By The Wyoming LLC Attorney TeamAug 14, 2023
The article explains that Arizona does not recognize Series LLCs, but business owners can form Series LLCs in other states for asset protection and flexibility. It provides information on forming and using Series LLCs, states that allow them, and tax considerations.
If you are an Arizona business owner, you may have heard of Series LLCs. Unfortunately, the state of Arizona does not recognize Series LLCs. However, this does not mean you can’t still benefit from a Series LLCs from forming a series in another state. Forming a Series LLC is an option that many business owners take advantage of because of the level of protection and flexibility it offers. If properly maintained, the Series LLC can be useful for both new business owners and experienced entrepreneurs. Before you can feel the full benefits of Series LLCs, you must understand how they work, which can be confusing. In this guide, we will explain what a Series LLC is, where to form them, how to form them, taxes, benefits, and risks.
Series LLCs are a particular type of LLC (limited liability company) where each series is a separate LLC. This allows for the unlimited segregation of assets and operations into independent series. Usually, each of them operates on its own with a different name, bank account, records, and possibly members and managers. Contracts are signed using the name of the series.
Series LLCs were first invented in Delaware to help the mutual fund industry avoid filing multiple SEC filings for different classes of funds by keeping these filings all under one umbrella while allowing the individual funds’ activities to be conducted separately. This concept is similar to that of the segregated portfolio company or protected cell company which exists in offshore countries such as Guernsey, the British Virgin Islands, Bermuda, the Cayman Islands, Mauritius, and Belize.
Currently, the main reason that Series LLCs are used is for the overarching goal of protecting against legal liability. If a lawsuit is filed against one series in the Series LLC, the other series will not be held liable and its owners are protected from personal liability. Debts and liabilities of each series are only enforceable against the assets of that particular series, not against any of the assets of the other series. This means that the assets are shielded and you avoid the risks associated with putting all of your assets into one LLC. This is without the inconvenience of setting up entirely new entities which can be expensive.
There are different procedures and paperwork from state to state, but the first step regardless is creating the parent, master, or umbrella LLC. You will need separate operating agreements and EINs for each series, but you only have to file articles of formation once. Additional series are sometimes referred to as child series or sub-LLCs. You can create sub-series in the future whenever the need arises, making this flexible and scalable to your business.
Arizona does not allow Series LLCs. Arizona amended its LLC statute in 2021 which meant that the series concept is not recognized for Arizona LLCs or LLCs organized in other states. This means that an Arizona creditor of the series of an LLC can get all of the assets of the LLC, even if it is a non-Arizona LLC that was set up in a state where a Series LLC is permitted.
This could be troubling for Arizona business owners or those who were hoping to set up a business in the state and are now wondering how to start a Series LLC in Arizona. Not being able to set up a Series LLC might put off new Arizona business owners who want to protect multiple assets, while national companies who use Series LLCs are likely to avoid Arizona.
Arizona is not the only state that does not allow Series LLCs, and there are even more states with confusing and conflicting rules over whether Series LLCs are allowed to operate there or not. This highlights the importance of hiring an experienced attorney to help you to get to grips with the rules that are in place in your location.
If you are an Arizona resident hoping to set up a Series LLC, you must do so in another state, such as Wyoming.
While some states do not allow Series LLCs, there are plenty that do, including:
This means that if you are hoping to set up a Series LLC you can do so in any of these states, and if you already have, you can operate within these states, given you follow all of their rules and regulations. LLCs can be formed in any state regardless of whether you have premises in that state or not, so even if you reside in Arizona, you could set up a Series LLC in one of the above states as long as your business will not have real estate, employees, or contracts tying it to Arizona.
In some states, the creation of LLCs is not allowed but they do allow Series LLCs that were created in other states to do business there. An example of one of these is California.
It is worth noting that this list of states is likely to change over time and they all have their own unique set of regulations, so, if you plan to DIY the setup of your LLC, it is vitally important that you do your research on the secretary of state website. Otherwise, Wyoming LLC Attorney can set up your series for you and will ensure that you are legally compliant.
Delaware was the first state to allow Series LLC with the Series LLC statute in 1996. As such, this state is often considered one of the best to set up a Series LLC. Delaware does require dual registration for those setting up from outside of the state, so it wouldn’t be suitable for someone setting up from Arizona, but there are low filing fees and franchise taxes in this state. You will only pay one franchise tax for the Series LLC per year instead of an additional fee for each series like in some states.
