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Delaware Series LLC
An overview of the Delaware Series LLC structure.
This overview is provided for informational purposes only, and is not intended to constitute legal, financial, tax, or other advice. You should not act or refrain from acting based on any information in this overview. Syndicate does not endorse or make any representation as to the capabilities of any tax advisor in our network and the provision of contact information is not a recommendation that you hire any such person. Please check with your legal and tax advisors to make the best decisions for your specific circumstances.

Quick Overview

In this page, we will be covering the following topics on Series LLCs:
  1. 1.
    What is a Series LLC? (jump to section)
  2. 2.
    When are Series LLCs useful? (jump to section)
  3. 3.
    What are the advantages of Series versus Standalone LLCs? (jump to section)
  4. 4.
    What are the risks of Series LLCs versus Standalone LLCs? (jump to section)
  5. 5.
    What are some best practices for managing Series LLCs? (jump to section)
  6. 6.
    Does my investment club need a Series LLC? (jump to section)

1/ What is a Series LLC?

A Series LLC is a relatively recent type of entity that lets you create a collection (or series) of segregated cells with their own members, interests, assets, and liabilities in a single entity. Some people liken this to a "honeycomb" (info on Harvard Business Services, info on upcounsel), where the members, interests, assets, and liabilities of each series are considered separate from each other series but they are also connected by virtue of being series of the same Series LLC.
One of the main advantages of a Series LLC is that you can create multiple child Series LLCs under a master or parent LLC. In some cases these can be created instantly at no incremental cost. However, because this is a relatively new legal structure, there are a number of drawbacks with a Series LLC versus a traditional Standalone LLC which are outlined below.

2/ When are Series LLCs useful?

The most common reason investors use Series LLCs is when they want to create different "seasons" or "vintages" of interests or assets within a single entity or be able to have members participate in differing percentages in certain assets and liabilities of the entity.
For example, Imaginary Investment Club could create a Series LLC called Imaginary Investment Club Series LLC. Imaginary Investment Club may initially have three members: A, B, and C. Imaginary Investment Club Series LLC could create an initial series under the Series LLC. The full legal name of the initial series could be: Imaginary Investment Club Series LLC, Imaginary Series 1, and the members of the initial series would be A, B, and C.
Eventually C gets busy and doesn't want to continue making new investments and there are a couple other people (D and E) who the club wants to include. Imaginary Investment Club Series LLC could create a new series for this new group. Let's call that new series, Imaginary Series 2. Its full legal name would be: Imaginary Investment Club Series LLC, Imaginary Series 2. Its members would be A, B, D, and E and only those members would share in the investments (and associated liabilities) acquired by Imaginary Series 2.
In the meantime, the original series, Imaginary Series 1, with A, B, and C as members, would exist in parallel until all of that Series’ investments are exited and they choose to terminate that series.

3/ What are the advantages of Series versus Standalone LLCs?

The advantages of Series LLCs are generally around cost and speed. Instead of using a Series LLC with Imaginary Series 1 and Imaginary Series 2, you could instead form separate LLCs. The first LLC would have A, B, and C as members. The second LLC would have A, B, D, and E as members. Each LLC would have its own separate operating agreement. If you use a Series LLC, the operating agreement for the Series serves as the operating agreement for each Series. In addition:
  • If you choose to create only protected (unregistered) series in your Series LLC, you only pay formation costs, annual franchise fees, and registered agent fees for the Series LLC, so you can create protected (unregistered) series simply and without additional costs
  • If you choose to create registered series in your Series LLC, you will incur a one-time filing cost, annual franchise fees, and potentially additional registered agent fees for each registered series in addition to the Series LLC. However, as a registered series, the Delaware Secretary of State will issue certificates of good standing for such series, which as discussed below, may help with tax reporting and dealing with third parties

4/ What are the risks of Series LLCs versus Standalone LLCs?

