Incorporating as an LLC is a sure-fire way to insulate yourself from litigation harms and enhance your confidence in moving your business forward.
But as your business expands, the margin for error becomes narrower when one party’s mishap can put an entire organization in legal jeopardy. Having all of your assets bungled up under a single entity makes your business an easy target for creditors in lawsuits.
A Delaware series LLC, however, doesn’t have such Archilles’ heel and is actually better compared to its predecessor when it comes to tax and cost efficiency.
What is a Delaware series LLC?
As the name implies, Delaware Series LLC is a cross between LLC and Series. A series LLC allows you to form an unlimited number of “mini-LLCs” or series, each with its own set of assets, purposes, business objectives, members or classes of members, and ownership interests. The series LLC, with its many subsidiaries, is ideal for businesses with multiple brands and real estate owners who own multiple buildings.
A series structure is made up of the main LLC (master LLC) and individual series that branch off of it. Each series LLC maintains its own distinct dynamic and independence from the others. The fundamental idea behind these independent series is to create barriers between the organization’s various assets and to protect members’ identities, safeguarding them in the event that one series is ever sued.
Other dynamics such as corporate governance and taxation also follow the same principle. Therefore, it’s not uncommon for each series LLC to have completely different taxation status from each other.
Why form your series LLC in Delaware?
Delaware is the best state for forming a series LLC because it has strong legal systems and courts that welcome business, innovative legislation, and dependable liability insurance. For these reasons, many astute businesspeople and real estate investors have relocated to Delaware.
Another significant advantage of Delaware is the Court of Chancery, a dedicated equity court that allows businesses to resolve disputes quickly with a judge rather than a jury, giving the state one of the most precedents for judgments involving business disputes.
Advantages and disadvantages of series LLC
Easy to operate
Only one in the series LLC needs to be incorporated with Delaware’s state government, other series inside the LLC are then created using the operating agreement for the series LLC.
Note that you don’t have to submit said operating agreements to the Delaware Division of Corporations, giving you full anonymity along with strong asset protection.
Low startup cost
The Delaware series limited liability company can be set up for less money than putting up many LLCs, and you only need to pay one filing fee.
Low franchise tax
For yearly Franchise Tax, your series LLC only needs to pay $300 to Delaware state by 1st Jun every year, regardless of how many series it contains. For individual LLCs, you would have to pay a $300 Franchise Tax for every LLC.
A single tax return
Only the parent LLC, which comprises all of the cell LLCs, is required to submit a tax return. Still, this tax return can be complicated, requiring the owners to get a professional tax preparer.
Separated registered agent fee
The state requires that all Delaware businesses keep a registered agent. Considering that the series LLC is a single organization, only one registered agent fee is required each year. If you wanted to create several LLCs, you would have to pay several time for each LLC.
Legal separation from other series
Each series must be treated as a separate entity with its own protocols, resources, and participants. In most cases, one series’ debts, liabilities, and responsibilities cannot be imposed against another or the entire series LLC. As a result, the other series can usually continue to run even if one is embroiled in a legal battle.
Separate accounting and bank account required
Since each series of the LLC generate separate financial statements, it must have a different bank account and accounting system. This can be a significant administrative problem if the series contains multiple LLCs.
Separate EIN required
For income tax purposes, each series is treated as a separate legal entity, which means that each must obtain its own federal Employer Identification Number (EIN) and file its own separate tax return, which would add complexity to business management.
This business structure is not recognized in several places. So, a series LLC is sometimes treated as a separate LLC.
Also, the Delaware series limited liability company is unusual for many banks. It is difficult for any financial institution to be aware that each series is allowed to open a separate bank account. Not to mention, accountants and attorneys may not all be accustomed to dealing with this structure which can introduce some challenges during consultation.
According to the proposed rules for Series LLCs of the Internal Revenue Service published in 2010, each series will be recognized as a separate entity for tax purposes. In other words, each series may have a separate tax classification; for example, one series may be treated as an S Corp, while another series may be taxed as a C Corp, and yet another series may be taxed as a partnership.
As different series can choose different tax statuses, it is challenging to calculate and keep track of the tax of the entire Series LLC.
How to form a Delaware series LLC?
Requirements for starting a series LLC
To start your series LLC in Delaware, you need to satisfy the following criteria:
- Having a separate asset name for each series
- Obtaining separate EIN or tax ID numbers for each series
- Maintaining a registered office and appointing a registered agent for each series
- Filing a one-page Certificate of Formation including the name of the registered agent
Forming a series LLC is the same as forming a regular LLC. You must prepare a Certificate of Formation and file them with the Delaware Division of Corporation, as well as pay the filing fee.
You must either check the appropriate box in the Certificate of Formation to indicate that you are forming a series LLC, or insert certain statutory provisions indicating that a series LLC is being formed with specific rights and limitations set forth in the Articles.
Make sure you explain your series LLC’s organizational structure in the operating agreement, including the shareholders and managers of each series, as well as the tax structure that will be applied to each series.
Each series must apply for its own EIN with the Internal Revenue Service (IRS).
Filing Fee And Tax Payment Of Delaware Series LLC
The Delaware Division of Corporations will require US$90 as filing fees for the Certificate of Formation. Currently, the price remains the same regardless of how many series are created using the Operating Agreement.
Plus, a series LLC will only have to pay the Delaware Division of Corporations one annual tax. The tax is US$300 and is payable by June 1 of each year.
The annual tax for a registered series is also due on this date.
Now you know what a Delaware series LLC is and how it works. Keep in mind that this business form is not yet widely accepted in all states. Since it is a new concept, there is still some uncertainty about how courts may view a series LLC in terms of liability issues.
If you need further counseling on the structure or would like to look at other options for your case, feel free to drop us a line at firstname.lastname@example.org.
Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.
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