a business bank account, you’ll most likely need an employer identification number (EIN). Many banks require this number to issue an account.
An EIN is simply a nine-digit code that acts like a Social Security number for a business. You can obtain one for free with the IRS. Once you have one for each series, you can get a bank account for your individual series.
After Creating Your Series LLC
Once you’ve established your series LLC, there are a few general guidelines you’ll want to follow to stay compliant and successful.
Maintain separation between each series
One of the biggest draws to creating a series LLC is that each LLC within the series is usually protected from the liabilities of the rest of the LLC. But to keep those liability shields intact, each LLC must be treated as a separate entity. That means separate books, separate bank accounts, separate financial records, separate member meetings — everything is distinct.
If there is any commingling of property, the whole series can be compromised. At worst, individual members might even be held liable. But by maintaining fully distinct LLCs, those personal asset protections can usually be maintained.
ZenBusiness is a financial technology company and is not a bank. Banking services provided by Thread Bank, Member FDIC.
Obtain necessary licenses and permits
Depending on your business type and the state you’re in, you may need to obtain certain licenses and permits for your business. And often, each LLC in the series needs to have these. For example, some states require a statewide business license. In other cases, an LLC might need to get an industry-specific license. Or each series might have to get a local license specific to the city they’re in.
In short, licensing requirements will vary, even within a series LLC. It’s imperative that you obtain the appropriate licenses for each series within the business to operate legally.
Comply with ongoing requirements
Every series LLC must comply with all ongoing requirements for LLCs in its state. This might include filing annual reports, paying annual taxes, and complying with all local and state regulations.
When you first start out, we recommend consulting with your state agency to learn what the filing fees and annual requirements are. That way, you’ll know exactly what to expect going forward.
Taxation as a Series LLC
The IRS has issued regulations to treat most series LLCs as separate entities from their owners for taxes, but some states may treat them differently. In most cases, the LLC itself isn’t a taxable entity unless it elects that status on the federal level. The most notable exception is an insurance business.
Typically, the members of each individual series will report the business income on their personal tax returns. That said, if one series elects to be treated as a separate entity for tax purposes (such as a corporation), then it will file its own income tax returns.
Benefits and Risks of a Series LLCs
There are definitely pros and cons to running a series LLC. Let’s start with the benefits. One of the biggest perks is the flexibility of a series; the structure lets one company act similar to a “holding company” without dealing with the complicated formalities of a corporation. In several states, it’s often cheaper to form a series LLC than a bunch of separate LLCs. Additionally, a series lets members pick some aspects of the business they’ll be involved in because they don’t have to all be members of each individual series.
Of course, there are drawbacks to a series LLC. One of the simplest ones is the fact that the series LLC as a business entity is so new. Courts are still deciding how to treat them in lawsuits. Tax treatment for series LLCs is sometimes unclear, especially at the state level.
It’s also important to note that expanding a series LLC into another state might not be possible. Some states allow foreign entities to qualify as a series LLC, but not all do. If you plan to expand into other states, another business structure might be a better fit.
Does each segment of a series LLC need a registered agent?
In general, the series LLC operates in much the same way as a standard LLC when it comes to registered agents. With any LLC, you’ll need to designate a registered agent to provide the government with a reliable point of contact for your business.
The registered agent’s role is to accept important document deliveries from the state — such as service of process, annual report notifications, etc. — on behalf of your business. Each time your registered agent receives a delivery, they immediately inform you of the delivery, then forward the document to your business location.
With a series LLC, you can typically just designate one registered agent for the entire series. If you’re using a registered agent service, it’s possible that the service will charge you more than it would for a typical LLC, but legally speaking, you do not need to designate a separate registered agent for each segment of your series LLC. However, we will note that if your series LLC operates in more than one state, you will need to designate a registered agent in each state.
Can you hire a registered agent service for a series LLC?
You certainly can, and we strongly recommend doing so. You are legally allowed to serve as your own registered agent in all 50 states, but this comes with some major disadvantages, such as privacy concerns and the risk of missing an important document delivery.
When you hire a registered agent service, your address won’t be listed as part of the public record. In addition, any service of process will be served through your registered agent service rather than your business, which eliminates the risk of being served in front of your customers or employees.
The biggest benefit in our opinion is that you won’t have to worry about being present at your business address for all standard business hours. The state will always deliver documents between the hours of 9 a.m. and 5 p.m., and if you serve as your own agent, you’re legally required to be available during those hours in case the state needs to deliver documents.
There are many reputable registered agent services available, and you can take a look at our extensive guide to thebest registered agent servicesif you’d like.
We can help!
At this time, ZenBusiness doesn’t do series LLC formations, but we do offer many other services to help you run and grow your series LLC. We can help you secure an EIN, get a registered agent, and stay compliant. Starting a business doesn’t have to feel like a massive undertaking. Here at ZenBusiness, we tackle the busywork so you can focus on what really matters: your business.
