A series LLC allows business owners to consolidate multiple business activities under one umbrella LLC. The most important benefit is the ability to protect each child series and its assets from the liabilities of the other child series and the master LLC. The tax treatment of series LLCs varies by state, since it is a state, not federal, designation.
For federal tax purposes, each series of a series LLC is treated as a separate taxable entity, which means each series would not be liable for the taxes of other series or the parent organization. Additionally, each series can make its own tax election, like an S-corp or partnership. The default classification for a multi-member Series LLC and each child-series is that of a partnership, unless it elects to be taxed as a corporation.
You can convert an existing LLC into a series LLC without starting a new business in some states by amending formation documents. Each series LLC is only liable for its debts, which protects other series if one faces a lawsuit. Forming and managing a series LLC is simpler than managing multiple separate LLCs.
Disadvantages of a Series LLC
While there are compelling advantages to forming a series LLC, there are also disadvantages. There are some unresolved tax issues regarding series LLCs and specific tax treatment may vary. In regards to state taxes, series LLCs may need to pay only a single state franchise tax for the entire entity or may be required to pay fees for each separate entity. Rigorous recordkeeping is required for tax purposes of running a series LLC.
Series LLCs are often used by real estate investors for the purpose of asset protection, and allow flexibility in tax treatment. They can be structured to provide the benefits of various business structures like S-corps and partnerships while offering liability protection without additional business formation fees.