Why the Series LLC Operating Agreement is Critical

We get a lot of interest here at Smart Business Incorporation regarding Series LLCs. One of the most frequently asked questions about the structure regards the Operating Agreement – and how it should be written. We also get lots of requests to review Operating Agreements prepared somewhere else.

In terms of how the Operating Agreement should be written, usually our first question is: which one? That’s because there should really be several – one of the Parent LLC, and one for each Cell you create underneath.

The Parent Operating agreement will come first. It will be the longest, and most complex, because it has to cover a lot of ground. If you’ve had a regular LLC, you know already that the Operating Agreements can be lengthy. That’s because state laws for LLCs have a lot of grey areas, and a lot of references to “subject to the term of the Operating Agreement”, which is legal-speak for “the Operating Agreement should tell you what to do here.” The Parent agreement in a Series LLC has to cover all of those things PLUS all of the stuff that is specific to Series LLCs, including things like whether or not your Series Cells can have separate ownership, how your Series LLC views assets, what management rights the Parent company denotes to the Cells, when the Parent Company is or isn’t involved, and so on.

The Cell agreements can be a little simpler. They set out the basics on how each Cell will run. They’ll have the ownership and management structure set out. If the Cell has made a tax election, ie it wants to be taxed as a C or an S Corporation, the agreement will need to contain all of that language as well. You don’t want to use an agreement that is written for partnership or single member taxation if your Cell is making a corporate tax election. That can create a potential issue for you if you were challenged or sued, in that your Cell isn’t formed correctly.

Over time we’ve looked at a fair amount of Series LLC agreements. There are some good ones out there, and there are some bad ones. A lot of Series LLC agreements are written from the perspective that the owners of the Parent LLC will own all of the Cells. So they have all kinds of restrictions, and sometimes will try to encompass the Cell operation as well. If that’s what you want, okay. But if that isn’t what you want – i.e. you want flexibility for a Cell to be owned and run by someone else – you’ve got to make sure your Agreement is set up for that.

Bottom line, if you’re looking at a Series LLC, get some advice from people who are familiar with the structure. This is a tough place for the DIY mentality.

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.

Related posts:

Leave a Reply