What is a Delaware Series LLC?
A Series LLC is a type of business entity that allows a business to have one “head” business and smaller businesses underneath it, all of which can be independent units. For example, a parent organization may be a new car dealership, but have smaller businesses they also own that do car rental, car detailing, and used car sales.
Why would you need a Delaware Series LLC?
The aim (and benefit) of a Delaware Series LLC is to legally divide these sub-businesses from a parent company, while still keeping them under the same ownership. This means that they are all legally separate, but can be managed by one overall business. In our example above, this would mean that the parent company, car rental business, and car detailing company would all be legally protected if the used car sales business was sued.
The benefits aren’t only in the legal protection a Series LLC offers, it also allows the Series LLC to be treated as a single entity when it comes to paying taxes, which helps cut down significantly on legal fees. As a Series LLC, you only need to pay one annual Franchise Tax fee ($300), instead of one fee for each LLC (which is also $300).
There are two types of Series LLC:
● Protected LLC: This type of Series LLC is essentially the “old” format of Series LLCs, in which you can create new LLCs simply by editing your Operating Agreement. This type of Series LLC does not address some of the additional issues that Delaware Series LLCs ran into, which led them to create…
● Registered LLC: This type of Series LLC requires each new series (business) to register with the Secretary of State by filing a Certificate of Registered Shares.
What are the pros and cons of forming a Series LLC?
The pros of forming a Delaware Series LLC are:
● Not costly to register multiple businesses: You can form just one LLC in Delaware ($90) and then any other LLCs can be formed by editing the LLC Operating Agreement.
● Lower taxes: You pay just one tax each year ($300) instead of paying it for each LLC, which can quickly add up.
● You only need to pay one registered agent fee: Similarly, you only need to pay one registered agency fee for your Series LLC, rather than one for each LLC.
● Legally independent: You can own and run multiple LLCs without having to worry about what happens if one gets into a legal battle or financial problems. If one company got sued, your assets in other companies could not be accessed, and the same goes for debt.
The benefits of a Series LLC are obvious, but it’s not faultless. Here are the cons you need to consider:
● If you got into legal trouble with someone or a business in another state, they may not honor the designation: Other states aren’t required to respect your Series LLC status in Delaware, so if you got into a legal battle with a company in Texas, the courts there will likely ignore the legal separation since they view a series LLC as a single legal entity.
● Taxes are different in other states: Similarly, other states charge annual fees for each business (aka Series) within the LLC, if the Series LLC operates as a “Foreign LLC” in their state. For example, California still charges $800 per series.
● You will find it difficult to acquire separate EINs: Most Series LLC owners want to acquire separate EINs (Federal Tax ID Numbers) for each business, but many people who have formed a Series LLC have found it difficult to do so.
● Other essential businesses and services aren’t familiar with a Series LLC: Many banks do not understand how a Series LLC works and may not allow you to open a bank account for each series. Similarly, you may find it difficult to find accountants and attorneys willing to work with you because they do not feel like they can offer adequate advice.
A Registered LLC offers some additional benefits:
● It receives a certificate of formation and a certificate of good standing for each series.
● It does, in theory, protect each series from another legally, regardless of where the legal dispute is taking place.
And one con:
● You must pay $75 in taxes for each series
How do you create a Delaware Series LLC?
Creating a Delaware Series LLC isn’t much more complicated than forming any other type of business. You need to submit a Certificate of Formation to the Delaware Secretary of State’s Division of Corporations online (or by mail if you prefer)and pay the $90 filing fee (plus $50 for a certified copy, if necessary).
Your business name must include the words “Limited Liability Company”, “LLC”, or “L.L.C.” like other LLCs, but you do not need to include the word “Series”. Like registering any other new business, the name must be distinguishable from other Delaware registered businesses.
If you’re forming a Registered Series LLC, you’ll also need to file a Certificate of Registered Shares for each series(separate business).
Do you need a registered agent for a Delaware Series LLC?
Yes – just like any other LLC, you’ll need a registered agent in Delaware in order to register there.
Should I choose a Protected Series LLC or a Registered Series LLC?
If you plan to do business solely with in the state of Delaware (including the professional services and financial services you use and hire), a Protected Series LLC should offer you the protections you’re looking for, while saving you additional work and annual fees.
However, if you plan to do any business with customers or professionals in another state (including financial services such as loans), a Registered Series LLC will give you more legal protection at a low cost and you’ll find it easier to work with customers and professionals in other states.