What is an Umbrella LLC?

A serial entrepreneur will often form multiple “brother-sister” companies to keep their assets from becoming commingled. But having partners that own an interest in each of these companies can generate separate partnership tax returns for each entity. One way to simplify this is to form a holding company with the partners. You can reduce the number of partnership tax returns to just one by having each separate company formed as wholly-owned subsidiaries, or children, of the parent umbrella LLC. All while ensuring that the assets or each subsidiary are protected.

In doing research, you may have come across the term “umbrella LLC” and wondered what, exactly, it means and how it can apply to your businesses. Here’s what you need to know, as well as how to decide if an umbrella LLC is right for you.

What Is an Umbrella LLC, Exactly?

An umbrella LLC is another word for a holding company. An umbrella LLC owns other LLCs that are below it, known as subsidiaries. It effectively shelters those LLCs from cross liability in the event that future litigation results in a judgment creditor trying to collect against assets of a company.

The traditional way to limit the future creditor to just the assets of the LLC against which she obtains a judgment is to set up multiple single-member LLCs owned by the same umbrella LLC. These different operating units help to insulate the assets of other affiliated operating companies. Bank of America and JP Morgan Chase are examples of companies which are umbrella LLCs with plenty of subsidiaries.

Umbrella LLC Benefits

An Umbrella LLC really provides benefits just like an umbrella protects the individual underneath it. Some of the protections are:

• Creating a shelter for the assets of each individual LLC as a subsidiary;
• Allowing for multiple business lines to lead up to one overarching parent company;
• Provides for a business structure that protects the Ultimate Beneficial Owner from compounding liability.

Umbrella LLC Cons

Umbrella LLCs are not without their drawbacks, mainly along the financial impact of keeping up with multiple subsidiaries. Such as:

• Higher overhead costs in general with multiple LLC filings;
• Taxes can become overly complicated;
• It can be very confusing which may result in comingling of assets in the long-run if the books are not properly kept.

Why Form an Umbrella LLC?

Subsidiaries of an umbrella LLC enjoy being affiliated with a larger company without being commingled with its assets. For example, a subsidiary may be able to borrow money at a lower rate thanks to the larger holding company. An umbrella LLC can also help companies save money by avoiding a multiplicity of tax filings.

And, from a legal standpoint, an umbrella company can shelter smaller subsidiaries from litigation issues.

Can an Umbrella LLC be formed as a Series LLC?

A Series LLC is one way to structure an umbrella company without needing to file separate subsidiary entities. A Series LLC has a Certificate of Formation that allows its members to establish protected business units. Assets can be allocated by members to be associated only with particular “protected series” of the company. This can be particularly attractive when separating well-insured or low risk passive investments. The members can divide the LLC into an unlimited number of protected business units. Each of those units has its own associated members interests, assets, and operations. A Series LLC is often compared to a honeycomb, where there is a group of individual, protected series as part of a larger LLC.

One protected series may be sheltered from the debts and liabilities of the other protected series therein under a Series LLC. By filing a Series LLC in Delaware, there is only one entity and it requires just one franchise tax payment each year, regardless of how many protected series have been established. This can be a potentially cost-saving option for people whose risk tolerance and assets profile do not justify the cost of forming separate subsidiary LLCs.

The traditional umbrella LLC, on the other hand, has one main LLC that owns and operates nothing. It only owns interests in other child LLCs, where all assets are held and operations are conducted.

Thinking of forming an umbrella LLC or Delaware Series LLC? We can help. If you have any questions about the process, or want to talk to an expert so you can decide which entity type is right for you. Please reach out to us at 1-800-759-2248 or email agents@incnow.com.