What is a Series LLC?
A series LLC is the latest and by far most sophisticated form of business entity created. The concept is that a single entity may be formed in a state, but separate series or “cells” may be internally created within the LLC. The series LLC is an innovative concept that was created by the State of Delaware approximately nine years ago, but has just now been receiving more attention. The series LLC is essentially a single umbrella entity that has the ability to partition its assets and liabilities among various sub-LLCs or series. Each sub-LLC may have different assets, economic structures, members, and managers. The profits, losses, and liabilities of each series are legally separate from the other series, thereby creating a firewall between each series. In addition, it eliminates the administrative burden and expense of forming multiple LLCs. The structure is very similar to a parent corporation with subsidiaries only without the expense, formalities, and heavy taxation.
The assets of a particular series are protected from enforcement against the assets of the LLC or any other series if (1) the LLC agreement provides for the establishment of one or more series, (2) separate and distinct records are maintained for each series and its assets are accounted for separately from the other assets of the LLC or any other series (and the LLC agreement so provides), and (3) notice of such limitation of liability is set forth in the LLC’s certificate of formation. See Del. Code Ann. tit. 6, Section 18-215(b). However, a member or manager may agree to be obligated personally for any or all of the debts, obligations, and liabilities of one or more series. See Del. Code Ann. tit. 6, Section 18-215(c).
Series LLC’s are definitely the advanced planning tool of the future. It offers tremendous advantages in planning for such businesses as hedge funds, venture capital funds, oil and gas deals, and fractional share arrangements. Complex business arrangements can sometimes be better managed by the use of a series LLC. As stated above, the first state to enact series LLCs was Delaware. The Delaware statute protects the assets of one series from the liabilities of another series. Other states which have enacted series LLCs stop short of these internal walls, but still gives each series what amounts to a separate business entity having separate rights, powers and duties from the other series, as well as different rights or obligations to participate in profits or losses.
Like LLCs in general, the Delaware series LLCs are not without certain risks. There are numerous unresolved issues regarding the series LLC, including, without limitation, tax issues and creditor/debtor issues (i.e., the interplay between the Federal Bankruptcy Code and state series LLC law.
Some practitioners have expressed concerns that the Internal Revenue Service will not permit the series LLC to file just one tax return for all the series combined. The California Franchise Tax Board’s position is that each series in a Delaware series LLC is considered a separate LLC, must file its own Form 568 Liability Company Return of Income and pay its own separate LLC annual tax and fee if it is registered or doing business in California.
States which have adopted series LLCs (other than Delaware) are Iowa, Illinois, Oklahoma and Nevada. There are a number of other states that are considering series LLC legislation. The fact that a state has not adopted a series LLC statute does not prohibit one from forming a Delaware series LLC and having it registered to do business in the state, though there may be complications in doing so from state to state.