Grow Your Business With a Series LLC

November 9, 2022/in Series LLC Applications

According to the Bureau of Labor Statistics, 20% of businesses fail in their first year, and only 50% will make it to their fifth year. One of the main reasons businesses fail is inflexibility. You often find inflexibility in a company’s business plan, however, it can also show up in its legal structure.

More traditional entity types, like LLCs, are not dynamic and can add friction when a company is trying to grow and expand. Successful business owners have used Delaware Series LLCs to get past this. Serial entrepreneurs are using Delaware Series LLCs as a growth hack to protect their personal assets while quickly scaling their business ideas.

The Delaware Series LLC Business Growth Hack

Forming a Delaware Series LLC can enable entrepreneurs looking to explore several business ideas in hopes of finding out what works. Here is how to use a Delaware Series LLC to accelerate business growth.

Step 1.) Protect Multiple Businesses With One Entity

A Series LLC enables entrepreneurs to incubate different ideas or products while protecting both themselves and the business as a whole.

An entrepreneur can put different businesses into individual protected series. This keeps the assets and liabilities of each business separate from one another. If one business experience’s setbacks, or even fails, the creditors of that business cannot come after the assets of related businesses or the Series LLC in general.

Additionally, business owners also receive these protections for their personal assets. This offers entrepreneurs the freedom to put ambitious thoughts into action.

Step 2.) Spin Off Successful Businesses

Entrepreneurs trying several ideas and gaining experience are bound to find a business that takes off. Series LLC owners can spin off successful businesses held within protected series as separate LLCs.

By incubating business ideas and spinning off winners, entrepreneurs can substantially reduce their personal liability risk while achieving significant business benefits.

What Is a Series LLC?

Most entrepreneurs are familiar with the traditional Limited Liability Company, or LLC. The LLC has become the most popular entity type for small businesses. This is because LLCs are easy to set up and relatively cheap to maintain.

The Series LLC is the next evolution of the LLC. Created by Delaware in 1996, the Series LLC allows companies to provide limited liability protection for multiple businesses using just one entity.

A Series LLC has the ability to create an unlimited number of separate units called “protected series”. Each protected series can have a separate business purpose, separate business assets and even separate members or managers.

Delaware Series LLC vs. LLC

Before the Series LLC, entrepreneurs had to endure a more costly and inefficient process to protect multiple businesses from cross liability. Business owners traditionally form each new business as a separate LLC; each of which is owned by a Holding Company. Forming each LLC requires filing a Certificate of Formation, paying associated filing fees, and paying Annual Franchise Tax.

The Delaware Series LLC is great for serial entrepreneurs because it is completely flexible. The Series LLC enables entrepreneurs to create unique ownership structures that are tailored for the specific needs of their business. A Delaware Series LLC can also be more cost effective to maintain. Creating a Delaware Series LLC requires making only one filing and paying one Annual Franchise Tax for the whole entity.

Delaware Series LLC Business Benefits

In addition to asset protection, the Delaware Series LLC offers several key business benefits. These benefits include:

Reduced Costs

Forming a Delaware Series LLC requires paying only one filing fee. Additionally, a Delaware Series LLC only needs to make one Annual Franchise Tax payment no matter how many protected series it creates.

Flexibility

The Series LLC offers flexibility through its Operating Agreement. The Operating Agreement is a private document that governs the internal affairs of a Series LLC.

The Operating Agreement allows Series LLC members to tailor a legal structure that meets the needs of their business. Members can create unique ownership structures, establish special provisions like a Right of First Refusal, and make personalized schedules for distributing profits.

Series LLC owners can easily adjust the company’s legal structure as it grows by amending the Operating Agreement. Since the Operating Agreement is a private contract, Series LLC members can make changes to the ownership structure without having to file any documents with the state.

Administrative Efficiency

Series LLC owners create new protected series simply by adding them in the Operating Agreement. No additional state filings are necessary after forming a Series LLC.

Consolidated Ownership

Members in a Series LLC can be associated with each protected series. Serial entrepreneurs can centralize decisions across multiple businesses. This enables ease of management.

How Do Series LLCs Work, Exactly?

Protected series of a Series LLC have their own asset shields, just like a traditional LLC. A Series LLC protects the business assets of each protected series from the liabilities of the other businesses. This means you can manage multiple businesses under one entity while keeping their individual assets and liabilities separate.

This asset protection strategy is called “ring fencing”. Think of a Series LLC like horses in a barn. Protected series all exist under one roof. However, internal firewalls rope off the assets and liabilities of each protected series in separate paddocks.

