A limited liability company (LLC) is an American business model that is quite popular among startups. This structure provides business owners with liability protection and high-level operational flexibility.
Since it’s more flexible than a corporation, an LLC offers numerous advantages such as tax benefits. An LLC is a pass-through corporate entity, so the business doesn’t pay taxes. The income that an LLC generates passes through the entity to the members, managers, and owners.
They file their corporate taxes as their personal tax returns.
Forming an LLC requires you to file the paperwork with your state and pay the nominal fees for starting a company. Different states have different regulations for forming an LLC company.
While there are variations of LLCs, our focus here is on series LLCs and restricted LLCs. Today, we’ll discuss the differences and similarities between these two business entities.
Restricted LLC explained
Restricted LLCs are business entities that are only allowed in Nevada. It’s a type of LLC with specific operational and legal restrictions, hence the name. A restricted LLC is free of taxes for ten years after its formation.
However, an owner of the entity can’t make distributions to the members during that period. This business entity allows the owner to distribute corporate assets among family members by passing them from one member to another.
Family members aren’t personally liable for corporate assets. The asset passing also allows family members to avoid taxation. When forming a restricted LLC, you must specify the entity status in the articles of organization.
Series LLC explained
A series LLC allows an owner or owners to assemble multiple LLCs under one umbrella. This entity isn’t a corporation per se but a form of business ownership valid in every state in the U.S.
It also provides the same legal liability protection as a regular LLC. The advantage of forming a series LLC lies in separating the business from its owners, also called members.
Since series LLCs involve several members, the entity pays taxes as a partnership. The income that the company generates passes through to members or partners according to their respective share of the LLC.
A series LLC includes the following elements:
- Umbrella or master LLC; and
- Separate LLCs.
Separate LLCs and master LLCs are individual business entities with separate assets for liability purposes.
Although separate LLCs, also called cells, possess corporate assets, the master LLC manages all of the cells in the series LLC.
Each cell is liable for its obligations and debts and features unique members or owners. The cells also maintain separate accounting.
Where can you open these types of organizations?
Availability is one of the most notable differences between series and restricted LLCs, since you cannot form either one in every state.
Appearing first in Delaware, the series LLC entity is now available in the following states:
| Iowa | Texas | Alabama |
| Nevada | Utah | Arkansas |
| Oklahoma | Puerto Rico | District of Columbia |
| Tennessee | Virginia | Kansas |
| Delaware | Wyoming | Missouri |
| Illinois | North Dakota | Montana |
Series LLCs aren’t available in California, but you can form an LLC in any of the states listed above and register your series business in the state of California.
Restricted LLCs, unlike series LLCs, are only available in the state of Nevada.
This information could change, so we recommend checking with your state before forming a series LLC.
How they limit liability
Series LLCs provide limited liability as a means of legal protection. Series LLC owners can enjoy better liability protection than regular LLC members. Regular LLCs limit liability by protecting owners against any legal actions made by the company.
However, series LLCs use a different business structure that provides better legal protection. They limit liability by protecting each individual cell from legal actions made by other cells that form the LLC.
Whatever happens to one cell’s assets won’t affect other cells under the same master LLC. Restricted LLCs, on the other hand, face the same limited liability protections as traditional LLCs.
Different restrictions
Series LLCs and restricted LLCs differ in the range of restrictions that they involve. Restricted LLCs have a limited way of making distributions, while series LLCs have almost no restrictions. LLC owners make periodic payments called distributions to the other members as their shares of an LLC’s profits.
After forming a series LLC, the owners must wait for ten years before they can make any distributions to the other members. However, this restriction also introduces an unexpected benefit as it offers favorable tax treatment to the members.
Separate entities
Although they both share an LLC structure, restricted and series LLCs are different entities. A restricted LLC is more of a family business. Its purpose is to serve as a vehicle for transferring corporate assets to family members. Since it’s a temporary business model, it isn’t suitable for conducting long-term operations.
Series LLCs, on the other hand, are regular LLC businesses that allow owners, members, and managers to own, hold, and manage several corporate interests, assets, or properties under one master company.
Series LLCs comprise several cells, where each cell is a separate legal entity with its own liabilities, property, assets, and business objectives. Restricted LLCs don’t have individual cells or separate members. They don’t divide assets, managers, or owners into different groups.
Separate responsibilities
In a series LLC business structure, there is one master LLC and separate subsidiaries or divisions. Each subsidiary is responsible for its own liability, loss, debt, and profit.
Although the master LLC is in charge of business operations, subsidiaries conduct their operations separately from other divisions. The series business structure protects one division from the liability of another.
Tax differences
With series LLCs, only the master LLC must file tax returns. However, that tax return also includes all other divisions. While a series LLC doesn’t have the benefit of a tax-free interest period, a restricted LLC does.
A restricted LLC owner can decide to distribute the interest generated from the company among family members and write it off as a gift. Any gifted restricted LLC interest is tax-free but only for a limited period.
Growth limitations
A series LLC business structure can have as many LLC cells as it needs. Creating new business divisions doesn’t come with additional expenses, which is not the case with regular LLCs.
Adding new divisions to the existing LLC would require you to pay state filing fees for each new division you form. Basically, a series LLC can grow according to the current needs.
On the other hand, a restricted LLC is just a family partnership. Since it shares the same business structure as a traditional LLC, it can’t have separate divisions or assets under one master company.
How are they similar?
Since series LLCs and restricted LLCs share the same business structure, both entities reap the benefits of an LLC.
Limited liability
In both structures, owners, managers, and members aren’t personally liable for legal claims or actions of their respective companies.
An LLC protects them and their personal assets, such as investments, bank accounts, cars, property, and possessions, from legal liability and creditors seeking to collect from the company.
An LLC operating agreement protects your business from personal and financial liability as well as conflicts of interest and trade secret sharing.
Pass-through federal taxation
All LLCs are pass-through business entities. That means that their profits belong to the members and are not subject to government taxes on a corporate level.
An LLC business structure allows each member to pay tax on the corporate income on their federal income tax returns.
Flexible management
A master LLC runs all operations and manages other divisions in a series LLC. However, each division has a manager who runs their individual business operations. Restricted LLCs operate similarly unless stated otherwise in filings with the secretary of state.
Easy startup and maintenance
Forming an LLC requires some paperwork and paying state fees. Different states have various taxes, fees, and requirements for LLC formation. We recommend hiring incorporation services to handle all ongoing LLC formation requirements.
Conclusion
Although series and restricted LLCs may share the same business structure, they serve different purposes. Both business entities have their advantages and disadvantages. The best way to decide which business model suits you is to consider their differences and similarities.
Business owners planning to expand their operations and form new companies in different states in the foreseeable future should consider a series LLC as a viable option. However, if you want to secure a prosperous future for your business in Nevada, you should opt for a restricted LLC.