Series LLC vs. LLC: Understanding the Differences
Have you heard about the Series LLC and been curious about what makes the Series LLC different from a conventional LLC?
In this article, we'll outline the key differences between a Series LLC and a traditional LLC, as well as the advantages and disadvantages of each.
What is an LLC?
An LLC (limited liability company) is a business structure that provides liability protection to its owners (referred to as "members") while also safeguarding the LLC's assets from the creditors of each member. The LLC is the most common business structure due to its straightforward setup, flexibility, versatility, and user-friendly nature.
See our Texas LLC overview for more information.
What is a Series LLC?
A Series LLC is a type of limited liability company (LLC) that has the ability to create separate and distinct cells or “series” within the framework of a single LLC. Each series operates like a separate LLC with its own assets, liabilities, business purpose, and even members.
Assets owned by one series are insulated from the liabilities of the other series. As such, the impact of a lawsuit or judgment against one series is confined to that particular series. Due to its unique ability to effectively compartmentalize assets (or businesses), a Series LLC can be used as an alternative to multiple traditional LLCs.
Learn more about the Texas Series LLC.
Key Differences
Cost
Availability
Legal Requirements
Every LLC is subject to a range of legal requirements and compliance obligations that need to be observed. A Series LLC, however, must comply with additional regulations to maintain each individual series's liability barrier.
For example, the Texas Business Organizations Code states that the liability barriers between series exist only (1) to the extent the records maintained for that particular series account for the assets associated with that series separately from the other assets of the company or any other series; and (2) if the company agreement and certificate of formation contain the proper notice of limitations.
Failure to comply with the Series LLC regulations will essentially strip away the benefits of a Series LLC, transforming it into a single traditional LLC without any protective barriers between the individual series.
Asset Protection
A Series LLC is a type of LLC (with all of the benefits of a traditional LLC) that can partition a single LLC into separate insulated cells or "series." Each individual series is similar to an LLC in that each series can do almost anything an LLC can do AND each series insulates the assets of a particular series from the liabilities of the LLC and the other series.
To illustrate the key asset protection differences, let's view it from a real estate investor's perspective. Suppose a real estate investor has multiple properties. The investor's options from least to most protective would be:
- Hold multiple properties in a single traditional LLC. Using a single traditional LLC has many benefits (i.e., the owners and their assets are insulated from the LLC's liabilities), but this option would be the least protective of the three because all of the LLC's assets would be at risk for any and all liabilities of the LLC. For example, anyone with an unpaid judgment against the landlord/property owner (the LLC) would be able to seize and sell all of the LLC's assets to satisfy their judgment.
- Form a Series LLC with multiple series (each series holds a separate property). A Series LLC can segregate its assets into separate series, thus insulating the assets of each series from the liabilities of the other series and the LLC itself. The Texas Business Organizations Codes states: "the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular series shall be enforceable against the assets of that series only, and shall not be enforceable against the assets of the limited liability company generally or any other series."
- Form multiple traditional LLCs (each LLC holds a separate property). From an asset protection standpoint, using multiple LLCs would be the most protective and conservative approach, as it is almost impossible for a creditor of one LLC to seize the assets of another LLC. Each LLC, however, will require (1) a $300 state filing fee, (2) a separate registered agent, (3) a separate bank account, and (4) a separate annual report.
Advantages and Disadvantages
The primary advantage of a Series LLC lies in its ability to create an unlimited number of series within the framework of a single LLC. Each series insulates its assets from the liabilities of the other series and the LLC. In other words, each new series is like a new LLC but does NOT require (1) a $300 state filing fee, (2) a separate registered agent, (3) a separate bank account, or (4) a separate annual report. Each new series can be created quickly (same day).
The primary disadvantages of the Series LLC are (1) limited legal precedent, (2) varied state regulations, and (3) heightened record-keeping obligations.
When to Choose a Traditional LLC
A traditional LLC is preferred to a Series LLC when:
- There is only one business asset.
- The assets of the business are located in a state that has yet to authorize Series LLCs.
- The owners of the various assets/businesses will be different.
- The to-be-protected assets are not valuable.
- The liabilities associated with the various businesses/assets are not substantial.
When to Choose a Series LLC
A Series LLC is preferred to a traditional LLC when:
- Multiple assets need to be insulated from each other.
- The assets are in Texas (or another state that honors Series LLCs).
- There is common ownership between the various assets/businesses.
- Bookkeeping will not be an issue.
Conclusion
Understanding the distinctions between Series LLCs and traditional LLCs is crucial when deciding between the two popular entity types. The Series LLC presents a unique structure that allows for the creation of insulated "series" within a single LLC, offering cost efficiency and asset segregation. While traditional LLCs provide simplicity and familiarity, Series LLCs offer enhanced asset protection by isolating liabilities within individual series.
The choice between the two depends on factors such as the number and value of assets, jurisdictional considerations, and bookkeeping preferences. Despite the benefits of Series LLCs, concerns over limited legal precedent, state-specific regulations, and increased record-keeping requirements highlight potential drawbacks.
Ultimately, the decision to form a Series LLC or a traditional LLC should align with the specific needs and circumstances of the business in question.
Zachary Copp, Esq.