The Latest New Entity Type: The Series LLC

Person Signing Document Paper

The Evolution of Limited Liability Entities (LLE)


The last 15 or 20 years have witnessed a rapid evolution in entity types available for operating a business. For a couple of centuries, corporations were the major choice for a limited liability entity. Over the years, state corporate statutes, appellate case decisions, and tax regulations have made corporations a well-established, understandable, and predictable entity type.

Limited Liability Companies

Beginning in the late ‘70s in Wyoming through the mid–’90s in Delaware, several new types of limited liability entities have been created. These include limited liability companies, limited liability partnerships, limited liability limited partnerships, and, beginning in 1996, the amendment of the Delaware LLC Act to provide for a series LLC.

The Series LLC

Unlike a regular LLC that is a single legal entity with one set of owners (members) and one set of assets with each member having the same rights, obligations and ownership interests for all the LLC assets, a series LLC permits an unlimited number of “mini-LLCs” or series to be created, with the ability of each series to have different assets, purposes, business objectives, members or classes of members, and ownership interests.

Limited Availability of the Series LLC

Since 1996, only 7 other states have adopted statutes permitting the formation of a series LLC. The reason for its slow acceptance is for much the same as it was for the regular LLC: the entity type is new and tax regulations and case law decisions interpreting the series LLC statutes have lagged behind the enabling legislation. This uncertainty has discouraged widespread acceptance of the new entity type. Once the IRS adopted specific regulations for the tax treatment for an LLC, its popularity skyrocketed and is now a popular entity type in all 50 states.

Proposed IRS Regulations Under Consideration

As this article is being written in late 2010, the IRS has publicized proposed regulations for the tax treatment of the series LLC seeking public comment. When greater predictability of tax treatment is produced from new tax regulations, the popularity of the series LLC should increase, though 4 years after the adoption of the Delaware statute, there are virtually no reported legal decisions providing any clarification or certainty of series LLC statutes. Also, as this article describes below, the series LLC raises many additional issues that will remain unresolved even after more definitive tax regulations are adopted by the IRS.

Understanding the Series LLC Structure

A series LLC is essentially a group of separate LLCs contained within one master LLC entity. The Delaware Code describes it as follows:

“A limited liability company agreement may establish or provide for the establishment of 1 or more designated series of members, managers, limited liability company interests or assets. Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations, and any such series may have a separate business purpose or investment objective.” (Title 6 §18-215(a))

A Delaware series LLC has “the power and capacity to, in its own name, contract, hold title to assets (including real, personal and intangible property), grant liens and security interests, and sue and be sued.” (Title 6 §18-215(c))

If stated in the Certificate of Formation and certain recordkeeping and other requirements are met, the liabilities, debts and contractual obligations of any series can only be enforced against the assets of that particular series, not the assets of any other series or the master LLC entity itself. The members and their ownership interests, rights and responsibilities, provisions for admitting new members and terminating or transferring membership interests can be different in each series. The previous option for forming a series LLC, and the only option in states without a series LLC statute, is the formation of multiple LLCs with each LLC being able to have its own member, assets, etc. and not be responsible for the debts and obligations of another separate LLC entity.

The problem with the Delaware series LLC and virtually all of the other 7 states to date that have adopted series LLC statutes (Illinois being one exception), is that a series is not defined as a separate legal entity. Rather, it simply is invested with all the legal advantages of being treated as if it were a separate legal entity. This raises various issues (discussed later) that remain to be resolved.

Examples of How a Series LLC Might Be Used

One Entity with Multiple Related Business Operations

How would a series LLC be used? Let’s take a privately held company that’s a large volume manufacturer. It has its own retail stores to sell its goods and has its own fleet of trucks to provide transportation from the warehouses it owns to stores. If all operations were in a single entity, any liability arising from a trucking accident would expose all the company’s assets to potential liability.

Rather than the additional expense of forming, maintaining, and administering multiple LLCs or corporations, the company forms a series LLC with multiple series. One series manufactures the product. Another series owns and operates the retail stores while yet another series own the trucks and leases them to the company and hires and supervises the drivers. The last series owns the company’s real estate.

If the intent of the series LLC statutes are upheld when tested, any claim arising from the negligence of a driver should limit the claimant to the assets of the series that hires and supervises the driver and perhaps the series that owns the trucks, but not the other series that are established for separate purposes and had no involvement in the actions creating the claim. In short, a court would treat each series as if it were a separate legal entity for liability purposes.

Using a Series LLC for Multiple Investments

Here’s a far simpler and more likely illustration. An individual owns multiple real estate investment properties. Each property is a single asset in its own series. A claim arising out of any one property should not allow a creditor or claimant to reach the assets of any other series. If all properties were in a single LLC, all would be at risk for a claim arising out of any one property.

If one or more of the properties had different owners or ownership interests among the same owners, they could not be placed in a single LLC but could be placed in separate series because the owners (members) and their percentage interests in each series are not required to be the same.

How to Form a Series LLC

Forming a series LLC is essentially the same as forming a regular LLC. Articles of Organization are prepared and filed with the Secretary of State or equivalent agency in a state and a filing fee is paid. The Articles of Organization may have a checkbox signifying that a series LLC is being formed or it may allow or require the preparer to insert certain statutory provisions indicating that a series LLC is being created with specified rights and limitations set forth either in the Articles or in a separate written operating agreement maintained by the company.

The Essential Document: The Series LLC Operating Agreement

The main governing document is always the written operating agreement describing the master LLC and the characteristics of each series, but this is not filed with any government agency and is not a public record.

