A series LLC is a new, unique form of LLC established in Delaware in 1996. The framework and inspiration behind Series LLCs began with investment trusts, which have been used since the early 1990s to provide savings and efficiencies for mutual fund families. Using Series in investment funds allowed for the segregation of investment portfolios, as well as allowing members to allocate income from particular investments to specific beneficiaries. The surging popularity of these investment trusts prompted Delaware to amend its Limited Liability Company Act to permit the creation of Series LLCs.
A Series LLC allows an LLC to designate a series of owners, managers, or assets and liabilities legally separate from each other and the LLC generally. The rights and obligations of members and managers may vary from Series to Series. Each established Series operates as a separate entity with a unique name, bank account, and separate books and records.
Furthermore, each Series may enter into contracts, sue or be sued, and hold title to real and personal property. A series LLC conceptually resembles a large corporation with several subsidiaries. However, the series LLC allows for liability and risk to spread across separate entities without the associated cost of setting up new entities.
Our lawyers here have extensive experience guiding our clients when creating a Series LLC. Contact us today to determine if a Series LLC is a good strategy for you.
When is a Series LLC a Good Strategy?
Generally speaking, the most attractive aspect of a Series LLC is the liability protection it offers to each Series. Separate Series have their assets and liabilities shielded from other Series within the overall Series LLC. Therefore, a Series LLC is an appealing option for complex business ventures managing various assets. The business venture can minimize and spread potential liabilities and risks amongst various business ventures through the Series LLC. Without the Series LLC, the business venture would not otherwise be possible when operating the entire business under a traditional LLC.
What States Offer Series LLCs?
As previously mentioned, Delaware was the first state to offer Series LLC in 1996. Since then, many states have followed suit. Currently, 21 states offer Series LLCs, including:
- North Dakota
- South Dakota
The remaining 29 states, notably including California, do not allow for domestic Series LLC formation. Still, they recognize Series LLCs formed in other states, which can do business in these states by registering as a foreign LLC. In addition, some states, like North Dakota and Wisconsin, have "false series" laws that are not quite the same as other Series LLC laws. The Series referred to in these state laws is more akin to the different series of capital stock corporations can issue. The laws allow for Series with differing membership interests allowing members to have different voting or financial interests than other members. However, there is no liability shield offered in these states, and the formation of a Series LLC is not allowed.
Pros and Cons of a Series LLC?
There are several pros and cons to weigh when forming a Series LLC. We'll start with the positive aspects of a Series LLC:
Savings. One of the original prevailing benefits was cost savings. Instead of paying hundreds of dollars to a state's secretary of state in registration fees, the Series LLC offered beneficial cost savings in the form of only requiring one registration and only one payment of fees. Some states have started to chip away at this perceived benefit by requiring the filing of organizing documents, and the associated required costs, for each Series formed. There are still savings in other forms, though. To provide an example, in the mutual fund field, it is thought that obtaining regulatory approvals for a fund within a series is much easier and less time-consuming than if each fund was a separate entity. Also, a Series LLC only requires one registered agent for the entire Series, resulting in appreciable savings.
Organizational Streamlining. Series LLCs help business owners set up an overall hierarchy for complicated business endeavors. Each Series will be organized using the original operating agreement of the parent LLC. Duties and tasks can be delegated to separate members and managers of each Series. For example, a Series LLC would be an effective and streamlined way for a real estate company to manage multiple acquired properties effectively.
Liability Protection. The hallmark benefit of Series LLC is the heightened liability protection it offers. The Series' assets and liabilities are treated separately from the assets and liabilities of other Series. This is a significant benefit given the minimal administrative and financial cost required to obtain this protection. If one Series is involved in litigation, the assets of another series cannot be seized to pay for the costs of an unfavorable judgment against the Series that was sued.
Flexibility. The members and managers of a Series LLC have plentiful options at their disposal when determining how to split financial and management rights, with few statutory mandates. The flexibility a traditional LLC offers exists in the Series LLC and in each Series itself, allowing for more exotic organizational structures.
