Series LLC Basics: Subsidiary Cells

The ability to create subsidiaries is the biggest difference between a regular LLC and a Series LLC. Under Series LLC law, your entity has the ability to create an unlimited number of subsidiary Cells. The Cells do not function as true subsidiaries, unless you want them to. State laws allow each Cell to choose to operate entirely independently of the main LLC, with different owners and Managers.

Under state law, each Series Cell is considered a separate and unique LLC. There is no legal difference between a Cell and a regular LLC. Where taxes are concerned, you can choose to have the Cells consolidate income and expenses onto the main LLC’s return, or you can make separate tax elections and have the Cells file separate tax returns.

How you establish a Series Cell differs a little from state to state. In most states where the Series LLC is accepted, it’s an internal paper transaction.

The first step is for the Managers of the Series LLC to authorize the creation of the new Cell. This is done by Consent Resolutions, which set out the name of the new Cell, the Managers and the Members. A schedule is then created and attached to the Series LLC’s Operating Agreement, setting out the details of the new Cell. Finally, a separate Cell Operating Agreement is created, which sets out how the Cell will govern itself. The Cell can then make an IRS filing to obtain its Federal Tax Identification Number, establish its bank account and begin business operations.

In some states, there may an additional step, whereby you file documentation with the Secretary of State, notifying the office of the new Cell. Illinois falls into this category. It was one of the earliest adopters of the Series LLC and is widely considered to have the most comprehensive legislation regarding the management of the structure. In Illinois, Series Cells are established by filing a Certificate of Designation (Illinois Form LLC 37.40). Illinois law specifically states that a Cell will only receive asset protection if the Certificate of Designation has been filed.

In states where you don’t have to register the Cell, you gain some additional privacy. Without the registration being public knowledge, it’s much more difficult for someone to find out who owns the Cell and where it was created.

Naming Your Series LLC

You will need a name for your Series LLC and each one of the Cells you are creating during initial set up. All states require you to use the proper corporate designator after the name of your LLC, which will be either “Limited Liability Company, LLC, or L.L.C. You will also have to comply with individual state naming requirements. Usually that means you can’t use certain words, like “bank”. All states have a list of what is and isn’t acceptable for LLC names, typically on their websites or in the instructions that come with their pre-printed Articles of Organization.

No state requires you to use the word“Series” in the name of your Series LLC. But when it comes to naming the Cells, though, state laws differ. Illinois has the most stringent requirements. In Illinois, you are required to use the full name of the Series LLC and then the name of the Cell, e.g., Butterfly Holdings, LLC – Caterpillar Series. Not all states have this type of requirement. Nevada, for example, makes no mention of how the Cells should be named.

For practical purposes, we like to see clients use the Illinois-style naming convention when filing for the Tax ID number with the IRS.

If you don’t like the idea of using a long company name, you may want to consider filing a fictitious business name, or D/B/A application for each Cell. That will allow you to create a shorter name for everyday use, like company logo, website, bank account, business card, and so on. But make sure that you use the longer, formal name when it’s required. For example you wouldn’t ever want to enter into a contract with a third party without naming your full structure, e.g., Butterfly Holdings, LLC – Caterpillar Series, d/b/a The Caterpillar Project.” Now you’ve made it clear to everyone that there is a legal business entity involved.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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