Delaware Series LLC
An LLC is a great way to protect yourself from lawsuits and increase your confidence in your ability to move your business forward.
As your business grows, the margin of error gets smaller. A single mishap could put your entire company in legal trouble. Your business is easy prey for creditors when all your assets are bundled up under one entity.
However, a Delaware series LLC is not as archaic and actually performs better than its predecessor in terms of tax efficiency and cost efficiency.
What is a Delaware Series LLC?
You can create unlimited “mini-LLCs” (or series) with your own assets, business objectives, members or classes, ownership interests, and members. With its many subsidiaries, the series LLC is great for real estate investors who own multiple buildings or businesses that have multiple brands. Delaware Series LLC, as the name implies, is a combination of Series and LLC.Â
The main LLC (master LLC) and the individual series that are sub-divisions of it make up a series structure. Each series LLC has its dynamic and is independent of others. These independent series are designed to create barriers between assets of the organization and protect members’ identities in case they are sued.
A similar precept applies to additional dynamics, such as tax and corporate governance. It is not unusual for series LLCs to have different taxation statuses.
Reason to form your series LLC Delaware?
Delaware is the best place to form a series LLC. It has strong legal systems, courts that are open to business, new legislation, and reliable liability insurance. Many savvy businesspeople and real estate investors have moved to Delaware because of these factors.
Delaware’s Court of Chancery is another important advantage. This court, which is a dedicated equity court, allows businesses to quickly resolve disputes with a judge instead of a jury. It gives the state one of most precedents in business dispute judgments.
Requirements for starting series LLC
The following requirements are required to establish a Delaware series LLC.
- Each series requires a distinct asset name
- You will need to obtain separate EINs or tax ID numbers depending on the series.
- Establishing a registered office for each series and appointing an agent.
- A one-page Certificate for Formation containing the name of your registered agent.
Formation Process
It is just as easy to form a series LLC as a regular LLC. You will require to ready a Certificate of Formation and document it with the Delaware Division of Corporation.
To confirm that you are forming an LLC series, you must either check the appropriate box within the Certificate of Formation or insert certain provisions that will indicate that an LLC series is being formed.
This includes details regarding the shareholders and managers, as well the tax structure applicable to each series. The governing approval should comprise evidence about the administrative configuration of the series LLC.
Each series should apply for an EIN with Internal Revenue Service (IRS).
Filing Fee and Tax payment for Delaware Series LLC
The current price does not change based on how many series have been created by the Operator Agreement. The Certificate of Formation will be published by the Delaware Division of Corporations.Â
The Delaware Division of Corporations will only charge one annual tax to series LLCs. The tax is US$300. It is due by June 1st each year.
Also due on this day is the annual tax for a registered serial.
Advantages and Disadvantages
Advantages
Simple to use
Only one series LLC must be registered with Delaware’s state government. You don’t need to accept the operating approvals from the Delaware Division of Corporations
Other series within the LLC can then be created using the operating agreement. This gives you complete anonymity and strong asset protection.
Low start cost
You can set up the Delaware series limited liability company for less than many LLCs. Also, you only need one filing fee.
Low franchise taxes
Your series LLC will need to pay $300 each year to Delaware state for the annual Franchise Tax. This applies to all series. Individual LLCs would be subject to a $300 Franchise tax.
One tax return
Merely the parent LLC is compelled to document a tax return. This tax return is complicated and owners should consult a professional tax preparer.
Separated registration agent fee
All Delaware businesses must have a registered agent. The series LLC is one organization, so only one registration fee is required every year. You would need to pay multiple times for each LLC if you want to create more.
Legal separation
Every series should be assessed by several entities with its procedures and resources. Most cases do not allow one series to impose its debts, liabilities, or responsibilities on another series, or the entire series LLC. The other series can continue running even if it is involved in a legal dispute.
Disadvantages
Separate account and bank account
Each series of LLCs must have its financial statements generated by a different accounting system and bank account. This could be a problem for administrative reasons if there are multiple LLCs.
Separate EAN required
Each series can be treated as an income tax entity. For this reason, each series must file its tax return and obtain its federal Employer Identification number.
Unrecognized term
This type of business structure may not be recognized in all places. A series LLC may be considered a separate LLC.
A lot of banks don’t know about the Delaware series limited responsibility company. Additionally, attorneys and accountants may not be experienced in dealing with this structure. This can create problems during consultations. Any financial organization should be aware that each series has the liberty to unlock several bank accounts.
Tax problem
According to the IRS’s recommended Series LLC rules, each series will be evaluated by a different entity for tax purposes. This means that each chain will be treated as a separate entity for tax purposes. There are S Corp, and C Corp. Another series, however, may be treated like a partnership.
Because different series can choose different tax rates, it is hard to calculate and track tax for the entire Series LLC.
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Conclusion
The Delaware series LLC is not yet universally accepted in all states. Because it’s a new concept there is some uncertainty over how courts might view series LLCs in terms of liability issues.
However, a Delaware series LLC is not as archaic and actually performs better than its predecessor in terms of tax efficiency and cost efficiency. Also, you only need one filing fee. Your series LLC will need to pay $300 each year to Delaware state for the annual Franchise Tax. This applies to all series.
FAQ’s
Delaware is among the states in which you can establish a Series LLC. A Series LLC is a distinct business entity made up of a single parent company also known as the “master” LLC and one or more “series” or “cells” which may have their own financials, bank accounts for business, as well as limited liability.
Series LLC tax reporting is like the tax reporting of a traditional LLC. Although every LLC within the group functions as a distinct entity to manage and impose obligations and the tax burden, the series LLC is considered one entity, which means it only needs to file taxes.
It’s not only the IRS that will require distinct EINs for each business in the Series LLC. It is required that you maintain a separate bank account for each business, and banks generally need an EIN to create a business bank account.
With the help of a Series LLC, a holding company is able to manage all companies under one umbrella without putting at risk the assets of one company being used to pay off obligations or debts of the other business.
Reshma Ali has great expertise in mergers & acquisitions, Financial planning, and international company formation and offers advice and knowledge to help businesses achieve their objectives.
