Series LLC - The Ultimate Guide to the Illinois Series LLC
Illinois Series LLC
Overview
If you are an entrepreneur in Illinois, a Series LLC may be the right legal structure for you, especially if you own more than one company or are a real estate investor.
A Series LLC operates similarly to a company with subsidiaries. It has a Master LLC, also known as the umbrella or parent company, but can also create any number of constituent cells underneath the Master LLC, referred to as “series”. Essentially, this allows businesses to have the liability of an LLC with the operational and tax flexibility of a partnership. Much like a regular LLC, the members (also known as owners) are not personally liable for business debts or lawsuits created by the Master LLC or any series.
The other perk of a Series LLC is that it’s a low-cost option for entrepreneurs and business owners who have more than one business. Since the business owner is allowed to keep each business separate for tax purposes, the assets of each series are kept separate, even if a different series is facing a financial liability. The other major benefit of a series LLC is that it handles taxes in the same fashion that a partnership does, meaning the Series LLC is not subject to double taxation. Since the Secretary of State considers a Series LLC as one filing entity, there is only one annual report and one annual filing fee required.
Currently, only 19 states and the District of Columbia permit a Series LLC, Arkansas, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nebraska, Nevada, North Dakota, Oklahoma, Puerto Rico, Tennessee, Texas, Utah, Virginia (effective 2020), Wyoming, and most famously, Delaware.
In Illinois, the Series LLC Statute was added to the Illinois’ LLC Act on August 16th of 2005. It contains most of the same line items found in the Delaware statute, but there are some provisions that create more separation between each series.
While a Series LLC can benefit multiple types of business owners, it can be a real win for Real Estate Investors and entrepreneurs who own and operate multiple or diverse businesses. According to the Illinois Series LLC Statute, each entity is treated separately and distinctly at all times. A series can sue or be sued, contract with any party, or hold title to a property all in its own name.
Additionally, the legal separation of the series provides business protections that other business structures may not. For example, for a real estate investor who has more than one property, the Series LLC can do several things. First, it reduces liability to the investor. If someone falls and is injured at Property A, only the assets of Property A are at risk. Additionally, the Series LLC can minimize overall expenses since there is only one filing fee for this type of business structure. Finally, a Series LLC allows the entity to consolidate taxes and all series in the LLC can be reported in just one tax return if structured properly.
Benefits
Asset Protection
Personal Asset Protection
When you operate without any formal business structure, your personal assets are all at risk. Everything you worked hard for – your savings, your home, cars, everything. Because there was no separation between your personal assets and your business assets. With a Series LLC your personal and business assets will be treated separately in the eyes of the law. You can still be sued, but creditors will only be able to go after the assets of your Master LLC or the particular Series depending upon which entity you conducted your business. Your personal home, vehicle, and bank account will be safe. This level of asset protection is especially important in the beginning stages of owning a business.
Business Asset Protection
Additionally, the assets of each Series are protected from each other and the assets of the Master LLC are protected from the assets of each Series as well. This is horizontal (between Series) and vertical protection (between Master & Series).
Limited Liability
As the name implies, members of a Series LLCs benefit from limited liability. By forming a Series LLC, only the Master LLC or the respective series (depending upon which entity you conducted your business) is liable for the debts and liabilities incurred by the business. If the Master LLC or any Series is found liable only the assets of the Master or that particular Series (depending upon which entity you conducted your business) can be taken by creditors to satisfy a judgment against the LLC. But the LLC owners would not be personally liable for that debt.
There are certain criteria that must be met to ensure that the assets in one series are protected from another entity’s liabilities. An example of this would be keeping assets of the series separate from the assets of the Master LLC. Also, any records that are specific to the series should also be kept separate from the Master LLC as well as the other series entities. It’s very important to keep them separate because blending them together may cause a series to lose its liability protection if it is not strictly distinct from the Master or other series.
The Master stays separate from the series, and each series entity is separate from the other series entities under the Master. Essentially, this means your personal assets as well as other series inside the Series LLC are not held liable for financial or legal judgments against a series.
Corporate Customization
Manager v. Member-run
Series LLCs are member-run entities or manager-run. Someone, whether an owner of the LLC or some other designated person (whether an employee or a contractor), must conduct the day-to-day operations of the business. In the LLC world, this difference is referred to as “member-managed” or “manager-managed.” Although it may seem like this designation is an internal operations matter, in Illinois, you are required to indicate this structure in your Articles of Organization. That’s why it’s important to understand the difference and know what you plan to do before creating an LLC.
