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What is an Umbrella LLC?

By IncNow | Published May 27, 2020

umbrellaOften a serial entrepreneur will form multiple “brother-sister” companies to keep their assets from becoming commingled. But if an entrepreneur has partners that also own an interest in each of these companies, it can generate a separate partnership tax return for each entity. One way to simplify this is to form a holding company with the partners, then have each separate company as wholly-owned subsidiaries, or children, of the parent umbrella LLC. This reduces the number of partnership tax returns to just one, while making sure the assets or each subsidiary are protected.

In doing your research, you may have come across the term “umbrella LLC” and wondered what, exactly, it means and how it can apply to your businesses. Here’s what you need to know, as well as how to decide if an umbrella LLC is right for you.

What Is an Umbrella LLC, Exactly?

An umbrella LLC is another word for a holding company. An umbrella LLC owns other LLCs that are below it, sheltering those LLCs from cross liability in the event that future litigation results in a judgment creditor trying to collect against assets of a company that is the subject of the judgment.

The traditional way to limit the future creditor to just the assets of the LLC against which she obtains a judgment is to set up a number of single-member LLCs owned by the same umbrella LLC. These different operating units help to insulate the assets of other affiliated operating companies. Common examples can be found in financial service companies, like Bank of America and JP Morgan Chase, which are umbrella LLCs with plenty of subsidiaries.

Why Form an Umbrella LLC?

Forming an umbrella LLC can allow subsidiaries to enjoy the affiliation of being a part of a larger company, without actually being commingled with the assets of a larger company. For example, a subsidiary may be able to borrow money at a lower rate thanks to the larger holding company. An umbrella LLC can also help companies save money by avoiding a multiplicity of tax filings.

And, from a legal standpoint, an umbrella company can shelter smaller subsidiaries from litigation issues.

Can an Umbrella LLC be formed as a Series LLC?

A Series LLC is one way to structure an umbrella company without needing to file separate subsidiary entities. A Series LLC has a Certificate of Formation that allows its members to establish protected business units where the members can allocate certain assets to be associated only with certain “protected series” of the company. This can be particularly attractive when separating well-insured or low risk passive investments. The members can divide the LLC into an unlimited number of protected business units. Each of those units has its own associated members interests, assets, and operations in what is known as protected series. A Series LLC is often compared to a honeycomb, where there is a group of individual, protected series as part of a larger LLC.

Under a Series LLC, one protected series may be sheltered from the debts and liabilities of the other protected series therein. By filing a Series LLC in Delaware, there is only one entity and it requires just one franchise tax payment each year, regardless of how many protected series have been established. As a result, it can be a potentially cost-saving option for people whose risk tolerance and assets profile does not justify the cost of forming separate subsidiary LLCs.

The traditional umbrella LLC, on the other hand, has one main LLC that owns nothing and operates nothing except to own interests in other child LLCs, where all assets are held and operations are conducted.

Thinking of forming an umbrella LLC or Delaware Series LLC? We can help. If you have any questions about the process, or want to talk to an expert so you can decide which entity type is right for you. Please reach out to us at 1-800-759-2248 or email agents@incnow.com.

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When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go