Business owners often seek ways to structure their companies efficiently while protecting assets and limiting liability. One option that has gained attention in recent years is the Series LLC, a unique entity structure that allows for multiple “series” or compartments under a single LLC umbrella. Each series is intended to operate independently, with its own assets, liabilities, and members.

While this structure may seem like an attractive way to save costs and streamline operations, Series LLCs come with significant legal, financial, and operational risks that can ultimately expose business owners to greater liability and administrative burdens. Below, we explore why Series LLCs can be problematic and what better alternatives exist.

What Is a Series LLC?

A Series LLC functions as a single LLC with multiple internal divisions (or series), each purportedly shielded from the liabilities of the others. This means a business owner could create separate series for different business ventures, properties, or investments—all under the same legal entity.

The appeal of a Series LLC lies in its promise of cost savings and liability protection:

• Cost Savings: Instead of registering multiple LLCs, owners pay to form just one entity and add series as needed.
• Liability Protection: Each series is meant to operate independently, theoretically insulating one series’ debts or legal troubles from affecting the others.

However, these theoretical benefits are overshadowed by serious legal uncertainties and operational challenges that make Series LLCs an impractical choice for most businesses.

Legal and Liability Risks of Series LLCs

1. Lack of Nationwide Recognition

One of the biggest concerns with Series LLCs is that they are not uniformly recognized across the U.S. While some states, such as Delaware, Illinois, and Texas, have specific laws governing Series LLCs, many states do not recognize or enforce the liability protections between series.

This creates serious complications when a business operates across state lines. If a lawsuit or dispute arises in a jurisdiction that does not recognize Series LLC protections, the entire entity could be at risk. Courts may disregard the series distinctions and hold the parent LLC and all its series jointly liable.

2. Courts May Not Uphold Liability Protections

Unlike traditional LLCs, Series LLCs have not been widely tested in court, making their liability protections uncertain. In many cases, courts apply “piercing the corporate veil” doctrines, which allow plaintiffs to disregard limited liability protections if corporate formalities are not properly followed.

Without a long track record of judicial enforcement, business owners relying on Series LLC protections may find themselves vulnerable to legal challenges that wipe out the assumed benefits of the structure.

3. Creditors and Lawsuit Risks

Creditors and litigants may challenge the separate liability structure of a Series LLC, arguing that assets across series should be accessible to satisfy debts or judgments. If a creditor can prove that a business owner failed to maintain proper records or financial separation between series, a judge may order that all series within the LLC share liability—defeating the entire purpose of forming a Series LLC.

Banking, Financing, and Tax Challenges

1. Difficulty in Obtaining Financing

Many banks and financial institutions hesitate to lend to Series LLCs due to their legal uncertainty. Lenders prefer well-established business structures, such as traditional LLCs or corporations, and may be unwilling to approve loans for Series LLCs—or they may require personal guarantees that eliminate any asset protection benefits.

Similarly, investors tend to avoid Series LLCs because they create complex ownership structures that are difficult to assess and value.

2. Tax Complexity and Compliance Issues

Series LLCs also create tax complications, as different states treat them differently. While some states allow Series LLCs to file a single tax return, others require each series to file separately. The IRS has not issued definitive guidance on Series LLC taxation, leaving business owners in a gray area regarding federal tax obligations.

Failing to comply with varying state tax laws can lead to penalties, audits, and administrative headaches.

3. Recordkeeping and Operational Burdens

Although Series LLCs are marketed as a simplified business structure, they actually require strict internal recordkeeping to maintain liability protection. Each series must:

• Have separate bank accounts.
• Keep independent financial records.
• Maintain distinct business operations.

Failing to uphold these formalities can result in courts disregarding the separateness of the series, putting all assets at risk.

As an anecdote, most clients with Series LLCs do not even understand how to properly sign a contract on behalf of the particular Series and will instead bind all the Series by accident.

Better Alternatives to Series LLCs

Given the high legal risks and operational complexities of Series LLCs, business owners should consider safer alternatives that provide more reliable liability protection and flexibility.

1. Traditional LLCs

Instead of a Series LLC, business owners can form separate LLCs for each venture or asset. While this approach requires separate filings and fees, it ensures strong liability protection and avoids the legal uncertainty of Series LLCs.

2. Holding Company Structure

A holding company with subsidiary LLCs can achieve the same liability separation as a Series LLC—but with far greater legal security. In this structure:

• A parent LLC owns multiple subsidiary LLCs.
• Each subsidiary operates independently with its own assets and liabilities.
• Liability protection is clearly established and recognized across all states.

Conclusion

Incorporated entities – be they traditional LLCs or corporations – are designed to provide liability protection; that is their core feature. The uncertainty surrounding Series LLCs creates liability exposure; the exact opposite of what you are looking for in an incorporated entity.

While Series LLCs seem like an innovative way to manage multiple businesses or assets under one entity, their legal and financial risks far outweigh the benefits. From lack of nationwide recognition to uncertain liability protections, tax complications, and difficulty obtaining financing, Series LLCs expose business owners to unnecessary risks that can be easily avoided with traditional LLC structures or holding company models.

If you’re considering forming a business entity, please reach out to Justin Banford at Bean, Kinney & Korman, P.C. at (703) 284-7253 or jbanford@beankinney.com.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.