Series LLC vs. LLC: Which One Do You Need?

Series LLC vs. LLC: Which One Do You Need?

What Is a Series LLC & Why Might I Need One?

What’s the difference between a traditional LLC and a Series LLC? Is one business entity better than the other? What about forming multiple LLCs? Is that different from forming a Series LLC? 

One key feature of an LLC common in both series and traditional is asset protection. Do you plan to form your business as a traditional Limited Liability Company, which is what millions of business owners do every year in an effort to protect — and separate — their personal assets from their business assets, or are you planning on forming multiple LLCs under a parent company — also called a Series LLC?

Two examples where the latter would work include multiple real estate properties or separate investments. If you fall under these two examples, you would want protection from liability and risk between the individual companies. Here, we'll compare traditional versus Series LLCs, discuss where and how a Series LLC functions and which type of LLC might be beneficial for your company.

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What Is a Traditional LLC?

The first Limited Liability Company, or LLC, was formed in Wyoming in 1977. It took the IRS 11 years to recognize this type of business formation. Since then, LLCs have grown in popularity with an average annual growth of 20 percent. One key factor contributing to their popularity is that they provide small business owners with protections when it comes to safeguarding personal assets. This means that a business owner can only lose money invested in the business and will not personally be required to pay back debts or cover damages when facing a lawsuit. Many business owners also prefer forming their business as an LLC due to the flexibility it offers, low-cost involved and less complicated tax preparation, especially when it comes to single-business tax reporting. 

What Is a Series LLC?

A Series LLC gives you all the same benefits as a regular LLC, but it serves as a sort of "umbrella company" with additional flexibility and protections for multiple companies or lines of business within your overall operation. But who uses a Series LLC? One example is rental property owners. A Series LLC can give rental property owners a way to separate their real estate investments from one another. Businesses that operate multiple channels of revenue (or have separate teams or divisions in different states) may determine that a Series LLC is the best fit for their company as well.

Even though Series LLCs were created to simplify investment portfolio management, this type of business structure is still a relatively new approach to LLCs. And Series LLCs are currently available in 22 states, including Delaware, Nevada, Texas, Virginia and Wyoming. 

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So, depending on the state in which you reside, the Series LLC option may not be available. If it is available, each "Series" of the LLC should be added and listed in the Operating Agreement.

Series LLC vs. LLC

Forming an LLC can be a straightforward and overall uncomplicated process. Although there are a number of requirements that business owners need to make when it comes to legally forming their business entity, millions of individuals have formed an LLC in the United States in the last 30 years.

Still, the work does not end with the business formation and the real work begins once the business is up and running. That said, small business owners tend to have their hands full with just one LLC. But what if the company, or even the product lines and services, expand to the point where the business can potentially find itself branching off in different directions? Should you form multiple LLCs or can you just operate under one LLC? Here are the pros and cons of each option.

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One LLC

Many, if not most, businesses owners form one LLC. But if there is a benefit in branching off, one option instead of creating a new LLC is to create a DBA (Doing Business As) or even multiple DBAs.

Pros: 

  • You can have one LLC with multiple DBAs that fall under the same company.
  • A DBA can help identify your company with the business, as well as provide product and service branding.

Cons:

  • A DBA is not a formal business structure or even a separate business entity but rather an extension of your company.
  • Since it’s not a separate LLC, there is a risk that each DBA will be liable for damages since they all fall under the same LLC.

Series LLC

Depending whether or not your state allows a Series LLC, the other option to protect assets from one business entity to the other is by creating separate LLCs for each business.

Pros:

  • It limits the risk between each business by providing separate liability.
  • A Series LLC may make loan and bank approvals easier.

Cons:

  • Compared to a single LLC, accounting and tax filing becomes more complex and costly.
  • Depending on the state, you may have to pay annual fees and costs for each LLC and also meet compliance requirements for each, which can become more complicated and costly.

Benefits of Forming a Series LLC Over a Traditional LLC

A Series LLC can be a great way to separate your business assets and divide the responsibilities for investment and debt in different areas or divisions of your company. A Series LLC allows you to form multiple “mini-LLCs,” so to speak, and operate them all under a single umbrella company. Each LLC in your series would have its own members, bank accounts, debt and other unique qualities that make up a typical LLC. Operating in this fashion can also help you disperse and minimize any risk and liability that could be shared if you operated all your businesses under one single LLC.

A Perfect Case for a Series LLC

If you're like the property owner we mentioned above, you might want to operate each of your rental properties as separate legal entities within a Series LLC. This way, if one tenant decides to sue you for something that happens on your property, your liability would be limited to that one property — not everything you own under the entire company. A Series LLC can also afford you certain protections when it comes to debt. Having your debts and obligations separated among your various channels of revenue can be a smart move. This makes it simple for you to manage the movement of your revenue and payment of debt.

From an administrative perspective, forming a Series LLC can make a lot of sense. First of all, the cost and paperwork involved with forming several separate LLCs versus starting one Series LLC can be significant. But remember that the filing fees and availability of a Series LLC option will vary from state to state.

If a Series LLC is available to you, it’s definitely worth thinking further about whether your business model could benefit from it. Especially if you are a startup or individual who wears many hats in your company operations (as lots of entrepreneurs do these days), forming a Series LLC could save you plenty of time and administrative effort that you could devote to growing your business.

Getting the Right Advice

Whether a Series LLC or regular LLC is the best choice for you, it's good to be cautious and seek professional advice before making any major business decision. So if you have a complex business that you want to simplify and operate as efficiently as possible, you might want to meet one-on-one with a local CPA or seek the advice of a company like Incfile that specializes in LLC formation with state-specific expertise. The right decision could save you money, time and years of legal headaches.

 

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