The Series LLC

There are still a number of old postings knocking around the internet that say that the LLC is a new and untested form of business entity.  Not so any more.  The LLC has been around in the US for more than thirty-five years and is the entity of choice today for many if not most small businesses and many larger ones, too.

As the law of corporations and business entities evolves, however, there are a number of new types of LLC that have that slightly raw, cutting-edge flavor of opportunity, salted with risk, that the LLC itself had back in those heady frontier days of the late nineteen seventies.  One such entity is the Series LLC.

Let’s think for a moment about why we have an LLC or corporation in the first place.  Business risks should always be segregated from personal assets, but there are often good reasons for segregating distinct business enterprises or major business assets from one another, too.  From a liability standpoint, ideally, if you owned 10 rental properties, you may wish to own each in a separate LLC, placing each into a separate “risk basket.”

Some entrepreneurs in this position begin to consider a holding company structure, a tried and true mechanism for separating risk and still retaining certain tax advantages of a single entity.  Still, this can become administratively inconvenient, not to mention very costly, when administrative costs and government fees must be paid for each LLC.

One solution, originating from the insurance industry and investment trust business (where investment trusts often own multiple portfolios in protected cells within a single entity such that the investment liabilities of one cell do not spill over and involve the holdings in other cells) is to provide for a single, broad, limited liability company structure that contains separate “risk baskets,” each operating like a distinct entity in itself, to hold each of these assets.  Each of these cells or baskets is called a “series.”

Certainly, not all states are yet able to organize Series LLCs; however, of the nine states that currently permit the formation of some type of Series LLC (DE, IL, IO, NE, OK, TN, TX, UT, and WI), Delaware and Nevada are among the leaders in establishing the basis for stability and longevity that the form will require if it is to become as widespread in years to come as the plain vanilla LLC is today.  Of course, just because you are doing business in Georgia, for example, this does not mean that your LLC–or your Series LLC–cannot be organized in, say, Nevada or Delaware.

At its core, then, the Series LLC principle provides a mechanism for the creation of separate series within an LLC such that the debts and other liabilities with respect to each series are enforceable against that series alone.  While the articles of organization indicate that the LLC is a Series LLC, in Nevada and Delaware, only the LLC operating agreement is required to detail the actual number of series and the assets each owns.  The operating agreement, of course, is not a public document but is simply maintained with the corporate records.  The assets of each series are contained in a schedule, and the schedule is amended each time a property is bought, sold or transferred.

The Delaware and Nevada LLC Acts further allow the LLC operating agreement to provide different members and managers for each series (for example, Series A may be wholly owned by the principal member of the LLC, Series B may be a partnership with the LLC member and an equity investor, etc.).  If the various series within an LLC do have different members or different membership rights, each series may be treated as a separate LLC for tax purposes (maintaining flexibility, but perhaps eliminating some of the administrative advantage of the series LLC in terms of its pass-through taxation potential).

Though each series must have its own “business purpose,” it is enough for this that each series owns a separate property.  To maintain the separation of liability, however, it is vital that each series is treated for all intents and purposes almost as if it were a separate company.  Best practice suggests that this means keeping a unique set of books and records for each series, a separate bank account, and taking care to enter into contracts in the name of the series, not the LLC (even though the LLC holds title to the property).

As noted above, the series LLC is a relatively new concept, and there a number of risks associated with its use.  This is just one reason why this is an entity choice that should be made in consolation with a business attorney and not by clicking through a series of online forms at Legal Wizz, or the do-it-yourself, online, business incorporation company-of-the-month.  Nine states permit the formation of such an entity, and while many other states (including Georgia) may have discussed doing so, the law in those states which may be considering permitting organization of series LLCs is still in various stages of development.  A separate question is whether a state (like Georgia) that does not yet permit the organization of series LLCs will respect that structure when a series LLC organized properly in an other state does business in a state that has not yet come onboard with the concept, a thorny issue that brings the Full Faith and Credit Clause of the Constitution into dialogue with state law.   If a court were not to accept the validity of the structure, a judgment against one series might be applied across the various series, dissolving the barrier conceived to protect such assets in the first place.

Similarly, while the IRS stated in a private letter ruling as far back as 2008 that the Federal tax classification (i.e., disregarded entity or partnership or taxable association) is determined for each series independently, and proposed Treasury Regulations should soon make this absolutely clear, individual states may choose not to respect this classification for state tax purposes, which may lead to unforeseen difficulties if states attempt to tax all the income across a multi-state series instead of just the income attributable to the series operating in that state.

No company, and certainly not a series LLC, should be organized and maintained by someone without the training and knowledge to do so.  It may be true that sometimes with great risk comes great reward, but anyone contemplating a business venture of any sort should nonetheless talk it over with an attorney accustomed to corporate structures, both simple and complex.  Not to do so is to invite the likelihood that with a particular great risk comes… well, just great risk.  The business lawyers at Briskin, Cross & Sanford are always ready to help companies and entrepreneurs weigh their options as they form or grow their business.

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