Wyoming is another highly business-friendly state. There are no strict reporting obligations or personal or corporate income tax. There are no franchise taxes at all. You can also set up a lifetime proxy to represent your shares or stocks if you want to remain anonymous. Another unique benefit is that under these state rules, you won’t need to set up separate bank accounts for each of the series.
Although the exact steps will vary from state to state, here we will outline some general steps that you should take when forming a Series LLC. You will first have to determine the name of the Series LLC, paying close attention to the rules of LLC naming in the state. The parent LLC usually has to have a different name from the sub-LLCs and you might have to ensure your name is not too similar to other businesses that have already been set up there.
Next, you are likely to require a registered agent who will receive legal documents addressed to the company. This person has to have a physical address in the state where you are filing the Series LLC and must be available to accept mail during business hours.
Then, there are of course many pieces of paperwork that have to be filed, usually with the secretary of state. The articles should state that the LLC can establish a series and you might have to fill out a separate form for Series LLCs. If you don’t do this step in the first instance, you will have to amend your operating agreement to establish a series later.
You will probably need an operating agreement for the parent LLC and each series. An operating agreement should outline the structure of the business, rules, roles, and provisions. You are likely to have to file articles of formation at this beginning stage but you probably won’t have to do this again for each series.
Series LLCs are often used by real estate investors who own a few properties because each series isolates and protects property from the liabilities of the other properties in different series. Companies with many branches or profit centers also use Series LLCs to shield each of their business operations.
To truly take advantage of a Series LLC, there are a few things that you should keep in mind. You can set up a new series whenever you see fit, but it will most likely need a different name, bank account, documents, and other assets. It can have the same members as the umbrella LLC or different ones. It must operate separately. You should ensure that your operating agreement has specific details to protect you, your business, and all stakeholders. Work out things like:
Keep these in mind for any new series you may create. Ensure you always follow the rules for LLCs in the state where it is registered and use the proper sub-series name on all documents and correspondence, such as lease agreements with tenants. You should also ensure that you file your tax return properly, which we will cover in the next section.
With your Series LLC, you can establish new profit centers relatively easily. Each of these will be protected from the liabilities of the other series and your personal liability will not be affected. This could be a brilliant opportunity to explore new avenues within your business, like opening a new store or purchasing another real estate property, for instance. Each series can have its own investment objective or business purpose.
There are some discrepancies when it comes to taxing Series LLCs. It is disputed whether each series is a separate entity for tax purposes. In California, for instance, each series is classified as a separate entity and must file its own tax return and pay LLC annual tax and fee. In other states, you file one tax return for the entire LLC including the series.
Under federal tax law, a Series LLC can file one tax return to encompass the parent LLC and all the series. However, this rule could change in the future, so keep an eye out for changing federal tax obligations.
Many benefits contribute to the growing popularity of this newer type of LLC. As we have already mentioned, it means that you are authorized to create a series within the LLC which are all separate entities for liability purposes. This means that any lawsuits or debts against one series are not liable against the assets of the other series. This offers business owners greater protection so that risk is limited and segregated, rather than putting all of their assets into one LLC which can become vulnerable to lawsuits and debts.
A Series LLC is much more convenient than having to create separate entities for each section of your business. Plus, this is likely to save you significant money on things such as legal and accounting fees. It is a flexible option that can allow you to expand your business. You might even be able to do this country-wide, given the state in question allows Series LLCs.
This can hold great benefits, particularly for real estate owners who have multiple properties that they wish to protect against potential liabilities or investment firms with multiple strategies.
There are some risks that come with Series LLCs. For instance, if you don’t transfer the proper name of the sub-series on paperwork and documents, you are less likely to be protected against lawsuits against one of the series. It’s important to be thorough and having multiple series can make this difficult. Plus, as we have mentioned, there are tax and other discrepancies from state to state, so it is important to be astute to the rules of the state you are in to ensure you are following them and don’t encounter issues.
Further, in Arizona, the concept of Series LLCs is not respected in court, so trying to operate with a Series LLC in Arizona from outside of the state will not protect your assets if you are met with a lawsuit from Arizona. This can be risky and you are never guaranteed legal protection for your Series LLC when operating in a state that does not allow them legally.
These risks can be mitigated by scheduling attorney time to properly examine your options and ensure your business is fully compliant. Before proceeding, we recommend you watch the following video Series LLCs to see if a Series LLC is right for you. If you decide that a Series LLC is right for you after watching the video, we still strongly recommend that you first speak with an attorney before ordering this product.