Advantages of Using a Series LLC

Why should I use a Series LLC?

Cost Savings

By establishing a Series LLC to segregate real property (and other) assets and businesses within an LLC, the costs and administrative inefficiencies of establishing separate, multiple LLCs for each property can be avoided. Each specific real property in a multi-state or multi-parcel transaction can be placed into a separate series with liability limited solely to that property. Establishing a Series LLC also helps to minimize initial start-up and formation costs, filing expenses, and state franchise fees and other charges (as well as in some cases, annual maintenance, administrative, compliance and tax costs) that otherwise would be incurred with respect to the establishment of separate LLCs for each property which could amount to several thousand dollars. In general, for Secretary of State filing purposes, the Series LLC is considered one entity that f les a single annual report and pays a single fee. For example, in Delaware, a Series LLC is treated as one entity for franchise tax and registered agent fee purposes, meaning that it is assessed one $250 annual tax and one registered agent fee, rather than the separate tax and fee that would otherwise be applied individually to separate LLCs.

Asset Protection

From an asset protection point of view, isolating risky assets and businesses into separate entities away from other assets is always a good idea. The most common use of Series LLCs is for a real estate

holding company with multiple parcels of real estate. Best practices from a legal liability position would be to form a separate LLC for each of the separate properties. This would generally require separate organizational documents, complete with separate articles of organization and periodic reports to be filed with the Secretary of State for each LLC. Filing fees in that situation can add up very quickly, especially if the LLCs also need to be admitted to do business in other states and then need to retain registered agents for each LLC in those other states.

Along came the series LLC. Instead of using with a separate LLC for each parcel of real estate, one Series LLC could be formed with a separate series designated for each parcel of real estate. These series may vary between them as to ownership, profit allocations, distributions, voting rights, and so on. Theoretically, only one Operating Agreement would be needed to govern the rights and obligations between these different series interests. The Series LLC structure provide for the creation of separate protected “series” within one limited liability entity without the need to create separate entities, thus avoiding the inefficiencies and costs associated with multiple related entities. The state Series LLC statutes generally provide that the liabilities of a particular series are enforceable only against the assets of that series.

Flexibility

In general, the state Series LLC statutes allows the LLC Operating Agreement to designate series of members, managers or LLC interests that have separate rights and duties with respect to specific LLC property or obligations. The LLC operating agreement could specifically provide for the establishment of various series with differing members, differing assets, and separate liabilities, with separate “sharing ratios” with respect to the percentages in which the members of a particular series participate and share in certain items, such as cash distributions and the allocation of profits and losses. Separate functions of a business, such as real estate management services on the one hand and rental services on the other hand could be segregated and performed by separate series within an LLC. The Operating Agreement also could provide that a member of a particular series may be a member of another series. In other words, the Series LLC provides a business the flexibility to operate one or more separate divisions or lines of business all under one entity.

Equity Incentive

An additional use for the Series LLC is to help serve as an equity incentive program in a business with multiple divisions. With each division divided into a separate series, the LLC can give the key employees of each series some sort of equity interest tied to that series only rather than equity interests in the entity as a whole. This is believed to reward employees at successful divisions and protects them from the potential downside of other divisions.

Merging Businesses

A further use for the Series LLC is to facilitate the combination of business operations of separate businesses. For example, rather than engaging in a traditional merger, two companies wishing to merge might form a Series LLC, with each company contributing its assets to a separate Series of the LLC, or with the owners of each company contributing their ownership interests to a separate Series of the LLC. The LLC Operating Agreement could be drafted to determine exactly which rights and responsibilities are shared and which are maintained separately. The Series LLC provides a very efficient and flexible structure for this sort of business merger.