Paperwork is the key here. All states that offer Series LLCs say the same thing: you only get the liability protection between subsidiary Cells if you run the cells separately, keep separate books and records and can demonstrate that you aren’t commingling everything into one big company. You’ve got to run your Series LLC and its subsidiary cells as though they were separately incorporated LLCs to comply with this requirement.
That said, the first step to creating a series LLC are the same as creating any other kind of LLC. You’ll prepare and file Articles of Organization with the state. The articles will typically be a little different from those of a regular LLC – there will be a statement that this is a Series LLC, or a box to check, or even a whole different form. You will appoint the resident agent, set out the LLC’s business office address, and name the main Series LLC’s Manager(s). If you’re creating an Illinois Series LLC, you’ll also be filing additional 1-page documents with the name of each subsidiary cell, and the Manager(s) of each cell.
After that, you get into the Operating Agreement, which defines how your Series LLC is structured and operates. This document sets out the following key points (in addition to other administrative functions):
- The name(s) of the initial Managers and Members of the Series LLC
- The names of each Cell being established at the time the Series LLC is formed (there’s usually at least one, but not always).
- The names of the initial Managers and Members for each Cell being established
- How new Cells are created or dissolved
- How the Cells relate to the Series LLC, as true subsidiaries or independent entities
- How the Series LLC Managers are appointed or removed
- How Cell Managers are appointed or removed
- The level of control the Series LLC has over the Cells
- The duties and responsibilities of the Series LLC Managers and the Cell Managers
- Restrictions on ownership and transfer of Series LLC ownership
- How and in what circumstances Members may be bought out by the Series LLC, or other Members
- How the profits and losses are to be distributed amongst the Members
- What happens in the event of bankruptcy in the Series LLC or any of the Cells
- How disputes between Series LLC Managers, Members or both are resolved
- The level of control Series LLC or Cell Managers have over day-to-day operations of the Series LLC or the Cells, and when management actions and decisions require pre-approval by the Members
- How the Operating Agreement may be changed
- When the Series LLC may ask Members for additional cash or property contributions, and what happens when Members cannot or refuse to pay
In any LLC, Series or regular, the Operating Agreement is crucial but that’s especially applicable here. You’ve not only got the main LLC to consider – you also have to think about all the subsidiary cells, now and into the future. This isn’t an agreement you want to prepare by finding on one the Internet. Let a professional draw this one up for you. That way, you know it’s covered all the bases.
In fact, because each Series Cell is going to operate independently, we recommend that you create a separate Operating Agreement for each subsidiary cell, in addition to the main Operating Agreement. Remember, the Series LLC’s Operating Agreement deals with the overall operation of the Series LLC. It tells you how you can create and dissolve Series Cells, but it also allows for each Cell to operate independently. That means each Cell needs its own guide for how the Managers operate, what rights the Members have, how profits are distributed, and so on.
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March 6th, 2010 at 10:23 pm
Hi,
I am considering setting up a series LLC in Delaware to establish a business where i would import product and then warehouse, sell and distribute it to, for the most, part retailers but also via the net to end users.
Could I have cell 1 to hold cash (working capital fund) in a account and get cell 2 to conduct all the operation business? and possibly cell 3 to perform the web business?
Would I have to gain foreign authority to do business in NY for both (all) cells? as you suggested in CA?
How would I be able to maintain the separation of cells to protect the cash cell from the operating cell’s litigation exposure?
Would NY see the two (3) cells as connected from a ownership perspective, where
i) the cash cell would be liable for the operating cells exposure to be sued?
ii) so that i would be restricted from keeping the cash cell as the Delaware profit making cell and the operating cell (with authority to do business) as the NY break even operating cell?
I would greatly appreciate your perspective…
I am from Australia and can not do a s corp.
I like the LLC but have probably committed to a closed corp in wyoming on Friday. i might be able to stop this if you think it is worth changing.. But I would need quick notice.
regards
cameron
March 21st, 2010 at 9:38 am
Hi Cameron,
New York doesn’t have Series LLC law, so it’s difficult to give you a firm answer. You would need to follow all of the formalities - that means setting up paperwork for each cell, having a separate Tax ID number, separate bank accounts, and keeping separate books and records - in other words, treat them all as independent LLCs.
If you are living in NY (can’t tell if you’re in NY or Aus) then you would need to register the top level LLC into NY. After that, it all depends. If you have a physical location in NY from where you ship products, the cell doing the warehousing/distributing would likely need to be registered in NY. But the cash cell probably would not. The web business subsidiary also depends. If it’s fairly passive, you could keep it in Delaware, however, if you physically are located in NY, I am wondering if you would be caught up in the eTax bill (aka the amazon tax) that NY enacted in 2008. That would mean you would be collecting and remitting sales taxes for all NY-based customers, in addition to Delaware-based customers.
When you say you’re from AUS and can’t do an S Corp - can you clarify? If you are living in the U.S. and filing a U.S. tax return you can do an S Corp.