Forming a Limited Liability Corporation (LLC) is the most common and simplest way to protect the personal assets of a business owner. These entities shield a business owner’s personal assets from being claimed in a lawsuit against the business. A series LLC is a form of LLC that offers protection from liability of other series within the master LLC, which controls all of these corporations. It is designed to cover separate business ventures of a single person or corporation, useful in real estate, manufacturing, etc. Essentially, forming a series LLC protects one entity from becoming liable for anything any of the other entities encounter.
Only a select number of states have instituted legislation allowing the formation of a series LLC. Among the states that allow these are Delaware and Illinois. Delaware was the first state to enact a series LLC statute, and since that time few states have followed. This legislation is another example of Delaware being a business-friendly state. The concept behind a series LLC is to allow a larger LLC to be subdivided into a series of members or limited liability company interests. Each of these entities have separate rights, powers and duties with respect to obligations or properties within the LLC. One of the major benefits of the series LLC is that the debts and other liabilities of the other entities is solely enforceable upon that particular series. For example, if a firm manages two pieces of real estate, and the two are individual series within the LLC, Property A is responsible for only debts and liabilities it incurs itself, and cannot pass along debts or liability to Property B. Conversely, it shields Property A from any debt or liability Property B may incur. All of this is enclosed in the larger picture that both assets are still owned and operated within a larger LLC.
The Delaware statute outlines the guidelines, benefits, and legal repercussions included within the formation of a series LLC. The statute states that any series of the LLC may have separate business purpose or investment objective. The law further provides that if a limited liability company agreement establishes or provides for the establishment of 1 or more series then the debts, liabilities and obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series are only enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series within the LLC. This provision essentially protects the assets of a particular series from the liabilities of the LLC or of another series of the LLC.
Furthermore, the Delaware statute provides guidelines on management of a series. The management of a series is vested in members associated with a series in proportion to the current percentage or other interest of members in the profits of the series owned by all of the members. If for any reason a member ceases to be associated with a series, it does not, by itself, cause that member to be disassociated with any other series within the LLC, even when that member is the last remaining member in the series. A separate series can be terminated without causing dissolution of the limited liability company. A series is only terminated under the following circumstances: the dissolution of the LLC, upon a time specified in the LLC agreement, the happening of events specified in the LLC agreement, on an affirmative vote of the members associated with such series, or by decree of the Court of Chancery where requested by a member of a series when it “is not reasonably practicable to carry on the business of the series in conformity with a limited liability company agreement.”
Series LLCs are treated as such only under state law. Their treatment under federal law is still a bit murky, as is the tax treatment of such companies. One reason there hasn’t been an extraordinary amount of usage is that tax advisers often advise clients to be hesitant because of the uncertainty surrounding how they will be treated for federal and state tax purposes. The treatment of each series as a separate entity is only solidified under state law. Federal law may not recognize the individual series, and may treat the entirety of the LLC as one whole entity.
The formation of a series LLC is something to be carefully considered before it is enacted. There are certainly benefits that accompany forming separate series within an LLC, mostly having to do with asset protection and further liability limitations. They are a fairly new concept, and slow to catch on. Over the two decades since Delaware enacted the first series LLC legislation, only 15 states have followed, most of which have legislation much less specific than Delaware’s.