  • The series of a Series LLC are not separate legal entities and not all states recognize the series of a Series LLC as having assets and liabilities legally separate from each other, which means that outside of Delaware a court could treat all the series and the LLC as one entity. This would permit a court to make the funds and assets of one series available to satisfy the liabilities of another series or the Series LLC generally, notwithstanding the intention of the members of the Series LLC that assets and liabilities be segregated
  • The segregation of each series’ assets from the liabilities of the other series or of the Series LLC generally has also not been tested in the bankruptcy courts
  • Even in Delaware or other states that do recognize the separate assets and liabilities of the series of a Series LLC, if you do not comply with the requirements of the Delaware statute governing the formation of a Series LLC and its series, a court could still treat all the series and the LLC as one entity
  • Other states, like California, may tax each series separately if you qualify your Delaware Series LLC to do business in that state and in some states you may not be able to qualify a series to do business in that state separately from the Series LLC
  • If you do not create registered series for your Series LLC it can be challenging to get an EIN for the series to open a bank account in the name of the series, to qualify the series to do business in other jurisdictions, or to conduct business with others who want confirmation from Delaware of the existence of the series
  • While the IRS has provided guidance as to the tax status of a series of a Series LLC for federal income tax purposes, the status of a series for state tax or other federal purposes is not certain and may depend on the laws of each state in which the series does business or the members of such series are located
  • Attorneys, accountants, and some investors may be less familiar with the Series LLC structure and it can be difficult to get the guidance you need
Series LLCs can provide unparalleled speed, cost-effectiveness, and ease of use versus Standalone LLCs, especially if you plan to make multiple seasons or vintages to segregate the assets and liabilities of different investments within your collection. However, they are not suitable for every case and we recommend you check with your legal and tax advisors to decide which entity is best for you.

5/ What are some best practices for managing Series LLCs?

If you do choose to proceed with forming a Series LLC using Syndicate’s forms, here are some best practices to follow:
  • Register each series with Delaware by forming a “registered series” rather than a “protected series” under Delaware law
  • Get a separate EIN for each series, even if the series has only one member and would be considered an entity disregarded from that member for federal income tax purposes
  • Include the name “Series” in the name of your Series LLC and each series to give notice to others that the entity is Series LLC and that each series has separate and segregated assets and liabilities
  • Be sure that any asset or liability that is to be allocated to a single series is held in the name of that series and not the name of the Series LLC generally
  • When entering into contracts with third parties for the benefit of a series, enter the contract in the name of the series and not the Series LLC and specify that the contract is only with the series and that neither the Series LLC nor the other series has any liability under the contract
  • Keep funds for each series in separate bank accounts or wallets
  • Keep separate records of each series’ transactions and gains or losses and account for each series’ assets and liabilities separately from the assets and liabilities of each other series and the Series LLC itself
  • Do all allocations of distributions, profits and losses, and all tax reporting separately for each series and the Series LLC
We can help you register and get EINs, and our cap tables easily separate for each new series with automatic records of on-chain transactions. We'll send you reminders before tax season and if you request, can connect you to tax advisors in our network who may be able to help prepare your filings.

6/ Does my investment club need a Series LLC?

Choosing to create a Series LLC for an investment club provides a number of important advantages—such as enabling the instant and no cost ($0) creation of legal entities for different investment clubs, enabling an investment club to invest in startup equity, helping manage club members' legal and financial liability, supporting tax filings, and empowering clubs with off-chain abilities like opening bank accounts, paying service providers, and more. That said, these advantages come with a number of risks that a lawyer can help you evaluate.
Whether a legal entity is needed for your investment club is ultimately determined by you, your lawyers, the admin(s), and members of the investment club. Syndicate recommends that all investment clubs should consult with their own tax and legal counsel for their particular situation.
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Outline
Quick Overview
1/ What is a Series LLC?
2/ When are Series LLCs useful?
3/ What are the advantages of Series versus Standalone LLCs?
4/ What are the risks of Series LLCs versus Standalone LLCs?
5/ What are some best practices for managing Series LLCs?
6/ Does my investment club need a Series LLC?