Basics of a Series LLC

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filesIf you’ve been reading along all week, like what you’ve read, and are interested in what it takes to set up a Series LLC, today’s entry is for you.

Paperwork is the key here. All states that offer Series LLCs say the same thing: you only get the liability protection between subsidiary Cells if you run the cells separately, keep separate books and records and can demonstrate that you aren’t commingling everything into one big company. You’ve got to run your Series LLC and its subsidiary cells as though they were separately incorporated LLCs to comply with this requirement.

That said, the first step to creating a series LLC are the same as creating any other kind of LLC. You’ll prepare and file Articles of Organization with the state. The articles will typically be a little different from those of a regular LLC – there will be a statement that this is a Series LLC, or a box to check, or even a whole different form. You will appoint the resident agent, set out the LLC’s business office address, and name the main Series LLC’s Manager(s). If you’re creating an Illinois Series LLC, you’ll also be filing additional 1-page documents with the name of each subsidiary cell, and the Manager(s) of each cell.

After that, you get into the Operating Agreement, which defines how your Series LLC is structured and operates. This document sets out the following key points (in addition to other administrative functions):

  • The name(s) of the initial Managers and Members of the Series LLC
  • The names of each Cell being established at the time the Series LLC is formed (there’s usually at least one, but not always).
  • The names of the initial Managers and Members for each Cell being established
  • How new Cells are created or dissolved
  • How the Cells relate to the Series LLC, as true subsidiaries or independent entities
  • How the Series LLC Managers are appointed or removed
  • How Cell Managers are appointed or removed
  • The level of control the Series LLC has over the Cells
  • The duties and responsibilities of the Series LLC Managers and the Cell Managers
  • Restrictions on ownership and transfer of Series LLC ownership
  • How and in what circumstances Members may be bought out by the Series LLC, or other Members
  • How the profits and losses are to be distributed amongst the Members
  • What happens in the event of bankruptcy in the Series LLC or any of the Cells
  • How disputes between Series LLC Managers, Members or both are resolved
  • The level of control Series LLC or Cell Managers have over day-to-day operations of the Series LLC or the Cells, and when management actions and decisions require pre-approval by the Members
  • How the Operating Agreement may be changed
  • When the Series LLC may ask Members for additional cash or property contributions, and what happens when Members cannot or refuse to pay

In any LLC, Series or regular, the Operating Agreement is crucial but that’s especially applicable here. You’ve not only got the main LLC to consider – you also have to think about all the subsidiary cells, now and into the future. This isn’t an agreement you want to prepare by finding on one the Internet. Let a professional draw this one up for you. That way, you know it’s covered all the bases.

In fact, because each Series Cell is going to operate independently, we recommend that you create a separate Operating Agreement for each subsidiary cell, in addition to the main Operating Agreement. Remember, the Series LLC’s Operating Agreement deals with the overall operation of the Series LLC. It tells you how you can create and dissolve Series Cells, but it also allows for each Cell to operate independently. That means each Cell needs its own guide for how the Managers operate, what rights the Members have, how profits are distributed, and so on.

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