By The Wyoming LLC Attorney Team
Aug 14, 2023A Colorado Series LLC is like having multiple LLCs under one umbrella, offering significant asset protection. This means that if one series' assets are threatened by creditors or lawsuits, then the other series' assets will remain safe and untouched. To form an LLC of this nature in Colorado, understanding the cost involved, the benefits it offers, and the specific requirements, including the operating agreement considerations.
In this article, we look deeper into what a Series LLC is, how Series LLCs operate in Colorado, including how they are impacted by taxes and the necessity of filing an periodic report for compliance. We also discuss how you can use them, whether as a single member LLC or with multiple members, and the main reasons and risks of forming Series LLCs. Additionally, we touch upon the importance of conducting a business name search to ensure the uniqueness and availability of your chosen name for the Series LLC.
A Series LLC is a limited liability company that can create multiple 'series,' or separate legal entities, under it. It acts as a parent-child structure for your business. You start with the formation of the 'parent' LLC, which acts as the main entity for your investments. Then you can form as many 'child' LLCs under it as you want, with each series having its own separate legal status and assets that are not part of the parent LLC's assets. The series is separated as individual LLCs with the overarching goal of protecting against legal liability for the whole structure. Therefore, if a lawsuit is filed against one series, the other series will not be held liable.
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.
The beauty of this structure is that it requires only one initial filing (the Articles of Formation) and then amending the master operating agreement whenever you add another business to your chain. So, if you have 10 businesses under one ‘parent’ LLC, it's still only going to take one filing plus 10 amendments to make sure everything is legally sound and compliant with state regulations.
The Colorado Series LLC is a good option for businesses that want to create a holding company, operating as multiple LLCs within that same holding company. A benefit of using this type of business structure is that it allows you to reduce any liability you may have by separating each LLC into separate legal entities. This means that if one of your companies becomes involved in a form of liability or has financial issues for example, it will not affect the other LLCs within your series.
Here's a list of all the states that allow Series LLCs:
While Colorado does allow the formation of Series LLCs, the best states to form one in are Delaware, Texas, and Nevada.
In Delaware, there are favorable courts, legal protection, and operational benefits. If you're looking to set up an LLC in Texas, you'll find low-maintenance bookkeeping requirements as well as privacy laws that make it one of the best states for a Series LLC. Finally, if you're looking for a state with no taxes or privacy concerns but still want to take advantage of all of the benefits associated with an LLC, Nevada is an excellent choice.
There are a few steps to take when learning how to start a Series LLC in Colorado:
Setting up a series is relatively easy, but there are some things to consider before you get started. First, decide on the name of your Series LLC. Your name must comply with LLC naming rules and individual state requirements. The parent LLC must also have a distinct name from its child LLCs. The full name of the parent company usually has to be included in every series name, so creditors and investors can understand which is the parent company and which series belongs to it.
You then have to appoint a registered agent for the LLC. Most states require a registered agent for formal businesses, so this is a crucial step. The registered agent receives all legal documents and usually has to be a resident with a business address in the state the LLC is filed.
To form a Series LLC, you have to file the Articles of Organization. Some states have a separate form for Series LLCs, but most do not. The Articles of Organization state that the LLC can establish a series.
To form a series, you must amend the operating agreement to formally establish a series. In Colorado, each series must be treated as a separate entity for tax purposes and must maintain separate bank accounts and other assets, and must operate separately from the parent LLC. A series can have the same members as the parent LLC however you can choose to have different members for each series.
The LLC operating agreement should have specific details to protect the business and its owners. Examples include the ownership percentage, managerial structure, voting process, and other details that you wish to include in your operating agreement. You can set up multiple series in your LLC by naming each series as "Series A," "Series B," etc., in your operating agreement. Each series can have different ownership percentages, managers, voting rights, and other terms that are consistent with the needs of your business model.
A Series LLC structure can be beneficial if you want to create a separate entity for each of your businesses or projects, or if you have multiple investors who want a stake in your company.
There are a few benefits to using a Series LLC. One is that it limits your personal liability. The legal barrier the Series LLC creates helps to prevent any lawsuits, bankruptcy, or settlements against your business. It also helps to further protect your personal assets. Using a series helps to further protect assets by placing each property into a separate ‘child’ LLC which helps to significantly reduce the chance of any lawsuits or settlements.
The Colorado Series LLC is treated as a single entity, which means that only one tax return is submitted. Earnings and losses of the series pass through to the main LLC. This means that as the Series LLC is classed as a pass-through entity, a Series LLC owner chooses how they get taxed at the federal level. At a state level, it's slightly different. Series LLCs are state-designated therefore regulations vary from state to state on how to pay taxes.
Every company will have a different reason for wanting to form a Series LLC. Some include:
The main reasons for forming a Series LLC are to save costs and save on the costs of forming lots of individual LLCs. When you form a Series LLC, it's one payment of fees to initially set up the Series LLC. You can then create as many sub-LLCs within that series as you want.
The Series LLC gives members more flexibility on how they want to split the management of the business and finances. This allows them to be able to form a new series with the option of choosing how many members they want in it. This means they can have some series as single-member LLCs, and some series as multi-member LLCs. This flexibility benefits both the ‘parent’ LLC and the Series LLCs because it allows members to have greater control over their business.
If you own multiple properties, the Series LLC can be very useful. Each property can be associated with a separate series, so if anything goes wrong in one particular series, your other assets will not be affected. This is why Series LLCs are especially useful for real estate investors who own multiple properties. If you have a portfolio of rentals or commercial buildings, forming a Series LLC may make sense for you.
A Series LLC is a unique legal entity that provides several benefits to holding companies. It allows the owners of the holding company to own multiple businesses without having them be owned by the same entity, thus reducing the risk of one business' assets helping the debts of another.
A Series LLC also allows for greater flexibility in ownership structure for holding companies, as each business can have its board of directors and management team. This allows for more autonomy within the holding company and allows each business unit to operate independently while being under one umbrella company name.
The main risk of Series LLCs is that it's a fairly new concept. There are still many unknowns about the liability protection it offers and whether or not it will be upheld in non-Series LLC states. Another state is not required to recognize the other series of an LLC and could just recognize the 'parent' series, creating confusion as to which set of rules apply.
Series LLC is a relatively new type of legal entity that has not been well-tested regarding bankruptcy proceedings. The courts view LLCs as corporations under their Bankruptcy Code so have to apply corporate bankruptcy rules to this type of entity. However, there are some differences in how the structure is treated under state law, which has the potential to create additional challenges for creditors who are trying to recover any debts after an LLC's bankruptcy filing.
State law usually sees the parent LLC and the series as one complete entity. However, it's important to note that, for purposes of asset ownership and liability allocation, state law sees the parent LLC and the series as completely separate entities. This means that if just the series or the parent LLC filed for bankruptcy, it's not clear what the outcome would be.
While it's true that forming a Series LLC was generally easier and less expensive than forming several LLCs, times are slowly changing. Some states charge identical filing fees regardless of whether an LLC or Series LLC is being formed, which means the cost to form a Series LLC is now sometimes equal to or greater than the cost of forming multiple LLCs in that state. As more states copy this practice, it could become more difficult for businesses to take advantage of the lower costs associated with Series LLCs.
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.