By The Wyoming LLC Attorney Team
Aug 14, 2023In the diverse world of business structures, the Series LLC stands out for its unique ability to form an LLC with segregated assets and liabilities under one umbrella, providing nparalleled asset protection and operational flexibility. However, it's crucial to note that New York currently does not recognize this innovative structure, presenting a significant consideration for entrepreneurs exploring their options. This article delves into the mechanics of a Series LLC, from the initial business name search to understanding the specific requirements and benefits that accompany this form of business entity. Despite the state's stance, understanding how to establish a Series LLC, the associated cost, and the nuances of tax obligations can offer valuable insights. We'll also touch on the importance of a comprehensive operating agreement, the role of annual reports in maintaining compliance, and the potential for a single member LLC within the series framework. For those looking to navigate the complexities of Series LLCs, this guide illuminates the path forward, even as we await potential changes in New York's legislative landscape.
A Series LLC, or Series Limited Liability Company, is a business structure that was first introduced in Delaware in 1996. This structure was invented 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.
A series LLC is structured so each series is effectively its own individual company, working with its own assets and own management away from the rest of the company. It consists of an “umbrella” LLC that runs the rest of the series, with the other ones being junior LLCs underneath the main LLC in the series. Each is its own distinct legal entity, acting on its own from a legislative, financial, and taxation perspective. Although Series LLCs were initially established to set up mutual funds for investors in a series of states and territories, with innovative entrepreneurs expanding on the concept the structure is utilized for more and more reasons.
Whether or not you’re allowed to form a Series LLC depends on the state that you are in, as it is a matter of state law rather than federal law. The State of New York does not allow businesses to form a Series LLC. You can, however, choose to either operate a standards LLC in NY or you can form an out-of-state Series LLC as an alternative in one of the states that allow this type of organization.
Although New York doesn’t allow you to form a Series LLC, several states do support entrepreneurs who are considering the creation of a Series LLC as an alternative to more traditional business structures. Some of these states operate under different rules and regulations, with the states that you can form a Series LLC including:
Although these are the only states where you can form a Series LLC, there are a few states where you can register a Series LLC without having to initially form the company in that location. The first of these is California, allowing you to take full advantage of the opportunities that Silicon Valley can offer and benefit from the advantages of a Series LLC also known as SLLC. Some territories such as the Bahamas also allow the creation of SLLCs.
There are a few steps in the process of forming an SLLC, and getting each one right means that your organization falls within the law. Some of the main steps in the process of forming a Series LLC include:
The first step in the process is preparing all of your information. This starts with working out the ideal name for your series, with some states having mandatory naming requirements such as including the term “LLC”, “Limited Liability Company” or any other abbreviation of those terms. After getting the legal necessities done, focus on choosing a name that adequately suits the company. Select a name that suits your company’s identity and goals as a priority.
Every SLLC requires a Registered Agent, so choosing your Registered Agent early is a must. This individual or company receives any correspondence from legal or financial bodies on behalf of your series. There are three different options for choosing a Registered Agent, with some choosing someone that is a resident in the state, some choosing a third-party company that is resident in the state, and others choosing a company that has the right to do business within the state. If you’re seeking a greater level of anonymity through an SLLC, choose a Registered Agent service to avoid getting a company member’s identity involved in the registration.
Finally, file your company with the state. Depending on the state that you are in, the process differs significantly, with a Series LLC in New York not being possible. Choose the state that you register in carefully, as different states have different laws regarding the anonymity that your company is permitted and the specific tax laws surrounding an SLLC. By filing in the right place, there can be significant financial advantages in addition to all of the existing benefits of using an SLLC.
Different companies have unique ways of using a Series LLC. While some organizations can focus on using a Series LLC with each organization holding individual packages of real estate, others can separate their national corporation into state-by-state entities to keep them separate and ensure that there is no risk to the overarching organization. Due to the wide range of benefits that using an SLLC structure has to offer, implementing the structure in a way that suits your company is ideal rather than following an existing template or strategy.