Reduced Administration and Paperwork. When filing for a Series LLC, you typically only need to register with the state once instead of the multiple registrations required when establishing several traditional LLCs. Similarly, only one operating agreement is required, and only one annual report needs to be submitted for the entire Series LLC. This drastically cuts down on the money and time spent filling out standard administrative paperwork. Series LLC documents are not complex instruments either; they can state the series name, the managing party, and the members for that particular Series. The management of the subsidiary LLCs will fall under a master Operating Agreement that was drafted when the parent company was established. This eliminates having to consult several other lengthy operating agreements for each entity while also producing savings filing and future renewal costs.
While there are several considerable benefits that a Series LLC offers, there are some risks to consider when deciding whether forming a Series LLC is a good idea for your business venture:
Tax Treatment. It is still unclear how the IRS and state tax departments treat Series LLCs as states lack consistent and uniform tax guidelines for Series LLCs. Some states treat a Series LLC as one taxable entity, while others view the Series as multiple taxable entities. The IRS has yet to issue final rules regarding the tax treatment of Series LLCs, but it has issued proposed regulations under which each Series is treated as an entity formed under state law. Therefore, the classification of a Series would be determined under the same “check the box” rules that govern the classification of other entities. Conversely, tax treatment could become substantially more burdensome for some larger Series LLCs, resulting in accounting and tax filing becoming more complex and costly.
Uncertainty under other laws. Given the Series LLC's relatively new prominence, it is uncertain how it will be treated under several different laws. The US Bankruptcy Code does not recognize the Series LLC. Therefore, it is currently an open question as to whether each individual Series can file for bankruptcy without impacting the other Series or the Series LLC itself, which may result in the Series LLC being forced to file for bankruptcy as a single entity. Furthermore, there are question marks concerning how a Series LLC will be treated under securities laws and how a security interest of a debtor series is to be perfected under the Uniform Commercial Code.
Commingling of Assets. Similar to traditional LLCs' personal liability protection, owners and managers of Series LLCs must avoid commingling assets of different Series to avoid any veil-piercing issues. It is currently unclear how strictly assets must be segregated to maintain the liability protection Series LLCs offer. Cases addressing the subject have not been meaningfully litigated yet in several states. Series LLC owners must tread lightly without knowing how egregious commingling of assets must get to warrant the discarding of liability protection.
How to Form a Series LLC
State laws vary greatly in how a Series LLC is to be formed. Generally, a Series LLC is created the same way as a traditional LLC by filing an organizational document, such as Articles of Organization, with the Secretary of State. This formation document will have to include a statement that the LLC may establish Series, which are protected from liabilities of other Series and the LLC itself.
States take three different approaches to form a series:
First, some states allow a series to be established in the Series LLC's operating agreement without requiring any additional filing.
Second, other states require a series to file with the state filing office either the certificate of designation or a certificate of registration.
Finally, Delaware has its own unique approach because it allows for two different types of series. A "protected series" is established in the LLC operating agreement with no further filing required, while a "registered series" requires the members to file a certificate of registration with the Delaware Secretary of State.
Series LLC Tax Issues
While state tax treatment of Series LLCs greatly varies, the IRS has proposed regulations to handled Series LLCs. Under the Proposed Series LLC Regulations issued in 2010, the IRS declared that each Series of a Series LLC is treated as a separate entity regardless of its state law status. A series with a single member is treated as a disregarded entity. A series with two or more members is treated as a partnership by default. Ownership interests in a series are determined under general tax principles, which consider the true owners as those who have economic benefits of ownership rather than treating Series LLC as the owner of assets simply because it holds title to such assets. This allows for the Series to establish common ownership and file one under the Series LLC.
Main types of companies/industries that use Series LLCs
Series LLCs are frequently associated with real estate investment businesses because they easily allow for managing and purchasing multiple properties while keeping the assets and liabilities separate from each other. Holding Companies also opt for the Series LLC as a logical entity structure because it can hold all individual businesses under a single umbrella while mitigating the risk of one business' assets from being used to satisfy the debts or liabilities of a separate series. Insurance companies have adopted Series LLCs to isolate risk and segments of the financial service industry, such as establishing a separate series for each investment theme in a multi-themed hedge fund.
Questions about whether a Series LLC is right for you and your business venture? Contact our knowledgeable lawyers at Newburn Law, PC today so that we can help answer any questions you might have.