A Series LLC is a form of LLC where each series is treated as a separate LLC. This means that each series acts and operates as its own business with independent membership interests, assets, and operations. However, California does not allow the formation of Series LLCs, but it recognizes them as a legitimate form of business, meaning that if created in another state, they can operate in California as foreign entities. This article provides a step-by-step guide on how to form a Series LLC and transfer it to California, as well as which states allow the formation of Series LLCs.
The most common business structure in California is an LLC, a limited liability company. LLCs are popular because they protect the owner of a company from any personal liability and debts that a business may incur. This protects the owners' personal finances as well as their reputation and is well-suited to new entrepreneurs with limited experience and legal knowledge.
There is also a type of LLC known as a Series LLC, that you may want to consider using when starting your business. In this article, we will provide an insightful guide to understanding what a Series LLC is, how to start a Series LLC in California, the benefits they provide, and how our company Wyoming LLC Attorney could help you with any legal queries.
What Is a Series LLC?
A Series LLC is a unique form of limited liability company that operates in a completely original way. To put it simply, a Series LLC is an LLC where each series is treated as a separate LLC, its own entity. Each series operates independently with a unique name, bank account as well as separate books and records. This happens when the articles of formation specify that they allow for unlimited segregation of membership interests, assets, and operations into independent series.
This essentially means that each series acts and operates as its own business and has been completely compartmentalized in the eyes of legal legitimacy and the way they operate. The series is separated as LLCs to protect the legal liability of each series as individuals. This means that if a lawsuit is filed against one series, the others will continue unaffected and free of legal concerns. This can be a great benefit to newly formed LLCs and essentially offers more protection.
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.
Does California Allow Series LLC?
Each state in the United States of America has different rules and understandings when it comes to LLCs. Their separate governments have different rules and regulations that must be abided by when conducting your business in their state and these will vary depending on where your business is registered. The state of California does not allow for the formation of Series LLCs. This means you cannot form, register and operate a Series LLC that was created in the state of California.
However, California does recognize Series LLCs as a legitimate form of business. This means that if you were to create a Series LLC in a state that does allow for the formation of LLCs and transfer your Series LLC to California, the state will allow it. California allows foreign LLCs, those from another state, to register as well as conduct business in their state, it just cannot be formed there.
Which States Allow Series LLCs?
A Series LLC is a creation of state law and can only be formed in states that legally permit it. Below is a list of all of the current states in the United States of America that allows for the formation of a Series LLC under their state law:
- District of Columbia
- North Dakota
- Puerto Rico
All of these states allow for the formation of a Series LLC under their governing state law. This means that if you wanted to operate a Series LLC in California, you could form it in one of these states that allow this formation. Then transfer the registration to California, where you could then continue to conduct your business. The most favored state to form a Series LLC in is Delaware. This is mainly because it was the first state to acknowledge and accept Series LLCs so it has the most amount of experience with its conduction and has a strong reputation of only a few bankruptcies.
How Do You Establish a Series LLC?
Forming a Series LLC can be a lengthy process but it is straightforward. We have composed a step-by-step guide on how to form a Series LLC and establish a series below:
1. Name your Series LLC – the rules for naming your Series LLC will vary depending on the state but as a general guide we have a few recommended pointers to consider. These are:
- Use the phrase ‘protected series’ within the name of each company.
- Name the parent LLC, the Series LLC/master LLC, in a way that distinguishes the difference between this and the child series, the individual protected series.
- Include the name of the parent LLC in full in each of the child series.
- The assets each child series holds should be included in the name of the child series.
2. Choose a registered agent – this is a person/business that receives service of process, other legal documents, and official communications from the state on behalf of the business.
3. Document your Series LLC – whether this is necessary will depend on the state you register your Series LLC in.
4. Create a Series LLC operating agreement – this is a legal document outlining the ownership structure and each member's roles within the LLC.
An important thing to remember is that when forming a Series LLC, it must be declared in the articles of organization. This must state that an LLC is allowed to establish a series.
In California, you must follow these steps to form a Series LLC under the registration of another state, one that accepts the formation of Series LLCs. You then want to transfer the registration of this Series LLC, of Delaware for example, back to California as a foreign entity.
How To Use a Series LLC
When forming a Series LLC, you want to use it appropriately. It’s best to utilize each series as an individual. Treat them as separate entities to compartmentalize each element of your LLC. This will allow you to handle each series separately and have different members of your team in charge of different series. This will help your Series LLC to operate more smoothly and efficiently.
To completely do this, you want to give each child series, or sub-LLC, its own bank account, name, and records. This will further distinguish each series as its own entity and insist that it should operate as one. This means that if there is any legal trouble, the other series will not be affected as you have established each series as separate with separate rules and expectations. Each series should also have a name that states what it does and indicates its involvement in the master LLC in California.
How Do Series LLCs Pay Taxes?
Although each series operates as its entity, especially in the eyes of the law, taxing is still quite simple when it comes to Series LLCs. A Series LLC owner would file federal taxes in the same way that an LLC does, there is no difference. This means that the Series LLC owner only needs to file a single tax return as the main LLC.
This is because the earnings and losses of each series will flow through the master LLC so any tax issues and filings should be filed as one as well. It is still one company, despite their legal separation, so their finances should still be considered as one subject when it comes to paying federal taxes. Of course, this helps to avoid the over-complication of handling a Series LLC finances.
For every series that operates in California, you must also pay an annual tax of $800 per series. Keep in mind that you do not need every series of your master LLCs to be registered and operating in California as long as they are registered in the state they are operating in.
What Are the Main Reasons for Forming a Series LLC?
There are many reasons why one may consider opting for a Series LLC as the structure of their business. A Series LLC does offer a lot of benefits and some of these are listed below:
- Flexibility – the main reason for forming a Series LLC, is the flexibility it offers. This means that with a Series LLC, you get much more flexibility in terms of deciding how to split the management and financial rights. This flexibility is available across the entire LLC and each series that operates in California allowing you to decide and vary its structure.
- Cost savings – this was one of the original benefits and although a Series LLC may not be as cost-effective as it once was, there can still be savings as the approval of funds for each series can take less time and expense.
- Holding company opportunities – this is the logical option for a holding company that typically doesn’t operate its portfolio business.
- Real estate liability protection – this is useful for property developers who own multiple properties.
The Risks of Series LLCs
Although forming a Series LLC has its benefits, there are also many risks to consider. Some of these are:
- Series LLCs are not acknowledged in all states which are limiting – although California doesn’t allow for the formation of them the state still accepts them as valid foreign entities. However, this isn’t the case for all states which may cause issues.
- There are still some concerns around taxation – the federal tax laws of Series LLCs are not clear in every state.
- There is no clear guidance on bankruptcy – no one knows how it would work if one series would have to declare bankruptcy and how this would impact the other series.
LLCs can be a great structural choice for your business in California however, a Series LLC may offer more complications than necessary. Due to California’s non-acceptance of the formation of a Series LLC and just its acknowledgment as a foreign entity, a Series LLC may not be the best choice for business in California as it would require a lot of altering back and forth and possibly re-registering. In this scenario, a regular LLC or corporation may be the best option if you are set on beginning your industry in California.
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. Schedule attorney time with Wyoming LLC Attorney to get valuable legal advice.