A limited liability company offers the liability protection you can expect from a corporation. The entity has a distinct identity apart from the individual members. In terms of setup, the LLC easier to establish compared to the corporation, which explains its popularity.
The series LLC, meanwhile, is a relatively new concept. For instance, not all US states recognize it. Under the setup, you have an Umbrella LLC and several other LLCs that are distinct from each other. The LLC cells have their respective assets that are still linked to the master LLC. If a cell LLC incurs liability, the other cells are not affected.
Think of each cell as a subsidiary of a corporation, which, in this case, is the umbrella LLC.
Which States Recognize Series LLC
You must know, however, that not all states recognize the series LLC. It’s not a federal act, so you need to be operating in the state that allows it. Delaware was the first to recognize this type of business.
The other states are:
- Illinois
- Oklahoma
- Iowa
- Nevada
- Kansas
- Tennessee
- Utah
- Texas
- Puerto Rico
Although you are not allowed to create a Series LLC in California, the state nevertheless recognizes it if you applied somewhere else. You just need to register your company with California to do business there.
Converting Your LLC to Series LLC
Even if you operate as an ordinary LLC in one of the states mentioned above, you can’t just convert into a series LLC. It’s not as simple as that. The rules started to recognize the series LLC on July 1, 2012. If you started as an LLC before that date, you have to form another LLC.
But why convert?
It’s advisable to convert to the series LLC if you are diversifying and each product line has its distinct customers or suppliers. However, it can be complicated if your LLC is saddled obligations, taxes, or a pending lawsuit.
Under this scenario, you might as well liquidate the LLC and form a new series LLC.
Real estate developers also employ the protective barriers of the Series LLC because they can protect each of the assets in case of liability and litigation.
How to Convert?
If all the conditions apply to you, converting your LLC into a series LLC is quite straightforward. Each of the states requires similar standards and requirements that you need to comply with.
First, you must modify the Articles of Organization and the Operating Agreement. You can obtain the form from the state that allows you to amend the Articles of Organization. It’s not a complicated form as you will only fill up the basic information.
For instance, Delaware only needs the identity of the LLC and a short description of the amendment. Also, the form should indicate that each cell LLC is not liable for the liabilities and obligations of the other. After filling up the form, you submit it, along with the other documents, to the Secretary of State for approval.
What about the Operating Agreement? You will also have to amend it, but you don’t need to file a state form.