A member-managed Series LLC is one in which the members all participate in the decision-making process for the LLC. This is a very common way to go for many small businesses. If you own an LLC alone or with a small number of partners, it makes sense that each of you would want to be involved in the operation of the business. Member-managers each have the authority to make decisions on behalf of the company and act as agents for the LLC. If there is more than one member, business decisions must be voted upon and contracts should be approved by a majority of the members.
A manager-managed Series LLC, on the other hand, is not operated by all members. Either the members choose one or more members to manage the Series LLC or the members may hire a professional manager. The members give over authority of the company to the selected managers, who become the company’s agents.
Whether members or managers, the chosen management of the Series LLC acts much like the board of directors of a corporation. They make decisions, act as agents for the LLC, and can sign contracts on the LLC’s behalf. Additionally, each series can have its own operating agreement to determine the management of the series. If you want one series to be member-run and another series to be manager-run, that is complete fine. You must have an operating agreement for each series reflecting how it will be managed. Additional information about member vs. manager options can be found under the Operating Agreement section below.
Flexibility
Adding & Removing Members
How easily a Member can be added or removed from a Series LLC depends upon your Operating Agreement. To add or remove (also known as dissociate) a member from the Series LLC, the Operating Agreement should be followed by current members. Members can be voted out or their membership interests bought out, but member addition or removal should be outlined in the operating agreement. A resolution must be signed to reflect that a member has joined or left the LLC. The Operating Agreement should outline how, why and when a member can be added or removed.
Membership Classes
Your Master LLC or Series operating agreement may provide for classes or groups of members or managers. It can give them whatever rights, powers and duties as the operating agreement may provide. The Master LLC or Series operating agreement may also make provision for the future creation of additional classes or groups of members or managers associated with the series and give them rights, powers and duties as well. This includes rights, powers and duties senior to existing classes and groups of members or managers associated with the series.
Example – Ownership split evenly:
Typically, LLC ownership interests are split evenly.
Member 1 50% membership interest
Member 2 50% membership interest
Due to the Series LLC’s flexible nature equal distribution of ownership isn’t required. Series LLCs can split ownership among members any number of ways. This is typically done by creating different groups, also know as “classes” of members with different rights and responsibilities.
When LLCs have different ownership classes, each individual member is assigned a class, which is established within the LLC Operating Agreement. Classes are usually named alphabetically, where the first class is “Class A”, followed by “Class B”, and so on. Establishing distinct classes of interests is an easy way to group members with different ownership and/or economic rights.
Depending upon your business, it may be appropriate for founders and investors to have different entitlements, or perhaps different founders need to have different voting powers. In this case, the LLC’s classes of interests may look something like this:
Class A: Complete Voting Rights and Complete Economic Rights
Class B: Partial Voting Rights and Complete Economic Rights
Class C: No Voting Rights and Complete Economic Rights
Here, Class A would be business-founding members with complete voting rights. Class B would also be founders but would have less voting power. Class C would be investors, which aren’t given any voting power. All three classes, however, are granted economic rights in terms of the distribution of company profits or losses.
As you can see, LLCs are very flexible, and these classes can be defined in almost any way you can imagine.
Cost Savings
Typically, creating a Series LLC makes sense when you need to run a minimum of 2 companies. You will save on the first year and ongoing costs by selecting a Series LLC over multiple LLCs. To see if this model is right for you, check out the chart below:
Fees
There are different costs associated with a Series LLC depending how it is set up and maintained.
The initial registration fee is $500, which includes a $100 expedited fee. There is also a fee to file the Certificate of Designation. This outlines the powers, rights, or preferences of the Series LLC and is filed as an amendment with the secretary of state. This is mailed in along with the $50 fee. You can create a Series – by using the Certificate of Designation form at any time.
There are also annual fees associated with keeping the Series LLC in operation. It’s $75 per year for the Master LLC and $50 for each active series underneath. There could also be a one-time $50 expedited fee if you need it. If a Registered Agent is required, the fee ranges from $50 - $125 depending on the service provider. Finally, if a regular LLC is converting into a Series LLC, there is a $300 fee.
Operation Requirements
Naming Convention
Before forming a Series LLC, there are several things needed to become a legally operating entity. First, it will need a name. The format is [Name of Master LLC] Series [Series Name]. For example, ABC LLC Series 123.
