Illinois Series LLC

What is It?
A Series LLC is a novel business structure in which there is a single parent company and one or more subsidiary companies underneath it.  The parent company is merely a holding company and each of the subsidiaries are separate from one another.

Which States Recognize Series LLCs?
Only 10 states recognize the Series LLC:  Delaware, Iowa, Illinois (since 2005), Nevada, Tennessee, Utah, Wisconsin, Oklahoma, Texas and Kansas.

There are 3 main reasons to consider organizing a Series LLC:

1) Extra layer of liability protection If a Series LLC is set up properly it can provide an extra layer of protection for the owners.  If you view the diagram you can see that liability in a Series LLC can flow down from the parent to the subsidiaries but it does not flow up from a subsidiary to a parent.  Liability is also separated from one subsidiary to another.  It does not flow side to side between the subsidiaries.  This is why the parent company is nothing other than a holding company.  It remains separate from the business of the subsidiaries as well.

2) Simplified tax returns Although each of the LLCs, the parent and each subsidiary would require separate accountings, separate books and separate EINs, there would only need to be one combined tax return.  This is a great advantage to the old method of filing separate LLCs for each subsidiary company or property owned.

3) Save money on annual filing fees in Illinois The annual report fee for a parent LLC is $250.  Each subsidiary LLC is an additional $50 each.  If you organized a separate LLC for each business it would be $250 for each individual LLC.  For example, 2 individual LLCs would cost $500 per year ($250 x 2 = $500).  A Series LLC with 2 subsidiaries would cost $350 ($250 for the parent plus $50 x 2 for the subsidiaries = $350).

 

The Cons to setting up this structure:

1) No tax savings.  If one or more of the businesses would have qualified as a Sub S Corporation then you may be losing out on serious tax savings.  See a discussion on Sub S Tax Savings.  A regular LLC has the option of being taxed as an S Corporation, however, if the LLC is not owned by an individual, but by another company, the LLC may not qualify to be taxed as a Sub S.  The Series LLC structure is very advantageous for certain types of businesses.  So be sure to consult an attorney or tax professional to make sure you’re not losing out on tax savings.

2) Not recognized in all states.  As mentioned above, only about 10 states have enacted a statute dealing with Series LLCs.  This can cause problems if you are doing business out of state with a Series LLC.  For one, how do you register a Series to qualify to do business in another state.  Can you register the entire Series to do business in another state that doesn’t even recognize a Series LLC?  Can you register just one subsidiary that is doing business in that state?  Some states require you to register the parent and each subsidiary individually in order to do business there.  This can be costly.  This will be determined on a state by state basis depending on that state’s laws.

3) More costly set up fees.  The filing fee for a Series LLC is $750 plus $50 for each subsidiary.  This is opposed to $250 for organizing each separate LLC or $175 for a C Corp or an S Corp.  Plus attorney’s fees will most likely be higher due to the complexity of the set up.

4) Naming of the LLC.  The parent company will have a typical LLC name, however, in order to provide notice to all third parties that they are dealing with a Series LLC, each subsidiary name must include the entire parent company name.  For example, the parent LLC is called ABC LLC, the subsidiary would be called ABC LLC – XYZ.  This is fine if you are owning property and truly don’t care about the company name but if you will be holding the business name out the public it would be rather awkward.  Also, the Series LLC cannot adopt a DBA, so it must, at all time, use the entire name.  It can’t use just XYZ as its name or risk liability for doing so.

5) The Unknown.  Series LLCs have only been around since 1996 and only in Illinois since 2005.  There are many issues which are just up in the air and have not been fully vetted out.  The IRS doesn’t even have guidelines on how to file taxes on these structures.

For instance, what happens if a subsidiary were to file for bankruptcy, will a bankruptcy court join the rest of the series?  What about doing business in other states as I discussed above?

 

Set Up Comparison:

Separate LLCs
Prior to the advent of a Series LLC in Illinois, it would have been advised to create a separate LLC for each separate business.  This was not the easiest way to separate out liability.

For example, let’s say there were two partners who wanted to start a house flipping business called Two Best Friends LLC.  Without a Series LLC structure they would need to create a separate LLC for each property they flipped.  The filing fee for each LLC would be $500.  Each time they bought a property they would need to start up a new LLC, pay a $500 filing fee and each time they sold a property they would need to dissolve it.  There would be separate accounting, books, bank accounts and EINs for each.  Each property would mean organizing a whole new LLC, getting a new tax ID, opening a new bank account and filing another tax return.  If they kept a subsidiary LLC open for more than a year they would need to pay $250 each year for the LLC annual report.

Series LLC
With a Series LLC each time the Two Best Friends buys a new property they will file for a new subsidiary LLC under their Series LLC Structure.  The filing fees are $50 for each subsidiary LLC instead of $500 for each new one.  They will still need to have separate accounting, books, bank accounts and tax IDs.  However, each new subsidiary will cost much less.  For the parent LLC annual report, they will pay $250 for the parent plus only $50 for each subsidiary (rather than $250 for each separate LLC each year).  And best of all it will only be a single tax return for the entire structure no matter how many subsidiaries they have.

Series LLC with S Corp

If you are doing a business such as flipping houses or otherwise managing the property such as rental properties, then you could further separate out the liabilities from the management or renovation from the asset (the real estate) by also incorporating

Other Concerns

Mortgage or Loans.  Also consider, if you are looking to obtain a bank loan or mortgage, the lender may not be willing to lend directly to the LLC without a personal guaranty on that mortgage.  If that is the case the owners would still have personal liability for the mortgage debt, but liability protection for other concerns.

Insurance. I am often asked “Why should I bother with all of this if I have insurance?”  I can honestly tell you that if I were doing a business like house flipping or owning more than one piece of property this is how I would set it up.  You never want to have any personal liability when running any type of business.  Separate it from yourself.  Things happen even when you have insurance.  Ask yourself: what if my insurance is not enough to cover the liabilities?  What if the judgment is more than my insurance will cover?  What if the liability is a type of injury that my insurance won’t cover?  Will my insurance cover EVERYTHING?  Can I still afford my insurance if I make a large claim and keep the business going?  What if I forget to pay my insurance?

These are legitimate questions.  If you are incorporated or structures as an LLC the liability is separate from you personally and you can protect yourself, your family, your home, your retirement and other savings from any claims against the company.  Is it worth the risk?  I recommend you have the best of both worlds.  Get the LLC organized AND have good insurance.  The cost of the set up, maintenance and the cost of insurance are worth their weight in gold.

Conclusion

The Series LLC offers a unique and preferred approach to certain types of businesses, most especially those that include house flipping, investing or rental properties. Since it is a more complex legal structure to set up it should not be entered into without working with an attorney.  It will need to be set up properly and have the appropriate documentation to ensure liability protection.  It is also recommended that you speak with a tax professional with experience in filing Series LLC tax returns prior to setting one up.

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