Additionally, the personal assets of Series LLC members are also protected from the business liabilities of any protected series and are off limits to business creditors.

Who Uses Series LLCs?

Any business holding low-risk assets can use the Series LLC to achieve asset protection. Entrepreneurs currently use Series LLCs to protect a wide range of innovative businesses, from sophisticated investment companies to savvy ecommerce businesses.

Series LLCs have taken off in popularity amongst real estate investors. Individuals and firms managing a portfolio of properties are able to reduce liability risk by holding property titles within separate protected series. This protects each property from obligations and liabilities of any other property held within the Series LLC.

What’s the Best Way to Run Multiple Businesses Under One LLC?

November 7, 2022/in Series LLC Applications

If you’re a serial entrepreneur looking to maintain multiple businesses or product lines under one entity, you have several options. These include:

Forming one LLC and creating multiple trade names for each business.
Forming multiple LLCs managed by a Holding Company.
Forming a Delaware Series LLC

Each of these strategies differ in cost and liability protections. Picking the best plan for you depends on the type of businesses you operate, your ultimate business goals, and your appetite for liability risk.

We explain the who, what, how, and how much for running multiple businesses.

1. MULTIPLE DBAs

What Is A DBA?

A DBA (“Doing Business As”) is a trade name that an LLC or corporation can use other than its formal corporate name. For example, Agents and Corporations, Inc. trades under the name “IncNow®.” A DBA is also referred to as a “fictitious name.”

DBAs are useful because they provide clear public notice that a particular business is actually incorporated under a different name. Entrepreneurs use DBA’s to distinguish separate businesses that are operated by one legal entity. The Limited Liability Company, or LLC, is the most popular entity type for small businesses.

How To Get A DBA.

Businesses acquire DBAs by filing a form with the Secretary of State in the company’s state of formation. DBAs also need to be notarized by an official notary in the state of formation.

The form requires general information about the business, such as:

The corporate name,
The business address
The date of formation or incorporation,
The DBA trade name,
Nature of business,
and the members/partners of the business and their addresses.

How Much Does A DBA Cost?

The cost of acquiring a trade name is relatively low. Filing a DBA in Delaware requires paying a filing fee of $25. There are no additional annual costs associated with maintaining a DBA.

DBA Business Protections.

A disadvantage of the multiple DBA strategy is that there is virtually no internal liability protection. When multiple businesses are operated under one LLC, the individual debts, obligations, and liabilities of each business are not segregated from one another. This means that a hostile creditor of one business could potentially gain access to the assets of another business, or the personal assets of the LLC’s members.

Who Uses DBAs?

Entrepreneurs running small scale or early stage businesses may benefit the most from the multiple DBA strategy. In this stage, the general liability risk of the business is low.

An example would be an at home entrepreneur running multiple ecommerce sites selling different types of products. Each online store can have its own trade name and exist under one LLC.

2. FORMING A HOLDING COMPANY.

What Is A Holding Company?

A holding company is an entity created for the purpose of owning and managing other individual companies. Businesses owned by a holding company are known as subsidiaries. Each subsidiary can have its own business operations while keeping its assets and liabilities separate from other related businesses.

How To Form A Holding Company.

Setting up a holding company starts with forming each business as an LLC. This is done by filing Certificates of Formation with the Secretary of State for each entity. The Operating Agreements of each subsidiary LLC will name the general holding company as the sole member.

How Much Does A Holding Company Cost?

Forming an LLC in Delaware requires a $90 filing fee. Each LLC will also have to pay an annual fee to appoint its own Registered Agent.

Additionally, Delaware requires each LLC pay the Delaware Annual Franchise Tax. This is a $300 payment due annually on June 1 each year after formation.

Holding Company Business Protections.

A holding company benefits from liability protections by operating each subsidiary as a separate LLC. The holding company is not subject to the debts, liabilities, or obligations of any subsidiary LLC. This means creditors of a subsidiary cannot access company assets of any other business. The personal assets of the LLC owners are also protected from business liabilities of any subsidiary.

Who Uses Holding Companies?

A holding company can benefit businesses holding assets with low to moderate levels of financial risk. The relatively high overhead costs of forming a holding company can be worthwhile if the structure keeps the failure of one business from sinking the entire enterprise.

Holding companies are popular amongst real estate investment firms owning and maintaining multiple properties. Traditionally, each subsidiary LLC is used to hold title to an individual property. while a parent LLC manages the properties. This allows the company to acquire separate financing for each property while shielding them from cross liability.

