Series LLC Operating Agreement: Everything You Need to Know

The Series LLC operating agreement is an innovative concept that unites a series, aka cells, within one LLC. The concept was originally introduced by the State of Delaware.

Benefits of a Series LLC Operating Agreement

In Delaware, the law states a series limited liability company may be created using individual series of membership interests. When this type of business is formed, it is referred to as a Delaware series LLC.

Delaware series LLC benefits include:

• Retention of its own assets
• Conduct its own operations
• Have its own members
• Pursuit of business objectives different from the other "cells"

By working as an independent business with the series structure, each cell is insulated from issues relating to other cells such as creditors, litigants, or claims by members.

The Delaware series LLC is similar to that of the "segregated portfolio companies" used in other countries such as the British Virgin Islands, the Cayman Islands, and any other country not under U.S. jurisdiction.

When forming a Delaware series LLC, no matter how many series/cells it contains, there is only one filing fee.

Series LLCs are considered one business and pay only one Registered Agent and one annual Franchise Tax fee versus paying separate fees and taxes associated with an individual LLC.

The formation of an LLC protects personal assets from obligations and debts incurred by the business.

Requirements for Forming a Series LLC

• Each series/cell should have a bank account separate from the other cells. The series should also have a separate asset name, tax ID number, or a separate EIN (Employer Identification Number).
• If a sub-LLC (cell) purchases real estate, the deed needs to be in the name of that individual cell.
• The same rule holds true for any contract, notes, and loans to avoid confusion.
• Transactions between series should be treated as if they were with outside entities.
• Any loan transactions between series LLCs are to be interest-bearing and well documented.
• Assets and operations are separate from each series.
• Assets can be owned by only one series.
• Each series must have enough capital to support its business individually.

Information About a Series LLC Operating Agreement

• An Operating Agreement is prepared to outline the rules and regulations that will govern the operation of the series LLC.
• It is recommended that an attorney take on the job of drafting the agreement. An accountant is also needed to explain the tax laws associated with a series LLC.
• It is not a requirement to publicly file the Delaware Series LLC Operating Agreement.
• The option to add or remove a series can be done by amending the Operating Agreement. This can be done at any time. There is no limit to the number of series that can be included.
• Generally, a series LLC is required to have only one registered agent and file a single annual report.
• It is recommended that each sub-LLC/cell apply for a "doing business as" name. Also referred to as a DBA, it is an assumed or fictitious name.
• The records for the DBA should list the owners of the series, so there is no confusion about which series LLC is to be held responsible for any debt or other issues.

Things to Consider When Forming a Series LLC

Series LLCs are a popular option, but there is still some uncertainty surrounding rules and regulations.

• Delaware law states each series is treated separately in legal matters but whether the assets and liabilities would be considered separate in other states that allow series LLCs would depend on that state.
• Regardless of whether a Delaware Series LLC was properly formed, structured, and operated outlining the assets and liabilities of the individual series, it is up to the jurisdiction of that state whether to recognize those assets and liabilities as separate as adhered to under Delaware law.
• The tax treatment for individual series is not a certainty.
• As of January 2008, the IRS (Internal Revenue Service) notes individual series within the LLC will be taxed separately.

FAQS

Q. Which states offer series LLCs?

A. Along with Delaware, the following states currently allow the formation of series LLCs: Wisconsin, Utah, Texas, Tennessee, Oklahoma, North Dakota, Nevada, Montana, Minnesota, Kansas, Iowa, Illinois, the District of Columbia, and Puerto Rico.

Q. Where do I get a DBA?

A. In the county or state where the property resides.

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