EIN
Both the Master as well as each series will also need its own tax ID number or EIN. Each series will have a Certificate of Designation. The Master LLC will also need an Operating Agreement and you will have to determine whether each series will need its own operating agreement.
Separate Books, Records & Bank Accounts
Since each series is operating separately from the Master and the other series, it’s important that all books, records and banks accounts are only used for one entity and that each entity has its own accounts. It’s also important to keep all assets, loans and other operations inside each series and that there is no crossover or sharing between the Master or the series entities.
Operating Agreement
While a Series LLC has an operating agreement that is a bit more complex than a traditional LLC, there are definitely benefits that the operating agreement provides to your Series LLC.
Once you decide that a Series LLC is the way to go, you need to establish your operating agreement. It should consist of the following 5 goals:
1. The Master Company Must Establish Intent to Authorize Series LLCs
In Illinois, a Series LLC needs to be authorize to establish a series. This is done by filing the appropriate Series LLC paperwork with the state. After that is completed, the Master LLC can file a Certificate of Designation. This document allows you to create separate Series LLCs under the Master LLC. Once that is done, the Master LLC’s operating agreement needs to state its intent to authorize series as well.
2. The Management Structure of Each Series LLC Needs to be Identified
There are 2 type of management structures available to use in a Series LLC. Member-managed and manager-managed. A member-managed LLC means that the members make all of the daily decisions and handles the daily operations of the company. A manager-managed LLC is managed by a designated manager. This person makes decisions for the company without input needed from other owners.
You can choose the same or different management type for each series, if the nature of your business calls for that. If the type of management for the series differs from the Master, the structure needs to be stated in the series’ operating agreement.
3. The Members/Managers of Each Series LLC Must Be Identified
While there is a lot of flexibility in a Series LLC, your operating agreement will identify each member/manager’s roles, rights and duties. If the management/membership of any series differs from the Master, then the operating agreement of that particular series must state that. Also, make sure that each member/manager understands their monetary contribution to the series and interest and stake in the series.
If you want to keep things simple and you don’t need to separate membership interests, duties and rights between your Master LLC and your series, then the operating agreement for the Master will govern all of your series as well.
4. Each Series Needs to Be Established Separately
To be able to be fully and legally protected by the Series LLC, the Operating Agreement must specifically note that the Master LLC and each series are separate and distinct from one another and must follow Illinois Limited Liability Act to ensure the greatest level of liability protection has been secured. At the Law Office of Alexis Hart McDowell, also known as the Enterprise Esquire, we provide the required language to ensure that the Master LLC as well as each series are protected from each other and that you and your personal assets are protected and not exposed to liability as well.
5. Separate Books & Records from Master and Series LLC
As stated previously, keeping everything separate is a key component of a Series LLC. Creating separate bank accounts, credit cards, and books and ledgers are must-haves in this type of business. Co-mingling funds or failing to properly separate your accounts could render a Series LLC useless and all legal protections would be lost.
Taxes
Federal & State
The great thing about a Series LLC is that when it comes to how you want to be taxed, you’ve got options. The default taxation of a Series LLC by the IRS is as a partnership. This may be preferable if you have long-term real estate investments or rentals, and there is more than one member. The income and expenses of the business will flow-through to each member’s individual tax return. The Master LLC or the series will issue each member a K-1, depending upon how your Series LLC is structured.
C-Corp
You can also choose to have your Series LLC taxes as a C-Corp. With a traditional C-Corp structure, the business is subjected to “double taxation” which is when the profit is taxed both at the entity level and then again at the member’s tax rate since it is considered income.
S-Corp
Choosing to have your Master LLC or any series taxed as an S-Corp is another option. S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. There are other requirements to qualify for S-Corp status which you can read about here.
Although each series has its own EIN, books and records, if structured properly, a single tax return may be all that is required for your Series LLC, which ultimately saves your business time and money. Be sure to speak with your trust tax professional and check out this article for more information.
Contact the Law Office of Alexis Hart McDowell
If it sounds like a Series LLC could be the best option for your business or you want to discuss your options on how a Series LLC could work for you, schedule a free consult at www.enterpriseesquire.com/calendar. We will help guide you through choosing the right business structure for the long-term success of your business. Check out our Series LLC formation package or our freebies! We look forward to handling your legal needs.