3. FORMING A DELAWARE SERIES LLC

What Is A Delaware Series LLC?

A Delaware Series LLC is able to create an unlimited number of protected series fenced within one entity. Each protected series can function like a mini LLC with a separate business purpose, assets and members. A protected series can be spun off into separate LLCs once the business takes off.

The Series LLC’s key feature are the internal firewalls separating each protected series. The Delaware LLC Act provides protected series with limited liability protection between one another, as well as the main LLC. Series LLC owners achieve these protections without having to make any additional filings.

How To Form A Delaware Series LLC.

Only one Certificate of Formation needs to be filed to create a Delaware Series LLC. This is one advantage that the Series LLC has over the holding company. It is important that the Certificate of Formation includes appropriate language establishing the limited liabilities of a series.

The parent LLC can then create an unlimited number of protected series without incurring any additional costs. A Delaware Series LLC creates and dissolves protected series by amending its internal Operating Agreement.

How Much Does A Delaware Series LLC Cost?

Setting up a Delaware Series LLC can be significantly more cost effective than forming a holding company with multiple subsidiaries. Forming a Series LLC in Delaware involves paying the typical state filing fee.

Delaware requires Series LLC to make only one Delaware Annual Franchise Tax payment each year after formation. Protected series are not required to pay Delaware Annual Franchise Tax. A Delaware Series LLC can create an unlimited number of protected series at no additional costs to maintain them.

Who Uses Delaware Series LLCs?

The Delaware Series LLC is the cutting edge in asset protection structures. The entity benefits entrepreneurs looking for the freedom to explore opportunities and incubate multiple business ideas.

From a small local farm owning multiple pieces of equipment, to large scale investment companies managing segregated mutual funds, the Series LLC is a dynamic structure that grows along with the business. Low startup costs and internal liability protections make the Delaware Series LLC a viable vehicle for holding a range of asset types, from simple cash assets to leveraged securities.

Series LLC Considerations

Operating a Series LLC requires diligence and organization. Delaware’s LLC laws include specific record keeping requirements that need to be met for the internal liability shields of protected series to be valid.

As easy as it may be to set up a Delaware Series LLC, it is also easy for members and managers to inadvertently impose cross liability upon themselves and their businesses. The most successful entrepreneurs use systems to manage separate records and adhere to these requirements.

How the Series LLC Helps Captive Insurance Companies.

October 4, 2022/in Series LLC Applications

The Delaware Series LLC is often used in sophisticated industries. Examples include regulated finance, real estate investment, and oil field financing. Captive insurance is another application where the Delaware Series LLC has become popular.

The captive insurance industry has been able to benefit from using the Delaware Series LLC as a means to separate liability under one regulated entity. We discuss how to structure a captive insurance company as a Series LLC, as well as some of the history behind series insurance captives.

What Is Captive Insurance?

Insurance captives are complex entities that allow a group of companies to insure themselves against their own business risk. Captive insurance is different from commercial insurance where companies simply buy into a fund pool. Policyholders in an insurance captive wholly own the insurance company.

Policyholders can exercise control over the insurer’s operations and even benefit from underwriting profits. The captive insurance model can promote greater efficiency in coverage and lower insurance premiums.

How To Structure a Series LLC Captive Insurance Company

The Series LLC fits well with creative approaches to legal structures because of its flexibility. State laws typically abide by a core licensing approach for licensing captive insurers. This approach licenses the Series LLC entity, referred to as a “core” entity, as a special purpose captive.

The core captive has the ability to grant individual insurance licenses to associated protected series under its own Certificate of Authority granted by the state Insurance Commissioner. The core captive then uses protected series to hold the funds of individual policyholders as associated assets to protect them from cross-liability.

The Delaware Series LLC and Captive Insurance

In 2010, Delaware licensed the first Series LLC as a captive insurance company and created the Series Captive Insurance Company (SCIC). The statute was later revised in 2015 to formalize the licensing, taxation, reporting, and governance requirements for SCICs.

The Series Captive Insurance Company is often described as a “hub in spoke” structure. The business of providing insurance to individual policyholders is conducted strictly through the protected series.

The Series LLC functions as an administrative hub. Fees and policy premiums pass through the Series LLC entity down to the protected series. The main Series LLC represents a management service organization, or MSO. The MSO is tasked with managing the individual protected series.

The Delaware statute treats each protected series in a SCIC as a separate insurance captive. This means that each series is required to comply with regulatory requirements.

Requirements include:

Maintaining a resident manager;
Hosting annual meetings; and,
Adopting a conflict of interest policy.

