A Delaware Series LLC Primer, For Growing Businesses…

A limited liability company has become the tool of choice for businesses that want to make the step up from a sole proprietor operation to a corporation. The benefits of this step include a more favorable tax situation and protection of personal assets. A series LLC is a unique tool that provides protection for multiple companies, or series, each of which is possibly protected from losses or liabilities that may plague other series. The designation of a Delaware series LLC refers to the state in which it was first allowed. The series LLC is in essence a parent company with one or more subsidiaries.

Series LLCs pay one filing fee and submits one income tax return every year if each cell member is also a founding member of the original LLC. Should new members be added to a new series within the LLC, the new cell then creates a new partnership and files a separate tax return for that series. Also, should one series incur liabilities, the loss cannot cross over and threaten the assets that are titled in other subsidiary operations in the same series. A business that holds real estate in a series LLC can avoid sales tax that is due on rents paid by the operating subsidiary.

Another positive aspect of a series LLC is that the process for adding or closing down of different cells is relatively uncomplicated. Amending the company agreement can allow new series to be added. Units can be dissolved by a 2/3 vote of the ownership, or a regular majority if that is outlined in the operating agreement. The process is fairly straightforward in that the governing board can amend the agreement as need be as certain business interests prosper while others wane.

There are limits to the series as well. It is very important for each series to be a self-realized company. Loans between cells need to be thoroughly documented. Business transactions between series need to be completed at fair market values using independent appraisals. Each series should have a unique business name in every county in which it owns property. Assets and operations need to be kept separate from the other series. No two series should be co-owners of the same property. Any series operating in the state of California has to recognize that each series has to file its own income tax statement. Commingling of funds between cells is an invitation to tax and liability troubles. The whole point of a LLC is to keep liabilities of one company from infecting the other.

The Delaware series LLC is a model that will fit many businesses who wish to grow into other markets or ventures while protecting the company as a whole. As long as the proper procedures are followed this can be a great tool for economic growth.

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