When to Choose an Alabama LLC vs a Series LLC?
This article originally appeared at: https://www.sarahsshepard.com/blog/al-llc-vs-series-llc
You have several options when buying a business in Alabama or even simply forming your own legal entity. LLCs are among the most popular for small business owners. However, not all small business owners will own just one business in their lifetime — which is where a Series LLC comes in handy.
Series LLCs are a relatively new legal entity, and not every state offers this option. Additionally, not all Series LLCs are created equally regarding their protections and benefits.
The state of Alabama began offering Series LLCs back in 2017 as the general LLC legislation was updated. Since this newer entity is less established compared to traditional LLCs and other entities, it can be challenging to figure out whether a Series LLC is suitable for your business needs over an LLC or not.
One key feature that LLCs and Series LLCs have in common is that they offer asset protection. But, of course, your Alabama business lawyer will tell you that it’s a little more complex than that, so we’re going to dive into the details of choosing between an Alabama LLC and a Series LLC.
Here’s everything you need to know:
What Exactly Is an LLC? A Limited Liability Company (LLC) is a business structure within the United States designed to protect business owners from personal liabilities, i.e., personal responsibility for business debts and other liens. Although an LLC is essentially a hybrid entity, it combines specific characteristics of a traditional corporation with those of a sole proprietorship or partnership.
For example, the LLC business structure is most similar to that of a corporation. At the same time, the flow-through taxation of its members resembles that of a partnership.
Generally speaking, the regulations of an LLC fall under state statutes, which means the laws regarding these business entities will vary from state to state. The LLC owners are referred to as members. Most states — including Alabama — don’t restrict ownership, meaning that anyone can become a member. This would include individuals, foreigners, corporations, foreign entities, and even other LLCs.
However, membership rights do exclude banks and insurance companies.
In addition to LLCs offering the same limited liability like a corporation, they’re much more cost-effective to form and run, making them popular among smaller business owners. Moreover, LLCs can be used to run and own virtually any type of business. They’re not just limited to small business owners. Businesses of any size can form under an LLC. However, in many states, certain types of professionals must form special professional LLCs.
What Are the Requirements to Form an LLC? Forming an LLC is a pretty straightforward process. Mainly, you’re just required to file articles of organization or a similar document with your local Secretary of State’s office. Of course, each state will have its unique requirements, and in the state of Alabama, the requirements are as follows:
Choose an appropriate name for your LLC that includes “Limited Liability Company” or “LLC.”
Appoint a legal agent who will take responsibility for accepting legal papers on the LLC’s behalf if sued. It’s best to use your Alabama business lawyer as your legal agent.
File a Certificate of Formation with your county’s probate court.
Create an operating agreement
File a combined Business Privilege Tax Return and an Annual Report with the Department of Revenue (every year).
Comply with the state’s other tax and legislative agreements
What Are the Benefits of Forming an LLC? There are several benefits of forming an LLC, including:
Personal asset protection. LLCs provide business owners limited liability . They are not personally liable for any debts or liens incurred by the LLC business. Creditors can’t collect against your personal assets outside of your business.
Pass-through taxation. LLCs typically provide business owners with pass-through taxation. Any profits or losses will pass through the entity to the owner’s personal tax return at the owner’s individual tax rates.
Simplicity and flexibility. LLCs are the simplest entities to form and run while offering incredible ownership, management, and taxation flexibility. For example, there are no minimum or maximum limits regarding the number of members an LLC can have. All members can take on daily management responsibilities for operations or designate non-members. LLCs may also choose how they want to be taxed, such as a sole proprietorship or partnership.
What Are the Restrictions? LLCs do come with some restrictions and limitations. This would include:
Costs. Generally speaking, it costs more to form an LLC than a sole proprietorship or partnership. Once an LLC is created, it comes with annual taxes and fees that must be paid to the state.
Not ideal for investments. LLCs aren’t necessarily favorable if you plan to seek outside investors for your business. This is mainly because LLCs don’t really offer company stock in exchange for the investors’ money. Investments can still be made for LLC ownership interests, but it’s a much more complicated affair.