The Nevada Revised Statutes (NRS) are typical of the requirements for the Articles of Organization. Section 86.161(e) sets forth this requirement for the Articles of a series LLC:

“If the company is to have one or more series of members and the debts or liabilities of any series are to be enforceable against the assets of that series only and not against the assets of another series or the company generally, a statement to that effect and a statement:
(1) Setting forth the relative rights, powers and duties of the series; or
(2) Indicating that the relative rights, powers and duties of the series will be set forth in the operating agreement or established as provided in the operating agreement.”

Because the operating agreement is not a public record, it presents some substantial unresolved issues such as whether a creditor of a series LLC can be limited to a claim against the assets of only one series if the creditor was not made aware that the entity was a series LLC or that he was contracting with only one series within the master LLC. This and other unresolved issues are discussed below.

A Different Business Purpose for Each Series

Each series may have its own completely diverse business purpose or investment objective. One series could own one or more real estate assets while another may operate a retail business while a third series may have a portfolio of passive investments such as stocks and bonds. The only prohibited business purposes are typically for banking or insurance company operations. Additional series may be added from time to time to accomplish different objectives, each with its own set of members or classes of members and assets.

Tax Treatment Currently Unsettled

At the time of this writing, the tax treatment is unsettled for a series LLC both at the federal and state levels. Though state statutes provide that each series may operate as if it were a separate legal entity (though only Illinois affirmatively states that a series is a separate legal entity), this is not binding on the federal government which could classify each series as a partnership for tax purposes rather than allowing each series to choose its any tax classification for which it meets the necessary requirements.

The IRS issued proposed regulations in October of 2010 that would treat each series as a separate legal entity for federal income tax purposes regardless of whether a state LLC Act treated each series as a separate legal entity for state law purposes. This would require each series to obtain its own federal employer identification number (EIN) and file its own separate tax return for the appropriate entity tax classification it selected.

The proposed regulations, even if adopted, still leave many unanswered legal and tax-related questions.

Possible Advantages of the Series LLC

There are clear cost and administrative efficiencies by establishing a series LLC to segregate real property (and other) assets and businesses into their own series within an LLC for asset-protection purposes when compared to the cost of establishing separate, multiple LLCs for each property or business. Each specific real property in a multi-state or multi-parcel transaction can be placed into a separate series with liability limited solely to that property. This also helps to minimize initial start-up and formation costs, filing expenses, and state franchise fees and other charges (as well as annual maintenance, administrative, compliance and tax costs) that otherwise would be incurred with respect to the establishment of individual LLCs for each property and could amount to several thousand dollars.

It is far from certain that franchise tax savings will be achieved, particularly in states that don’t allow formation of a series LLC, if each series is treated as a separate legal entity for tax purposes. As an example, the California Franchise Tax Board (FTB) has taken the position that if a series is considered a separate legal entity and is doing business in California, it will be required to file its own California tax return and pay the $800 California franchise tax and other LLC entity-imposed fees and taxes. The factors that would classify it as a separate legal entity are the main characteristics that would induce a person to choose the series LLC: the members of a series are limited to the assets of that series and do not share in the income or distributions of other series, and the expenses of each series are paid only by that series.

Potential Risks and Unresolved Issues

Some unresolved tax and legal issues have been touched upon previously. Here are some other issues that remain to be resolved:

  • To confirm ownership of real property by a specific series, must a deed specify the series by name or is it sufficient for title to be in the name of the master LLC only and have the books and records of the LLC specify the series that owns the property?
  • If the master LLC is considered the legal entity and not an individual series, will a mortgage naming the series as the borrower create foreclosure problems for the lender because of a potential discrepancy between the record owner and the borrower?
  • Since each series can have different members with different assets and completely diverse businesses, could sales taxes be avoided by having otherwise taxable sales occur between series?
  • While states that don’t allow formation of a series LLC will likely apply the law of the formation state to strictly internal matters of the LLC, will non-series LLC states instead apply their own laws to treat a series LLC as a single entity to protect creditors and other third parties who are not part of the series LLC? Will the fact that a third party had no knowledge that it was dealing with a single series of a master LLC make a court more inclined to “pierce the corporate veil” to allow a creditor to pursue assets of other series?
  • Will one series in a series LLC be able to file bankruptcy proceedings and rely on the court treating its assets and liabilities as separate and distinct from the assets and liabilities of all other series?
  • Will a bankruptcy court require or allow each series to have its own bankruptcy counsel to protect a series against any claim that its assets and liabilities should be consolidated with all other series and the LLC treated as a single entity?


With all the legal and tax uncertainties surrounding a series LLC, the cost and administrative efficiencies are unlikely to be sufficient motivation for preferring a series LLC over multiple single LLCs. Clarification of federal income tax treatment by the IRS in the near future will give some impetus to the attractiveness of the series LLC, but will not resolve many of the remaining significant legal and tax issues, particularly for a series LLC with assets and/or members in states without a series LLC Act or with assets in multiple states. Until this cloud is removed, it is essential to obtain competent legal and tax advice before utilizing a series LLC.

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Robert Stenson

Robert Stenson

Robert Stenson brings more than 30 years of experience practicing corporate, general business, and real estate law to his work helping clients navigate the entity formation process. A Boston native, he earned his undergraduate degree from Georgetown University and then moved west to pursue his law degree at UCLA. In addition to his experience in large law firms and corporate environments, Robert has also launched several small businesses of his own — all of which inform his personalized and comprehensive approach to helping entrepreneurs.

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Person Signing Document Paper

The Latest New Entity Type: The Series LLC

The Evolution of Limited Liability Entities (LLE) Corporations The last 15 or 20 years have witnessed a rapid evolution in entity types available for operating a business. For a couple

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