A Delaware Series LLC Can Help Protect Your Businesses
The Delaware Series LLC is a business entity which enables members to place a web of liability shields over individualized assets within a single LLC. As the name suggests, a Series LLC entails a singular organization empowered to self segregate its assets. This creates many rings of protection. As the Delaware Series LLC has risen to prominence in the business world, entrepreneurs have come to recognize its ability to incubate business ideas and protect passive, low-risk assets.
When to Form a Series LLC
When a traditional LLC begins to branch off and undertake new business ventures or operations, it faces the risk of having all of its assets become subject to the liabilities and creditors of its divisions.
Before the birth of the Series LLC, the only option available to companies was to form multiple LLCs. Each LLC would hold individual assets. This still remains a tried and true approach. The nuance provided by the Series LLC allows members to create an unlimited number of cells that concurrently maintain ties to the primary LLC and provide only asset-by-asset exposure to creditors.
Series LLC Benefits
Each protected series associated with Delaware Series LLC has the ability to sue and be sued, have separate tax IDs and make separate tax elections, whether it seeks c-corp or s-corp status. It is theoretically possible that a protected series may be allowed to seek bankruptcy separately from any other protected series or the parent LLC due to their legal personhood. This segregation of assets is crucial to any company looking to mitigate future risks of “hitting an iceberg”. The Series LLC separates the ship into watertight compartments. This helps keep the ship afloat if one series becomes flooded with liability.
The viability of a Series LLC’s protections hinges on each protected series being operated at arm’s length. While maintaining separate bank accounts for individual protected series is not required, it is necessary to maintain separate and accurate records to keep each protected series distinct in case the structure is attacked by creditors.
A Series LLC also serves as a strategy for mitigating costs. Filing and maintaining separate entities may not be economically justified in certain situations. With a Series LLC, there is only one fixed annual franchise tax to be paid. This is regardless of the number of protected series associated with the entity. Subsequently, a Series LLC pays only one registered agent fee per year for the whole entity. Another advantage inherent to the structure of the Series LLC is the ease with which members can replicate the ownership structure within each successive series. For example, consider a Series LLC comprised of two members. The two members within a Series LLC by default will also be members of each individual protected series.
We generally do not recommend adding third party members to only some protected series in order to reduce the risk of internal conflict which serves as the most prominent threat for the viability of an LLC. While people establish business entities to protect themselves from business creditors, it is often the other members who sue in a business divorce rather than outside creditors.
Real estate businesses often successfully utilize the Series LLC. A Series LLC is able to establish each rental property as a separate protected series. This shields them from the liabilities of the other properties.
The Series LLC serves as a simple yet versatile tool for business owners looking to limit risk and exposure of their low-risk assets or for serial entrepreneurs who plan to explore the viability of multiple product lines simultaneously. The successful segregation of assets provided by the series structure serves as one of the most significant developments in the realm of asset protection.