Transfer of ownership. It’s much more challenging to transfer the ownership of an LLC because there aren’t typically stocks or shares involved. Plus, all the members of an LLC must be in agreement when it comes to adding or dissolving members.
What Exactly Is a Series LLC? A Series LLC is a unique form of the traditional LLC. With a Series LLC, the articles of formation specifically allow for an “unlimited segregation of membership interests, assets, and operations” into an independent series. In other words, a Series LLC acts as a parent company or an umbrella company where there can be multiple LLCs with separate liabilities.
Each series within a Series LLC (also referred to as “cells”) operates as a separate entity with its own unique names, bank accounts, books, and records. Series LLCs typically have different members and managers per series, and the rights and responsibilities of these members and managers will differ significantly. Each series also may enter into its own contracts, sue or be sued, and hold its own titles to real and personal properties.
With Series LLCs, each series will also have its own liability protections. This means that any assets owned by one series are protected against the risk of liability that another series under the umbrella may incur. It works similarly to that of a corporation with multiple subsidiaries. However, the concept behind the series LLC is designed to completely separate any risk within separate entities without incurring the cost of setting up new entities.
An excellent example of someone who would benefit from a Series LLC is a rental property owner who owns multiple active properties.
What Are the Requirements to Form a Series LLC? Forming a Series LLC in Alabama is virtually the same as starting a traditional LLC. You’ll need to file articles of formation with your county’s probate court, come up with a unique name that includes LLC, appoint a legal agent, create operating agreements (per series), and fulfill the expected reporting and tax duties.
The primary difference in formation is that you must distinguish your Series LLC from a traditional LLC. This requires that you specifically state that your LLC is legally authorized to form its own series in the articles of formation. In addition, you would need to draw up an operating agreement for the parent LLC and one for each series you plan to form.
It should be noted that you can form an additional series for your LLC at any time.
The operating agreement is written for your parent LLC and generally provides rules for how all other series will operate. Of course, this means that the operating agreements for each series serve as more of a customized version of those rules — but at least you won’t have to file articles of formation for each series.
Once you’ve formed the parent LLC, any series you wish to form is done via the internal mechanisms defined within your operating agreement. In other words, you’ll need to amend the parent LLC operating agreement to add on another series.
What Are the Benefits of Forming a Series LLC? There are several benefits of forming a Series LLC, including:
Reduced startup costs. When forming a Series LLC, you’ll only pay one filing fee. Additional series also cost less compared to setting up multiple LLCs.
Asset protection. Assets of each individual cell are protected as individual assets . So if there’s a lawsuit or debt against one series, it won’t affect the others.
Less administration is needed. When you set up multiple traditional LLCs, they’ll need to be administered separately, which can be time-consuming and costly. A Series LLC allows you to save on time and money as there are fewer requirements to set up additional series.
Less complicated. A Series LLC doesn’t take on the same complexities regarding the overall structure, taxes, and other formalities like corporate records as a corporation or subsidiary structure.
They only require one state registration and one tax return. Only the parent LLC must be registered with the state, which equals lower costs. This still applies to the annual or biennial fee required. Additionally, only the parent LLC is required to file a tax return as it automatically includes each series.
What Are the Restrictions? The restrictions for a traditional LLC apply to that of a Series LLC, with an additional caveat. As a result, series LLCs can be a little complicated regarding taxation.
While the parent LLC takes on the tax responsibilities of all the series beneath it, it can be difficult to distinguish whether each series is a separate entity for tax purposes. Therefore, an experienced tax professional will require you to help you navigate your company tax returns if you have a Series LLC.
When to Choose an LLC Vs. a Series LLC? Plan to run a business with multiple revenue channels or have separate divisions, teams, or storefronts in different states. A Series LLC may be the best fit for you. However, suppose you intend to run a particular business, as in one store or one revenue channel. In that case, a traditional LLC will work just fine.
Are you unsure which type of business formation will suit you best, or if you have more questions regarding LLCs and Series LLCs? Then, get in touch with us to consult with Sarah S. Shepherd or another experienced Huntsville corporate attorney. We can answer all of your questions, guide you in your decision-making, and help you with other aspects of your business.
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