Can an LLC Have Separate Divisions?

By Christine Funk, J.D.

Can an LLC Have Separate Divisions?

By Christine Funk, J.D.

A limited liability company (LLC) may operate with separate divisions in certain states. Referred to as a Series LLC, or SLLC, this approach can protect investors from losing assets from one part of the business due to risks associated with another part.

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How an SLLC Works Differently than an LLC

Practically speaking, an SLLC works to provide liability protection to certain LLCs where it makes sense to do so. For example, imagine an LLC where the goal is property investment and management. In a regular LLC, all the properties are held together under a single umbrella. If a pipe bursts at the LLC property located at 101 South Second Street and causes thousands of dollars in damages, the property at 888 Highway 55 and the property at 1231 Dayton Avenue may be at risk if there is an ensuing lawsuit against the LLC.

On the other hand, in an SLLC, each investment property is its own "series," which stands alone under its own umbrella under the larger LLC umbrella. Consequently, if there is property damage or personal injury at 101 South Second Street owned by an SLLC, only the resources from 101 South Second Street are available for recompense in the case of a lawsuit. The resources from 888 Highway 55 and 1231 Dayton Avenue remain untouched.

Setting Up an SLLC

Setting up an SLLC takes some time and consideration. First, you must find a state that recognizes SLLCs. In the articles of organization, or the formation document for LLCs in most states, the owners (called members) of the LLC must clearly state their intention to establish an SLLC. Next, the articles of organization must be filed with the appropriate government agency.

As with creating an LLC, it is beneficial—but not required in every state—to draft an operating agreement for an SLLC in addition to filing articles of organization. An operating agreement defines how the LLC is run and describes the roles of LLC members and managers. With an SLLC, you must have an operating agreement covering the entire LLC as well as one for each SLLC under the umbrella LLC.

Keeping Things Separate

It is important to clearly define the separate divisions of series in the initial paperwork. Further, in order to retain the benefits and protections of the SLLC, you must operate your business in a manner consistent with the separateness as declared in the beginning.

In our example, you would keep the business of the three investment properties separate. This means maintain separate bank accounts, separate names of the individual series, separate record keeping, and separate accounting books. The benefit of keeping things separate is that each of the separate entities is permitted to enter into contracts, file lawsuits, have their own assets, and have different managers.

Determining whether an SLLC is right for you is a decision you must base on your business model and the approach you wish to take to risk and responsibility. As such, it may be helpful to speak with a business attorney before deciding to form an LLC or an SLLC.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.