If you are considering establishing a limited liability company (LLC) in Delaware, but are looking for enhanced legal protections, it may be worthwhile to consider doing a Series LLC in Delaware.
A Series LLC is a unique structure that allows for the creation of multiple “series” within one LLC, each with its own assets, liabilities, and operations. Under Delaware law, an LLC is allowed to be composed of an individual series of membership interests. In effect, each series is treated as a separate legal entity. This means the debts, liabilities, obligations of one series cannot be enforced against another series within the LLC. Such a structure can provide notable benefits to investors and business owners, particularly those with multiple real estate holdings. Nevertheless, there are potential drawbacks to the Series LLC. We discuss both the pros and cons of doing a Series LLC in Delaware below.
Pros and Cons of Forming a Series LLC in Delaware: The Pros
- Nominal start-up costs: When creating a Series LLC, you only need to pay the fees associated with creating one LLC within the state of Delaware. The series within the LLC is then established internally via the series LLC’s Operating Agreement.
- Single Franchise Tax payment: Regardless of the number of series within your LLC, the single entity only has to pay a single annual Franchise Tax payment of $300 to the state of Delaware.
- Single Registered Agent Fee: Delaware law requires companies to maintain a registered agent in the state. However, since the series LLC operates under one entity, only a single annual Registered Agent Fee is necessary.
- Operational Flexibility: Each series can have its own members, managers, and business operations. This is beneficial if you have multiple ventures or assets with different partners or management teams. You can easily add new series without the need for separate LLC filings.
- Simplified Management: A Series LLC may simplify management by keeping all series under a single LLC, reducing the complexity of managing multiple separate entities. You can centralize administration while maintaining legal separation between ventures.
- Legal protection due to siloed framework: When it comes to creating a Series LLC in Delaware, the key issue is a series LLC versus a traditional LLC. Rather, the key issue is whether your LLC would benefit from the siloed units within the Series LLC framework. For context, since each series is treated as a separate legal entity with its own assets, members and operations, that generally means the debts, liabilities and obligations of one entity in the series cannot be enforced against another series. For example, if one series is involved in a legal dispute, the other series entities can generally avoid getting embroiled in litigation.
Pros and Cons of Forming a Series LLC in Delaware: The Cons
- Series LLC Not Universally Recognized: A potential drawback to the Series LLC is that it is not recognized in all 50 states. In fact, only 20 states, plus the District of Columbia, formally recognize the Series LLC. This means if you don’t reside in Alabama, Arkansas, Delaware, D.C., Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Puerto Rico, South Dakota, Tennessee, Texas, Utah, Virginia or Wyoming, then you likely cannot form a series LLC in Delaware.
- Complexity in Administration: While management may be centralized, keeping proper separation of assets, records, and operations between series is crucial to maintaining liability protection. Failing to properly segregate assets or records could expose one series to the liabilities of another. Each series requires its own accounting and record-keeping, which may increase administrative costs and effort.
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- Tax Complications: Taxation of Series LLCs is still evolving, and the IRS has not provided comprehensive guidelines for their treatment. Each series may be treated as a separate entity for federal tax purposes, which could complicate tax filings. Other states may have different tax treatment for Series LLCs, which could lead to inconsistent taxation across jurisdictions.
- Legal Uncertainty: Another potential con of the Series LLC is that its unique structure has not been tried and tested in courts across the country. Even if each series maintained separate records, assets and liabilities, there is the risk that a court in another jurisdiction could potentially decide to ignore the legal separation authorized by Delaware law.
- Jurisdictional Tax Issues: Another drawback is that some states charge annual fees for each series within an LLC when the series LLC operates as a foreign LLC in their respective jurisdiction. For example, California charges $800 per series for foreign series LLCs registered in the state.
Looking for Additional Information About the Pros and Cons of Doing a Series LLC in Delaware? Contact an Experienced Business Attorney in Los Angeles Today!
If you are interested in doing a series LLC in Delaware, the Hakim Law Groupp can help. We are a corporate law firm geared toward helping entrepreneurs tackle complex legal and regulatory issues. Our firm was founded on the premise that experience matters – at every stage of representation of a company’s life cycle. We take pride in providing the very highest levels of representation in addressing the legal and business challenges facing our clients today, tomorrow, and in the future.
Our team of skilled and highly reputable business attorneys in Los Angeles have worked at top-tier international law firms and served as general counsel to major companies. This high level of diverse legal and business experience is paramount to our boutique approach.
For additional information or to schedule an appointment, please contact The Hakim Law Group at 310-993-2203 or visit www.HakimLawGroup.com to learn more.
