Delaware Series LLC

What is a Delaware Series LLC?

The Delaware Series LLC is a limited liability company without a predetermined shape. When you form a Delaware Series LLC with the Delaware Division of Corporations, the entity you form (often called the “Master LLC”) can be pictured as an umbrella. Beneath this umbrella, you can add as many divisions, called “series,” to your company as you want, and each series can enter into its own contracts, open its own bank account, and have its own limited liability protection. Different members and managers can be associated with different series, and the series can even choose different tax elections (one series can be taxed as a partnership, for instance, while another can elect to be taxed as a C corporation or S corporation). There are currently no limits to how many series you can establish within your Delaware Series LLC.

So, in short, a Series LLC in Delaware is basically a lot of mini-LLCs operating under the umbrella of one LLC?

Basically, yes.

How to form a Series LLC in Delaware:

  1. Complete a Delaware Certificate of Formation for your Delaware Series LLC (this is the same form a typical Delaware LLC would file with the state).
  2. Add a Notice of Limitation on Liabilities clause to your Series LLC’s Certificate of Formation using the following language:
    “Notice is hereby given pursuant to Section 18.215(b) of the LLC Act that the debts, liabilities, and obligations incurred, contracted for, or otherwise existing with respect to a particular series of the LLC, shall be enforceable against the assets of such series only and not against the assets of the LLC generally, or any other series thereof, and none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the LLC generally, or any other series thereof, shall be enforceable against the assets of such series.”
  3. Submit the Certificate of Formation to the DE Division of Corporations and pay the $90 filing fee.
  4. Currently, no series within the LLC needs to file its own state formation document. Individual series get added and removed through amendments to your Series LLC operating agreement. However, new laws that take effect on August 1, 2019, also allow for the formation of “registered series” in Delaware, which you can form by filing a document called the Certificate of Registered Series and paying a $90 state filing fee. Ordinary series in Delaware (soon to be called “protected series” to distinguish them from “registered series”) will continue being added or removed by changing the Series LLC operating agreement.
  5. In the Series LLC’s operating agreement, explain the company’s structure, including the managers and members of each series and what type of tax structure will be assigned to each series.
  6. Each series in the Delaware Series LLC will need to apply to the Internal Revenue Service (IRS) for its own Employer Identification Number (EIN), as each series will be treated as a separate entity for tax purposes. Most banks will also require a separate EIN for each series to open its own bank account.

What are a Delaware Series LLC’s costs and filing fees?

The filing fee for the Delaware Certificate of Formation is $90 paid to the DE Division of Corporations. Currently, the fee doesn’t change no matter how many series are established through your Series LLC Operating Agreement. This will remain true for protected series when the new Delaware laws take effect on August 1, 2019, but at that point your Series LLC will always be able to form a “registered series” by filing Certificates of Registered Series with the DE Division of Corporations and pay an additional $90 state filing fee per series.

Currently, a Delaware Series LLC will only pay one annual tax to the Delaware Division of Corporations, though the special new “registered series” will pay its own $75 annual tax once the new Delaware laws take effect on August 1, 2019. The Delaware Series LLC’s annual tax is $300 due by June 1 each year, which will be the same due date for the payment of a registered series’s annual tax.

Does each series in a Series LLC have limited liability?

In theory, each series within a Delaware Series LLC should have its own limited liability in the case of lawsuits. Additionally, a series’s debts, contracts, bankruptcies, and other liabilities should not affect any other series within the LLC.

Those forming a Series LLC should be aware, however, that the Series LLC legal structure has not been vigorously tested in a court. A court ruling against a Series LLC could invalidate the limited liability shields between the series and their master LLC. However, the Delaware Series LLC would likely be the safest to form a Series LLC, particularly if your Series LLC will operate in Delaware, because the Series LLC business structure originated in Delaware, and any cases concerning the validity of a Series LLC structure would likely land in the Court of Chancery, Delaware’s court for businesses.

How is a Series LLC in Delaware taxed?

Just as each series within a Delaware Series LLC operates as its own entity, each series can choose how it will be taxed. In 2010, the IRS issued its proposed rules for Series LLCs. The IRS clearly stated that each series within a Series LLC will be treated as a separate entity for tax purposes. Each series can have its own tax designation, which means one series could be taxed as an S Corp, while a different series could be taxed as a C Corp, and another could be taxed as a partnership.

Do Series LLCs in Delaware need multiple EINs?

If each series within the Series LLC is operating as its own distinct business, each series will need to file its own tax return. In order to file a tax return, each series needs an Employer Identification Number (EIN). Many banks will also expect each series to have their own EINs to open separate bank accounts.

EINs are obtained through the IRS by filing Form SS-4. You can apply for an EIN online, by phone, or by mail.

Can a Delaware Series LLC do business in other states?

Only certain states and territories other than Delaware allow the formation of Series LLCs, including Alabama, the District of Columbia, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, Oklahoma, Puerto Rico, Tennessee, Texas, Utah, and Wyoming. California has established rules for foreign Series LLCs operating in the state, but does not allow the formation of in-state Series LLCs.

Series of a Delaware LLC can operate outside our state, but do so at their own risk, as the Series LLC has not been tested in court. Each series would need to register as a foreign entity doing business in the state.

Many other states will likely adopt rules concerning Series LLCs once the IRS formalizes its rules.

Can a Delaware Series LLC have different members for different series?

Yes, Series LLC members or managers can be associated with different series. These designations should get made in your Series LLC operating agreement.

What are the advantages of Delaware Series LLCs?

1. The Court of Chancery

The lack of court decisions concerning the Series LLC may make some entrepreneurs wary, but if the Series LLC is going be upheld as it is written into law, it’s going to be in Delaware where businesses have their own court system.

2. Security

Delaware Series LLCs file the same forms as a regular LLC, which means much of the members’ personal information isn’t required on the public document. The structure of the series are laid out in the company’s operating agreement, and that document isn’t filed with the state. Most of a Series LLC’s will stay private.

3. Multiple LLCs for Less

Currently, a Delaware Series LLC only pays one filing fee and one annual tax no matter how many series are formed within the entity, and the Master LLC and each series can (and must) share the same registered agent. This means a Delaware Series LLC will often pay fewer state fees than organizations that form multiple LLCs instead.

 

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