#1 Guide on Series LLC Before You Convert
What's more complicated than an LLC?
It's a Series LLC. If you desire to be or know an investor with multiple real estate businesses, there is a need to know whether you should protect your business with Series LLC. This term might be new to some people but is very predominant in real estate ventures.
Our below guide will cover a guide on it and compare the differences to help you decide whether you should convert to a Series LLC.
Differences between Series LLC and LLC
Series LLC for tax and administrative purpose
If you have multiple LLCs now, you will need to file tax and maintain each LLC separately. Instead of managing them separately, Series LLC gives you an opportunity to manage your different business ventures under the same umbrella.
Once you registered with your state agency that allows Series LLC, you can now set up mini LLCs that will operate under the master firm. Each of the series is organized through the Operating Agreements which define the structures in detail. Each mini LLC will have its own separate members, bank details, operating rules and so on.
In several states, you can easily add or dissolve LLC without public filing and just amending the LLC agreement. Under Delaware law, any particular series may be dissolved by 2/3 approval of the ownership interests, or a simple majority if provided for in the operating agreement. The benefit is clear, you can save on the LLC setup fees and paperwork which is useful if you are running a franchise whereby each entity form or dissolve rapidly due to business operations.
Takeaway #1: In theory, Series LLC reduce the number of paperwork in term of registration with the state agency.
An LLC in Series LLC may or may not affect other LLC in the Series LLC
The below 18 states that allow some form of Series LLC Concept:
- Delaware (Limited Liability Company Act)
- District of Columbia
- Indiana (http://www.in.gov/sos/business/2426.htm)
- Missouri [(http://www.moga.mo.gov/mostatutes/stathtml/34700001861.html])
- Montana (Montana Limited Liability Act)
- Nevada (Nevada Revised Statutes)
- North Dakota
- Puerto Rico
It is notable that states like California and Louisiana do not recognize or allow the formation of Series LLC in their state. What happens when a Series LLC operating in a state that doesn't allow Series LLC concept is liable for disciplinary action? Does the liability protection for Series LLC still hold?
States like Delaware is also still silent on whether each series is a separate entity. Each venture or LLC may not be protected from the liabilities of the other LLC and usually treated as a separate entity.
In the 2013 case of Alphonse v. Arch Bay Holdings, LLC, the United States Court of Appeals for the Fifth Circuit interpreted the application of the Louisiana Unfair Trade Practices Act to alleged violations by a Delaware series LLC. The court held that Louisiana law (which does not recognize the series LLC concept) would apply to determine whether a particular series of an LLC or the entire LLC would be the proper party to the litigation.
Takeaway #2: There are risks affecting the whole LLC when operating in states that don't recognize the Series LLC Concept.
Convert LLC to Series LLC
If you decide to convert to Series LLC, you need the Articles of Organization and the Operating Agreement. The state-issued form that must be used to amend an LLC’s Articles of Organization is typically short and requires only basic information. Delaware, for example, requires only the name of the LLC and a description of the amendment.
The amendment should identify the series and state that no series is liable for the debts or liabilities of the other. The amended Articles of Organization must be filed with the Secretary of State along with the applicable filing fee. Your LLC should similarly amend its Operating Agreement, although it doesn’t need to be filed with the state government.you will need to prepare the documents.
The alternative is to liquidate the original LLC instead and create a new Series LLC from scratch if you have a complex structure or relationship, accounting in place.
We hope that we manage to condense the complicated Series LLC into the key differences for your consideration. If you have any questions, feel free to leave a comment and we will find out more for you.