Used by permission of CPA Practice Advisor Magazine
By Nellie Akalp – CEO of CorpNet.com
A slowdown in the economy means you may have some time on your hands to get your businesses better organized. One option you might consider to better protect your assets is setting up a series limited liability company or SLLC for short. Here is what structuring your business as an SLLC and what protections the entity offers.
WHY A SLLC?
The series LLC allows business owners to divide multiple investments and debts and to operate each LLC as a separate entity with its own name, bank account, and recordkeeping. Under the master LLC, each separate entity can conduct business independently and segregate membership interests, assets, liabilities, and operations.
For example, if you own rental properties, you can operate each of the rental properties as a separate legal entity within an SLLC. The benefit is in the protections the separate LLC provides. If something happens and a tenant decides to sue you in court, the liability would be limited to the assets of the property LLC and not everything under the master LLC. Likewise, any debts or investments for the individual property belong solely to the one property.
HOW AN SLLC WORKS?
You have the option to have different members and managers run each LLC entity and you may choose to grant each manager different rights and responsibilities. Each individual entity can secure its own contracts, pay its own debts and buy its own assets without affecting the other entities under the SLLC.
Most important, the SLLC offers you substantial liability protection. Like a corporation with subsidiaries, one entity’s assets are protected from the liability risks of others LLCs under the master SLLC- without having to pay the additional formation fees. When you set up a series LLC, you pay just one formation filling fee no matter how many LLCs are formed under the master. And like regular LLCs, series LLCs are also more flexible and simpler to form than a corporation.
FORMING THE SLLC
Currently, not all states allow the formation of series LLCs. Series LLCs can be formed in:
In California, you cannot form an SLLC, but you can register an SLLC from another state. The steps to forming an SLLC are similar to a traditional LLC and require you to file Articles of Organizations with the Secretary of State. You will need to indicate in the Articles of Organizations the plans and authorization for subset LLCs. You also need to create operating agreements to detail the guidelines for the complete operations of the master SLLC and then subsequent operating agreements for each entity under the master. Each operating agreement should outline any unique rules applicable to the individual entity.
CONVERTING TO A SERIES LLC
What if you already owns an LLC, can the you make the switch to an SLLC? The answer is yes, however the process varies by state. In general, the LLC members must file an amendment to the Articles of Organization stating the conversion from an LLC to a series LLC. A new series LLC operating agreement also needs to be drafted indicating how the master LLC will be managed. In this case, filing an amendment is not sufficient. It’s also a good idea to use SLLC in the official title, such as Your Business, SLLC.
Only the master LLC is required to file a tax return and that will include information from all the series LLCs. We can help guide you through the complicated documentation, as tax treatment at the state level may be different than the federal level.