The Series LLC is a remarkably powerful tool, but it isn't a panacea. Few things in life are perfect, and the Series LLC is no exception. No entity, legal tool, or strategy is one-size-fits-all. Today, we're going to discuss some of the drawbacks of using a Series LLC. This post should help you determine if the Series LLC is right for you.
Forming a Series LLC costs money--usually several hundred dollars. Those costs can go up depending on if you need additional features for asset protection purposes. The Series LLC isn't unique in this regard. In reality, forming any company is going to cost you money. But forming a company correctly is difficult to do on your own, unless you're an attorney. If you aren't an attorney, you'll almost certainly need the guidance of one.
Lawyers aren't cheap, but if you want a correctly-formed entity you can rely on, this is an expense worth paying for. The alternative is doing it yourself, which means you risk making mistakes that your business will end up paying for in the end. You could lose liability protections, or even fail to register properly. The consequences of these mistakes are generally more costly than employing an attorney to oversee your company formation in the first place.
That said, Series LLCs do save immensely on start-up costs. This is because you're only going to file and pay fees once. If it comes down to using multiple Traditional LLCs or the Series LLC, the Series LLC actually is cheaper. How much you will pay is going to depend largely on what type of business you're running.
If banking isn't your forte, you may be initially confused by the banking requirements for Series LLCs. For the Series LLC to adequately protect the assets it holds, each series must have its own unique bank account. This can add up to a lot of paperwork, and for companies with many Series, quite a bit of labor and time spent on accounting.
See our previous piece on banking with your Series LLC for more details.
The Series LLC is a young entity compared to other corporation options. This means there hasn't been as much law made specific to the Series LLC. Courts operate on precedent, or previous rulings from other courts and prior changes in law.
When a legal concept or structure is as new as the Series LLC, it becomes difficult to predict what outcomes you'll face in certain situations. This is simply because you're entering barely-charted territory.
Bankruptcy is one example of where the Series LLC's newness can become problematic. If you're unfortunate enough to end up in bankruptcy court, your Series LLC may protect the items in your series. But it isn't certain.
Because there is little precedent on how the courts treat the Series LLC, it's impossible to say whether each Series would be treated as a unique entity. Similarly, we just don't know how the entity as a whole will be regarded by these courts. It's literally going to be up to the judge, and some business owners don't like this unpredictability.
The law is ever-changing, and the future is uncertain. For now, however, Series LLC protections have been able to withstand legal scrutiny and many attempts to breach its protections.
Ultimately, understanding how a Series LLC works and whether the Series LLC is right for you is going to depend on your business needs. If you're unsure whether this structure is the right fit for you, feel free to ask questions in the comments section below. You can also contact us for help forming the best entity for your business.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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