When you are using an SLLC, ensure that you work with experts from a few fields. Legal experts and LLC lawyers can help you to make sure that your structure is legally sound, and accountants can look after your company and make sure that your financial structure is correct. By using experts in your business structure, you increase your chances of success significantly and reduce the potential for liability even further than before.
As a business organization, a Series LLC still needs to pay taxes. There is a process for an SLLC to pay its taxes, which begins with keeping thorough records of the accounts for an SLLC and its business. This means tracking all of the assets that fall over the Series LLC’s control, the funds that the SLLC has at all times, and any debts that the organization has. By tracking assets and funds as thoroughly as possible, you have a more accurate idea of the profits and losses that the company makes and can calculate the right tax rates, all while being certain that the SLLC’s accounts are independent of the rest of the organizations in the series.
After completing a thorough accounting process, Series LLCs pay their taxes in the same way that a standard LLC does. Each individual Series is its own independent entity in the eyes of the IRS, which means that they pay taxes as its own body without dealing with the accounts of any other organization in the series. Keep the funds from every LLC in its own bank account where possible, as although sharing an account is possible it makes calculating taxes for the SLLC a more complicated process.
Different people form SLLCs for different reasons thanks to the wide variety of benefits of working within this structure. Some of the main reasons for forming a Series LLC in New York include:
The management and staff of a Series LLC have protection from liability for the company when using an SLLC structure. This is an especially useful tool for people working in the real estate sector that own several properties, with each property or group of properties being a part of a separate Series LLC. As each SLLC is its own individual legal entity, a larger company losing one set of its real estate holdings to a natural disaster such as a tornado or earthquake, or even legal issues like having to pay a court settlement, the individuals associated with the SLLC and the other companies in the series have no liability and don’t face financial harm.
An SLLC offers the people operating the business a greater level of privacy in comparison to running another business. Using a Series LLC means that you don’t need to disclose who the members of the organization are, instead simply using a Registered Agent for the service. This agent doesn’t need to be a member of the company and can be related to the business as a third-party service, which means that you retain the privacy of the organization and its members and still have the benefit of separating all of the parts of the company into their own individual entities. When you’re looking to form a company that doesn’t reveal the identity of its members, a Series LLC is the ideal structure for keeping your anonymity.
Some large organizations have branches and independent groups in different states or even around the world. An SLLC makes greater degrees of separation between the independent branches of the company, keeping the assets for each of the branches independent and allowing distinct parts of the business to thrive on their own and get taxed in line with their performance. Companies with a heavily decentralized structure can use SLLCs to increase the independence of every part of the group and incentivize better performances from each section of the organization.
When you are running a Series LLC, knowing all of the risks of running one of these organizations is essential. This helps you to resolve all of the issues you have relating to a Series LLC and prepare for those that you’re not yet dealing with. Some of the risks of forming a Series LLC include:
The idea of the Series LLC is a relatively new one, the first state to accept the Series LLC was Delaware in 1996, with states adopting the concept as time has gone on. For example, the most recent state to adopt the structure was Indiana as recently as 2016. Thanks to the recency of the developments, there is relatively little case law surrounding the SLLC. If there were to be a legal issue, there are no guarantees that your organization would be protected by existing case law, which means you could face a financial risk if your SLLC were to be the first to deal with these issues.
The nature of SLLCs means that different organizations are registered in states where they were not founded in. This means that business owners can find themselves dealing with multiple different state laws, adding even further complexity to the way that an SLLC works. Although this isn’t an immediate issue that every series will face, having a legal expert ready to provide your company with support is ideal in the event that something happening is legal in one state but a grey zone in the state where the organization was initially registered.
There are more complexities around accounting when working with a Series LLC. Every individual series benefits from having its own set of accounts and assets, as this makes tax and spending regulations far simpler. Not only does an SLLC need to have an expert accountant to keep this information separate, but it can lead to relative inflexibility. Thanks to the regulatory space between all of the Series, there is no transfer of assets between branches without recording everything. If a single branch has issues, this needs to be accounted for and can stop the central organization from providing support.
Before proceeding with creating a Series LLC, 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.