Series LLCs: Part II: Pros and Cons of a Series LLC
Series LLCs, being relatively new, have been the subject of discussion, promotion, and criticism. Here we discuss some of the pros and cons of forming a series LLC.
The pros of forming a series LLC significantly outweigh the cons. Some of the main reasons people gravitate toward this structure are as follows:
- Only one entity needs to be formally created in a state with a series LLC statute, often in Delaware, and it may be possible to create cells without filing any additional documents, depending on the type of cell.
- Each series is typically treated as a separate entity with its own assets, members, and operations. The debts, liabilities, and other obligations of one cell or of the parent typically cannot be enforced against another cell or the series parent LLC. As a result, if one cell is involved in a legal dispute, the other cells can typically continue operations without impact.
- While some states do not have their own series LLC statute, many states recognize series LLCs clearly through their filing documents for foreign registration of business entities allowing those in a state without its own series LLC statute to still use the series structure.
- Series LLCs can own membership interest in a variety of business entities just like a traditional LLC, so if a state does not recognize series LLCs and the parent LLC is a series LLC, the parent can still do business in the state by creating a traditional LLC which may be placed in the same holding structure.
- In some states a foreign registration statement will apply to each cell of the series LLC. In other words, only a single filing is typically needed to qualify the full series LLC family of companies to do business in a given state. Similarly, only one registered agent for service may be required for the whole series LLC family. Along with the elimination of filing fees at formation, these cost savings can be significant.
- Protected cells, which do not require a filing with the state for creation, have the added benefit of reducing administrative start-up fees associated with each separately fenced business asset.
- In Delaware, where most foreign series LLCs are created, no additional annual franchise taxes are owed to Delaware for any protected cells.
- While separate governance and banking must still be maintained to fence assets and liabilities, only one tax return is required for the series structure, thereby eliminating the need to file multiple returns as would be necessary if multiple, separate entities were formed to fence the assets and liabilities.
Some prior issues with creating a series LLC have resolved themselves, but these issues remain:
- A Certificate of Good Standing cannot be obtained for a protected cell of a series LLC. If a Certificate of Good Standing is required, the cell must be registered in order to get it. This drawback is resolved with creation of or conversion to a registered cell.
- Series LLCs are still new. As a result there is not a lot of case law interpreting them. It will be important to keep an eye on such developments if a series is formed. We at Jordon Voytek monitor for such changes for our clients.
- Not all banks have adapted to the series structure. Plenty of banks do recognize series LLCs and grant loans to cells. To open a bank account, banks typically ask for an EIN, an operating agreement, and resolutions, and the series parent and each cell has those. It is just important to confirm in advance of adopting the structure that you will have no banking issues.
- Not all attorneys and accountants are familiar with series LLCs and how to serve them. Having said that, we know great accountants in Pennsylvania, Ohio, and Alabama who are regularly serving series LLCs across the country.
Considering the many pros and the few cons, there are many situations where a series structure may be the preferred solution. As a result, in those instances, we still recommend the series structure as a great vehicle to fence assets and liabilities and for serial investors looking for a simple, and relatively private, structure for more complex holdings. The lawyers at Jordon Voytek are available to discuss your corporate organizational needs and to help you determine the best structure for your individual situation.
Jacquelyn Jordon Core and Michael T. Voytek are Founding Partners at Jordon Voytek, and April Slokan Oliverio is Of Counsel to the firm. They focus their practice on mergers and acquisitions, and corporate structuring and restructuring, including the formation of series LLCs. They are available to assist businesses of all sizes with general counsel services, meeting their day-to-day legal needs. Please contact Jacquelyn directly at Jacquelyn@JordonVoytek.com, or by phone at 304.777.0790, Michael directly at Michael@JordonVoytek.com, or by phone at 203.360.6232, or April directly at April@JordonVoytek.com, or by phone at 304.216.2119.