The MSO can fulfill these requirements for all protected series.

Additional Filings for Insurance Captives

The Delaware Secretary of State does not require Series LLCs to file annual reports. However, Delaware’s Department of Insurance now requires Series Captive Insurance Companies to file separate annual reports for each protected series.

If a protected series of a series captive is managed by a separate board, then the protected series is required to hold its own annual meeting. Under the statute, the financial condition of each series must be accounted for through an audit.

Delaware Series Captives vs. the Protected Cell Companies

Prior to the Series LLC, captive insurance companies tried implementing Protected Cell Companies (PCCs) to separate the liabilities of individual captive insurers. A PCC is similar to a Delaware Series LLC in that it provides segregation of assets through asset chamber “cells”.

Each cell is capable of operating independently from one another while ownership is consolidated under a core entity. Separate cells which encapsulate the business of insuring policyholders, while the core insurance company acts as an administrator. Individual cells of a PCC can be regulated in conjunction with the core entity.

How Protected Series Improve Upon the Protected Cell Company

The cells of a Protected Cell Company are less empowered than the protected series of a Delaware Series LLC. The PCC statute does not allow individual cells to contract in their own name. These restrictions limit the Protected Cell Company’s ability to provide asset protection. Cells of a PCC must have the core entity contract for them. Legal practitioners see this as being unnecessary liability exposure for the core entity.

In contrast, the Delaware LLC Act provides protected series of a Series LLC with legal personhood. Protected series are able to contract, sue or be sued, own separate assets and hold title to real property entirely in its own name.

The ability of protected series to enter into contracts provides significant advantages for captive insurance. For example, protected series enable insurance captives with better access to reinsurance markets. The PCC structure would only allow insurance captives to achieve reinsurance by forming and maintaining additional entities existing outside of the captive. This strategy not only incurs greater cost, but also greater liability. Captive insurance companies can promote administrative efficiencies by implementing the Delaware Series LLC. This can result in both cost savings and superior liability protection.

Adoption of The Series Captive

Delaware’s innovation in creating the Series Captive Insurance Company has influenced other states to adopt similar laws. Montana now permits Series LLCs to be licensed as special purpose captives. Tennessee has also amended its Limited Liability Company Act to allow a “series protected cell” structure.

How Series LLCs Benefit Investment Companies

August 10, 2022/in Delaware Series LLC, Series LLC Applications

To start an investment company, such as an open-end or closed-end fund, you first need to choose a form of entity. A Delaware Series LLC is often preferred for many reasons.

Why the Delaware Series LLC Is Designed for Investment Companies

The Delaware Series LLC is a good fit for investment companies because it offers flexibility and protection.

Investment companies have engaged in segregating classes of assets into separate funds as far back as the mid 20th century. They first used vehicles known as statutory trusts. For example, high-risk, high-yield investments could be allocated to one trust, and lower performing ten-year notes in another. The trusts issue freely transferable ownership interest to investors. Investors are afforded limited liability proportionate to their investment given they do not participate in management. A group of these funds is effectively known as a “statutory trust series”.

Prior to any supporting legislation, this process was both cumbersome and costly. Despite being part of a single fund family, statutory trusts were treated as being truly separate. Mutual funds were required to complete a costly SEC registration for each statutory trust within the series.

This changed with the Investment Company Act of 1940. The Act legally recognized statutory trust series and enabled companies to maintain separate funds under central management.

The 1990 Delaware Statutory Trust Act further developed the statutory trust series and helped propel the mutual fund industry, enabling the segregation of funds and providing limited liability to investors.

What makes the Delaware Series LLC an evolution of the statutory trust is the addition of legal personhood. At the time, the Delaware Statutory Trust Act did not grant series trusts any of the typical characteristics of legal personhood. For example, trusts did not have the power to sue or be sued, and they could not contract or hold property in their own name. These are all powers that protected series were purpose-built to have. This makes the Delaware Series LLC adaptable for many different business types.

What is a Series LLC?

Created by the Delaware General Assembly in 1996, the Series LLC is the next evolution of the ever popular Limited Liability Company. Under a Series LLC, one entity is created by filing a Certificate of Formation with the Delaware Secretary of State. This single LLC has the ability to create an unlimited number of separate cells, known as “protected series”, through its operating agreement. Each protected series can have a separate business purpose, separate associated assets, and even separate members.

Assets of each protected series are firewalled off in two directions: vertically, at the company level, and horizontally, between the other protected series. This type of asset protection structure is often labeled “ring-fencing”.

