As an entrepreneur and startup owner, a lot of choice await you when you enter the realm of business.
You may follow large successful companies and choose a corporation, or you may structure your business as an LLC or a Series LLC.
Whatever choice you make, in terms of legal entity for your business, it will significantly impact your personal and business life.
LLC and Series LLC
If you own a business, either as a partnership or a sole proprietorship, you should consider setting it up with a Regular or Series Limited Liability Company.
The two business forms have their similarities and differences, which can make the decision between the two quite confusing.
In this blog, we’re going to demystify the subject and help you decide what might best suit your business.
Limited Liability Company
A limited liability company, or shortly LLC, is a type of business structure that offers businesses limited liability but is easier to establish and maintain.
It limits personal liability by legally separating the business from its owners. So, if you have business debt or your business partner is accused of negligence, your personal assets such as home and bank account will not be at risk.
This makes it different from sole proprietorship or partnership, where business debt is also considered your personal debt.
It also avoids double taxation by providing businesses with the pass-through treatment of income for taxation. The owner/s of the Limited Liability Company report their operating results on their personal income tax returns without filing any returns separately for the LLC.
Series Limited Liability Company
The Series LLC or SLLC organizes several businesses under a single business group. Each business in the LLC operates as an independent business, also called cell LLCs. Each cell LLC’s members are liable for their own debts and obligations while the master LLC manages all the LLCs in the series.
The IRS requires each LLC in a series to file federal taxes as separate businesses, and many states follow these requirements when collecting state taxes on profits.
Differences between LLC and Series LLC
The LLC and Series LLC have some major differences in terms of ownership, organizational structure, and availability. It is vital to understand these differences because they will largely guide the nature of the business and how it grows in the future.
Formation and availability
To set up an LLC, the members of the LLC must create and file Articles of Organization.
It is a simple form that asks information such as the LLC’s name, names of the owners, and address. When choosing a name, it is required that the LLC’s name does not match with an existing LLC’s name in the state.
Some state regulations may also require the words ‘LLC’ or ‘Limited Liable Company’ to appear in the business name.
A series LLC is formed in two steps. First, you will need to register the business as an SLLC with your state. Then you will create the cell LLCs in the series through a process described in the operating agreement.
However, series LLCs are not available in all the states. Delaware was the first state that allowed Series LLC, and many other states have followed suit. As of 2019, the following states authorize the formation of Series LLCs.
- North Dakota
The state of California doesn’t register a Series LLC; however, you can form a Texas series LLC or a series limited liability company in any other state that allows Series LLC and do business in California.
There is no restriction on the number of owners (members) of an LLC. Not only US citizens, but non-US citizens and even non-US residents can become a member of an LLC. A corporate entity can also own a limited liability company.
A series LLC can have as many LLCs (cell LLCs) in it as you want. Each LLC would be distinct and administered and treated separately for their debts and obligations; however, the parent LLC will oversee and control all the cell LLCs in the series.
Registration and Taxation
LLCs can adopt the tax status of a partnership, sole proprietorship, or corporation depending on how it is structured.
The IRS classifies it either as a partnership or sole proprietorship based on the number of owners. This benefits the owner because they only have to pay personal income tax on their profits without paying any corporate or LLC taxes.
In the case of Series LLCs, only the parent/master LLC is required to file tax returns. Additionally, only the parent LLC needs to be registered with the state, which significantly reduces the registration fees and other legal costs. However, all the cell LLCs must be registered in the same state.
LLC and Series LLC are simple and less expensive to build and maintain. They are adaptable structures well suited for small and medium-sized businesses. If you are a novice entrepreneur, you should definitely understand both the structures to enjoy the tax benefits, flexibility, and lesser legal requirements.
About Ashley Rosa: Ashley Rosa is a freelance writer and blogger. As writing is her passion that why she loves to write articles related to the latest trends in technology and sometimes on health-tech as well. She is crazy about chocolates. You can find her at twitter: @ashrosa2.