TSL TRENDING STORY
Series LLC- An Uncertain Choice for Businesses
By Mashal S. Shah and Richard M. Pollak
The Series LLC is a relatively new type of entity that has been accepted by many states. The Series LLC includes one or more series and each series is only responsible for its own debts and obligations. A series is like, but not quite, a subsidiary that operates under an umbrella LLC. Born out of the idea that members of a company should be able to contract freely, the Series LLC has pushed the limits on how a company may be owned, operated, and taxed while retaining limited liability for its members.
Under Delaware law, each Series can hold its own assets, have its own members, conduct its own operations and pursue different business objectives, but still be protected from claims by others. In addition to filing a certificate of formation that provides notice that the LLC is a Series LLC, the LLC operating agreement must establish one or more Series and ensure that the liability of each series is kept separate. Further, the records maintained by the LLC for any Series must account for the assets associated with such Series separate from the assets of the LLC or any other Series.
Forming as a Series LLC is an attractive option for businesses because of the low start-up cost. Only one LLC needs to be formed with the state of Delaware and the different series are typically formed within the Series LLC’s operating agreement. Regardless of how many series are in the Series LLC, a single Franchise Tax payment and Registered Agent fee is due to the state of Delaware. The fact that the debts, obligations and liabilities of one series cannot be enforced against another series is another appealing feature of the Series LLC.
Despite the various benefits that Series LLCs offer, there are some downsides to them. Until recently, attorneys and investors had no guidance from case law or governmental agencies on the operation of a series LLC. While the lack of guidance and limited case law has hindered attorneys from using Series LLCs, creditors can take important precautionary steps to avoid problems. Creditors of a Series should obtain copies of the LLC’s operating agreement and the documents governing the Series with which the creditor is conducting business. Specifics about other Series may not be relevant if a Series provides the single-purpose structure that a creditor seeks. If, however, a creditor would like property in another Series to become collateral for the obligations of a specific Series, the creditor should examine the documents governing the other Series.
Even though there may be no public notice that a Series LLC has numerous Series, creditors should inquire about the existence of other Series when conducting business with a specific Series. The liability protection provided under the Series LLC statute should give sufficient comfort that the assets of a particular Series will not be subject to claims arising within other Series or the Series LLC. U.S. Constitutional precedents suggest that Series protection should be honored, based on a whole host of doctrines such as full faith and credit, equal protection, substantive due process, and the personhood status granted to entities.
The Series LLC concept appears to offer opportunities and flexibility that advance corporate law far beyond that previously imagined. States without Series LLC legislation plead for it. Yet, the plethora of unanswered questions surrounding Series LLCs and the potential pitfalls puts attorneys in an impossible predicament. Because only seven states presently authorize Series LLCs, using this type of limited liability company may be risky. Creditors and owners of Series LLC must understand that the outcome and issues are uncertain in absolutely any litigation in which a Series is a party, since there is minimal case law and analysis upon which attorneys can rely.
Richard M. Pollak is a partner in Troutman Sanders LLP’s Finance practice where he represents financial institutions and other lenders in a wide range of financing transactions, including structuring, preparing and negotiating loan documents for secured and unsecured credit facilities, loan workouts and restructurings, government contract lending, and lending to high tech companies.
Mashal Shah is a Juris Doctor Candidate at George Washington University School of Law and a summer associate in Troutman Sanders’ Tysons Corner, Va., office.