The series limited liability company (LLC) is a type of business structure that allows a group of subunits, called series, to be owned in a tiered structure. At the top level is the “parent” or “umbrella” LLC. Below this are one or more series.
Not all states allow series LLCs. California does not. In states that permit them, the laws vary on how to form a series LLC and meet the requirements necessary to maintain the liability shield.
Simple in principle but complicated in practice, series LLCs can be riskier than simply forming separate LLCs for asset protection. To make the most of this complex legal entity, business owners need a carefully drafted operating agreement tailored to their organization.
How a Series LLC Works
The series LLC originated in Delaware in the 1990s.[1] Since then, its use has expanded to other states and is typically used for companies that benefit from siloed units within a larger business entity, including real estate and other investors, insurance companies, and companies that have multiple brands.
Rather than forming multiple LLCs to protect one company’s assets from a related company’s liabilities, businesses can form a single entity—the series LLC—composed of multiple series that effectively function as separate business entities.
Each series can have its own assets, members, and operations. And since the series are legally walled-off from one another, the debts, liabilities, and obligations of one series are not enforceable against another series or against the parent organization.
For example, a real estate investment company could be organized as a series LLC in which each series owns a different property. If one of the properties is involved in a lawsuit that results in a judgment against the series that holds it, the LLC as a whole and the other series in it are protected from the liabilities of the series that owns that property. In a non-series LLC, however, every property owned by the LLC could be reached by the claimant to settle the debt.
Benefits of Series LLCs
Serial entrepreneurs, real estate investors, and other businesses can benefit from series LLCs in the following ways:
● Lower startup costs. Typically, only a single filing fee is required to set up a series LLC, versus multiple filing fees to form separate LLCs.
● Asset protection. Within a series LLC, when one series is involved in a legal dispute or creditor action, it does not affect the parent companyor any other series. This can be particularly advantageous to holding companies.
● Flexibility. In addition to asset protection, one of the main benefits of a series LLC is the ability to set up each series differently. Management, financial rights, and voting rights can differ from series to series, giving members a great deal of independence and flexibility without sharing risk with other series.
Drawbacks of Series LLCs
The series LLC structure is not optimal for most bsinesses. A Forbes contributor called it “the most complex legal entity yet created by humankind.”[2] During the drafting of the Uniformed Protected Series Act, some drafters said use of the series LLC should be limited to regulated industries, such as the hedge fund and insurance sector, and should only be used by those represented by experienced counsel.
Although the series LLC structure is available to the public, it should be approached with caution for reasons that include:
● Maintaining the liability shield. The liability shield that is such an attractive feature ofseries LLCs is not simple to maintain. Although there are differences depending upon the applicable state law, to maintain it, companies generally must state the limitation of liability in its formation document and operating agreement, and they must maintain separate books, records, and bank accounts for the assets of each series. Failure to do so, which may arise from poor bookkeeping and accounting, could result in loss of the liability shield.
● State variability. Not every state allows series LLCs. Currently, they can be formed in fewer than half of the states. Even when one state permits a series LLC, there can be issues operating across state lines in states that do not authorize their formation. Some states, such as California, do not allow the formation of series LLCs but do allow “foreign” series LLCs to operate. States vary in whether they tax the foreign LLC as a single entity, or tax each series separately.
● Legally untested. Compounding the problem of state variability in series LLC law is the fact that series LLCs have only been around since 1996. Many important issues have yet to be tested in the courts. This includes whether a court in one jurisdiction can ignore the legal separation granted by another jurisdiction. The treatment of series LLCs under federal bankruptcy and tax laws is also unclear.
Series LLCs Demand Experienced Legal Counsel
Series LLCs are not an entity for the faint of heart—or the inexperienced. They present intriguing possibilities, mixed with major uncertainties, for sophisticated businesses.
Like forming a regular LLC, forming a series LLC involves naming the business, getting a registered agent, filing paperwork with the appropriate state authority, and drafting an operating agreement.
The success or failure of an LLC in achieving its goals depends in largely on the strength of its operating agreement. Given its complexities, this applies doubly to the series LLC. But with the right planning, execution, and guidance, the benefits of a series LLC can outweigh its disadvantages for some businesses. For help forming a series LLC or questions about whether it is right for your company, contact our business attorneys to schedule an appointment.
[1] Sandra Feldman, The Series LLC: An organizational structure that can help mitigate risk, Wolters Kluwer (Feb.18, 2020), https://www.wolterskluwer.com/en/expert-insights/the-series-llc-an-organizational-structure-that-can-help-mitigate-risk.
[2] Jay Adkisson, Understanding The Uniform Protected Series Act: What Is A ProtectedSeries?, Forbes (June 18, 2018), https://www.forbes.com/sites/jayadkisson/2018/06/18/understanding-the-uniform-protected-series-act-what-is-a-protected-series/?sh=3fa42b585824.