Every protected series associated with a single Delaware Series LLC is considered to be a legal person. As a result, each protected series has many of the same rights and powers of a traditional LLC. A protected series can contract in its own name, own or hold title to assets or property, grant loans, obtain an EIN number, and open a bank account.

“Each protected series can have a separate business purpose, separate associated assets, and even separate members”.

Series LLC vs. a Holding Company

Many investment companies may consider using multiple LLCs to form a holding company structure.

The traditional Delaware LLC is an extremely popular entity structure amongst businesses of all sizes. It is a reliable means of providing limited liability for members and predictable governance for ownership and management.

One way of structuring an organization is to use a Delaware LLC as the single member and manager of a number of operating LLCs also filed in Delaware. Often, this has been accomplished by creating separate LLCs, known as subsidiaries, for different lines of business or separate business assets. The main entity is referred to as a holding company. The holding company is named as the member of each subsidiary LLC and is issued all of the membership interest. This results in an ecosystem where multiple businesses are connected, however, their individual debts, liabilities, and obligations are separate from one another.

How Does the Series LLC Improve Upon the Holding Company?

The holding company structure is sound in providing limited liability between business assets. However, there are drawbacks, mainly in the form of administrative burdens and costs. Micro-entrepreneurs and solo-entrepreneurs are burdened with the time and monetary costs of forming multiple entities and maintaining each entity’s associated filing fees. Each LLC has an annual franchise tax and a duty to maintain a Registered Agent in the state of formation.

The Delaware Series LLC came along in 1996 as special interest legislation for the mutual fund and regulated finance industries. This was a benefit because multiple classes of funds only needed one SEC filing. In Delaware, a Series LLC with protected series only pays one annual franchise tax and only needs to pay a single Registered Agent fee. This has made the Series LLC popular among small time “serial entrepreneurs” looking to incubate many business ideas simultaneously to see which will thrive.

The Delaware Series LLC enables founders to create unique and innovative ownership structures through the Operating Agreement. These structures can include different classes of members with differing rights, responsibilities, and voting capacities. For example, this allows investor A to be a member associated with the assets of protected series 1 only. Then investor B can be a member associated with the assets of protected series 2 only, and so on.

“The Delaware Series LLC came along in 1996 as special interest legislation for the mutual fund and regulated finance industries”.

How Do You Structure an Investment Company as a Series LLC?

Here is an example of how an investment company operating as a closed-end fund can be formed as a Series LLC:

Under this structure, the company itself serves as the “management service organization”, or MSO. The express purpose of the MSO is to manage the funds held by each protected series.

Each protected series is set up as a special purpose entity created to hold individual associated assets. An investment company can isolate financial risk utilizing the internal firewalls in place between each protected series. This can keep one particular asset from becoming a contagion that infects the entire fund family.

With the creation of each protected series, separate series agreements would be drafted to name individual investors as non voting members of the protected series associated with their chosen investment(s).

When an investment reaches maturity, the protected series could be terminated and its assets liquidated. Distributions can be made to investors proportionate to their share outlined in the separate series agreements.

“An investment company can isolate financial risk utilizing the internal firewalls in place between each protected series”.

How Do I Start a Delaware Series LLC?

Creating a Delaware Series LLC starts with filing a Certificate of Formation with the Delaware Secretary of State. The Certificate of Formation requires little information about the company, other than its name. It does not need to include the names of the members.

It is important that the Certificate contains specific language citing Delaware Code Chapter 18 Section 215. This establishes notice of the limited liabilities of a series, which is a prerequisite for the internal liability shields to be honored in court.

A Delaware Series LLC only needs to appoint one registered agent no matter how many protected series it creates. The name of the registered agent is also included in the Certificate of Formation.

The next step is to draft the Series LLC Operating Agreement. This is an internal document that will serve as the foundation of your Series LLC. This internal document governs how ownership and responsibilities will be managed throughout the life of the company. In the event of a disagreement amongst LLC members, the operating agreement serves as the guide for resolving disputes in a swift and just manner. Additionally, Separate Series Agreements must be drafted to establish each protected series.

Every entity must maintain a physical address in the state of Delaware in order to receive legal notices, such as lawsuits. To comply with this provision, you must appoint a registered agent. A registered agent operates an office in Delaware and is responsible for receiving “service of process” on behalf of your company.

Consult with an Attorney

The investment fund industry is well regulated, and you should engage an experienced securities attorney to assist you with the process. Almost all securities attorneys will be familiar with the Delaware Series LLC as a tool to help you accomplish your goals efficiently under one entity umbrella that is purpose built for this application.