When To Convert Your LLC to a Series LLC

Currently, 16 states, the District of Columbia and Puerto Rico allow businesses to form series LLCs. Arkansas, Virginia, and Nebraska have passed the Uniform Protected Series Act, which provides a comprehensive framework for the creation and protection of series LLCs. If you own an LLC, you may wonder, what is a series LLC? Does it afford more protections than a typical LLC, and if so, should you consider converting your entity into one?

What Is a Series LLC?

Typically, a limited liability company affords the owners, or members, protection from liability for any debt, lawsuits and other burdens the business incurs. Instead of collecting on a debt or judgment from the owners, the person or entity seeking remuneration can only go after the assets that belong to the LLC. The owner’s assets are off-limits. However, all the assets that belong to the LLC are fair game.

When you initially form your business, an LLC may afford all the protection you need. After all, your business’s assets may be limited to a few computers, a work vehicle and your bank account. As your business begins to grow though, this may change, and the LLC may begin to acquire assets with significant value, such as real estate, heavy equipment, and capital contributions. At this point, you may wish to protect each individual asset within your LLC. A series LLC allows you to do this.

A series LLC essentially serves as an umbrella entity under which you can shelter multiple business entities. Those business entities are made up of assets, and only the assets in a single series are subject to creditors. A series LLC can serve as a useful tool for keeping members, assets and other business interests separate but under a single body.

Pros and Cons of a Series LLC

As with any business structure, a series LLC comes with its advantages and disadvantages. On the one hand, you can enjoy all the flexibility that comes with the separate operation of each individual entity. This is by far the most significant and obvious benefit of forming a series LLC. Each entity under the umbrella entity would have all the same elements of a typical LLC, such as memberships and accounts, which would make it easier for you and other members of the series LLC to manage debts, liabilities and other obligations.

The first benefit translates into the second biggest advantage of forming a series LLC: time savings. A series LLC can help you streamline your business from top to bottom and make everything from administrative tasks to management infinitely simpler than trying to operate each entity as its own entity.

On the other hand, if your decision to form a series LLC is made without much thought or consideration, you could end up hurting your business and creating more work for yourself. As a series LLC, you still need to comply with the laws of every state in which you conduct business. After all, the majority of states do not recognize series LLCs, which means you may unwittingly sabotage your growth efforts by forming one.

If you form a series LLC without having first created a strong infrastructure, you may just end up creating more work for yourself. You will still need to manage the separate finances and assets of each entity, which could become a headache without a solid management team in place.

Finally, there is the tax situation to consider. Because the series LLC is a fairly new structure and recognized by so few states, it is unclear as to how the members should file taxes. Should the members file taxes for each separate entity under the umbrella entity, or should they file for just the series LLC? Even though California does not recognize series LLCs, the California Franchise Tax Board has determined that each individual entity is a separate entity and, therefore, members need to file a tax return for each.

How To Form a Series LLC?

If you’re already operating multiple business entities, you may wish to unify them all by creating an umbrella entity. If you do choose to go this route, you will need to be sure to include your LLC within your series LLC operating agreement. This step is crucial, as it establishes the connectivity to your otherwise separate businesses.

If you operate businesses throughout several different states, check state laws to make sure each state in which you do business recognizes series LLCs. It may turn out that this option is not even available to you.

Can an Existing LLC Be Converted Into a Series LLC?

Yes, you can convert an existing LLC into a series LLC. However, before you can make the transition, you may need to do a bit of housekeeping. Remember, a series LLC is just a collection of individual entities that are housed under a single entity, which means you must still maintain separate records, finances, and assets for each one.

If one or several of your businesses have significant outstanding debt, contractual obligations, pending lawsuits or other liabilities, you may have to put in some serious legal legwork before making the conversion. Depending on the extent of your obligations, it may make more sense for you to liquidate your original LLC and then just form a new entity as a series LLC.

Regardless of what you choose to do, you will need to pay careful attention to two crucial documents: The operating agreement and the articles of organization. Though the process should be fairly straightforward, you must make sure that each specifies the series and clarifies that no LLC within the umbrella entity is responsible for the liabilities or obligations of any of the others. In addition to filing an amendment to the existing articles of organization, you must also draft a new operating agreement for the series LLC.

You will also need to review the titles for any assets within the original entities. Update the titles to reflect ownership, the new structure and the structure under which you plan to house individual property. Going forward, make sure to maintain wholly separate and accurate accounts for each individual LLC. Doing so can help you maintain the protection afforded by an LLC.

Which States Allow/Disallow Series LLCs?

As previously mentioned, just 16 states, the District of Columbia and Puerto Rico recognize series LLCs. Those states are as follows:

• Delaware (the state that created the series LLC)

• District of Columbia

• Alabama

• Illinois

• Iowa

• Indiana

• Kansas

• Montana

• Nevada

• Oklahoma

• Missouri

• North Dakota

• Texas

• Tennessee

• Wyoming

• Wisconsin

• Puerto Rico

The remaining 34 states do not recognize series LLCs. It’s important to note that while some states may not allow the formation of series LLCs, they will allow series LLCs that were registered in other states to register as a business and conduct business in them. One such state is California. If you plan to operate in a state that does not recognize series LLC, check state law to see what their stance is regarding registration and conducting business.

Do You Want To Convert Your LLC Into a Series LLC? 

Forming a series LLC may prove to be more difficult and time-consuming than forming a typical LLC, partnership or sole proprietorship. However, it does come with significant benefits for those who own and operate multiple businesses.