How do you form a Series LLC?
The state laws governing Series LLCs vary greatly. In general, however, they provide that a Series LLC is formed in the same manner as a traditional LLC. That means it files a document generally called either Articles of Organization or a Certificate of Formation with the state’s business entity filing office, such as the Secretary of State.
The main difference is that the formation document of a Series LLC will have to include a statement that the LLC may establish series which are protected from the liabilities of other series and the LLC itself. Some states have separate forms for Series LLC formations. Some do not.
LLCs are also subject to the federal Corporate Transparency Act (CTA). Under the CTA an LLC is required to file a beneficial ownership information (BOI) report with the Financial Crimes Enforcement Network unless it qualifies for an exemption. LLCs formed in 2024 must file within 90 days of receiving notice that the formation is effective. That drops from 90 days to 30 days in 2025. (LLCs formed before 2024 file by January 1, 2025).
A Series LLC is subject to all of the provisions of the LLC law as a traditional LLC except for those that specifically apply to Series LLCs—such as the recordkeeping and liability limitation provisions. That means, for example, a Series LLC will be required to appoint and continually maintain a registered agent and file an annual report.
How do you form or establish a series?
There are three basic approaches the states take to forming a series. In some states the series is established in the Series LLC’s operating agreement. No filing is required. In other states a series is formed by filing a document, called, for example, a certificate of designation or a certificate of registration, with the state filing office. Delaware and Texas take a third approach. They have two types of series—“protected series” which are established in the LLC agreement with no filing required, and “registered series” which require the filing of a certificate of registered series with the Secretary of State.
Naming requirements for a series also vary by state. In general, the states that require a filing have naming requirements. Typically, the name of the series will have to contain the name of the Series LLC and the series’ name itself will have to be distinguishable on the state records from the names of other series and other domestic and foreign entities.
Other notable differences in the state laws include whether each series will have to file an annual report and pay an annual fee, whether a certificate of good standing can be issued for a series (which might make it easier to get loans or business partners) and how process can be served. (Although in general the Series LLC’s Registered Agent is the Registered Agent for each series.)
Perhaps the most important provisions of the Series LLC laws are those that set forth what has to be done in order for a series to have that liability shield. Again, you have to check the specific statute but in general (1) the formation document must provide notice of the limitation of liability of the series the LLC may establish, (2) the operating agreement must state that the assets associated with a series are the assets of that series only, and (3) the books and records of the Series LLC and each series must account for the assets associated with each series separately from the assets associated with the Series LLC itself or any other series.
Failure to properly maintain separate books and records can result in a loss of the liability shield. (This is why the Series LLC has been said to be a poor choice for people who are bad at bookkeeping or don’t have good accounting advice.)
What are the main reasons for forming a Series LLC?
There are a few common reasons why organizations choose to form a Series LLC. These include the following:
Cost savings
One of original advantages of using a Series LLC rather than forming separate LLCs was the savings in formation costs. This can still be the case, however with the recent trend in state laws requiring the filing of a document and the payment of fees to form each series, this may not be the advantage it once was.
There can still be savings, though. For example, in the mutual fund field it is thought that obtaining the regulatory approvals for a fund within a series can be done with less time and expense than if each fund was a separate entity.
Flexibility
One of the major advantages of an LLC over other entity choices is that it is so flexible—giving the members many options in deciding how to split the management and financial rights, with few statutory mandates. That flexibility exists in the Series LLC and in each series.
Holding company opportunities
The Series LLC structure is a logical option for holding companies, which typically own but do not operate their portfolio businesses. With a Series LLC, a holding company can hold all individual businesses under a single umbrella while mitigating the risk of one business’ assets being used to satisfy the debts or liabilities incurred by another of its businesses.
Real estate liability protection
Series LLCs can also be a useful tool for real estate investors who own multiple properties. Under this scenario, each property can be associated with a separate series within the Series LLC. If one series is involved in litigation—say, for example, hazardous wastes are found there—the assets of the series associated with the other properties cannot be used to pay for clean-up costs. Or so the theory goes.
What are the risks of operating a Series LLC?
While theSeries LLChas clear advantages under some scenarios, there are also risks and unresolved issues of which to be aware.
For one, the tax treatment of Series LLCs and series by both the IRS and state tax departments is unclear.In addition, federal bankruptcy laws offer little guidance on Series LLCs, as it is unclear whether a Series LLC must file bankruptcy as a single entity, or if each individual series can file for bankruptcy without affecting the rest of the series or the Series LLC itself.
Another uncertainty is whether a series could be required to file a BOI report with FinCEN. Reports must be filed by “domestic reporting companies”. And the term ‘‘domestic reporting company’’ means any entity that is: (A) a corporation; (B) a limited liability company; or (C) created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe. It is not clear if a series meets this definition.
Other question marks involve how series will be treated under the securities law and how to perfect a security interest in the assets of a debtor series under the Uniform Commercial Code (particularly where the series is established in the operating agreement without a registration filing).
As mentioned above, comingling funds or assets is a significant risk for Series LLC operators, especially those with less experience. Assets must be maintained and accounted for separately. However, what is less clear is how serious the violation of the separation requirement has to be to result in a loss of liability protection. Will any minor error be enough? Does it have to be material? And can it be cured before liability is assessed?
Another significant question mark is what happens if the Series LLC and/or a series does business in a state other than its formation state, particularly if it is a state that does not authorize the formation of Series LLCs or address the qualification of foreign Series LLCs. There are questions as to how the Series LLC qualifies to do business, whether and how a series qualifies, and most importantly will the courts of the foreign state respect the liability shield authorized by the formation state.
Factors to consider before forming a Series LLC
All of the advantages and risk factors of using a Series LLC must be considered before deciding whether this structure is beneficial for any particular business or venture. Although formation of a Series LLC is relatively simple, it is a complicated structure that, unfortunately, is not well understood. An experienced corporate service provider can assist with filing the formation documents, filing the BOI reports if required, providing the Registered Agent, filing annual reports, obtaining certificates of good standing and certain other compliance needs. Still, the advice of legal experts familiar with the Series LLC is highly recommended to ensure the requirements to maintain the liability protection are met.
It’s also important to understand that the liability protection offered by the Series LLC is not ironclad. The Series LLC has yet to be vigorously tested in court. This means the extent of the liability protection offered is still somewhat unclear. Those seeking more certainty in terms of risk mitigation may wish to look elsewhere. This is especially true of those who anticipate doing business in states other than the state of formation.
Conclusion
Series LLCs offer a variety of interesting benefits and protections. Yet they are also a fairly new business structure—and one that is still not widely understood. The Series LLC has not been widely tested in courtrooms, which means that its liability protection benefits remain somewhat theoretical. Those operating a Series LLC in states outside their home state may wish to proceed with caution, as it is difficult to predict whether the courts of those states will respect the liability shield.
Overall, most business owners who want to segregate their assets in order to provide a liability shield will still find the process of using separate and distinct LLCs to be the safer and simpler option. At least that’s true today. But as the laws evolve and the business and legal communities get more comfortable with the concept, the Series LLC may become a much more popular option.
