33 Walt Whitman Rd Suite 208 Dix Hills, NY 11746

Ph: (631) 470-9753 Fax: (631) 824-9343

Email: dbarton@bkalegal.com

Series LLC

What is a Series LLC?

The Series LLC is an innovative concept that was created by the State of Delaware approximately nine years ago, and has recently been receiving more attention.

The series LLC is essentially a single umbrella entity that can partition its assets and liabilities among various sub-LLCs, called “series” or “cells”. Each individual cell (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 calls, thereby creating a firewall between each cell. In addition, the Series LLC structure 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 tax burdens.

The assets of a particular cell are protected from enforcement against the assets of the LLC or any other cell if (1) the LLC agreement provides for the establishment of one or more cells, (2) separate and distinct records are maintained for each cell and its assets are accounted for separately from the other assets of the LLC or any other cell (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).

Many business owners form an LLC in order to protect personal assets from a legal claim relating to their real estate investment or business liabilities.

Series LLC’s have tremendous advantages for such businesses as hedge funds, venture capital funds, oil and gas deals, and fractional share arrangements, and can be particularly suitable for real estate investors. A business owning multiple real estate properties typically creates separate LLCs, one for each property. This can be burdensome due to the administrative costs and government fees that must be paid for each LLC.  With a Series LLC, however, a single LLC entity is formed, and separate series or "cells" may be created within the LLC.

Each cell can have its own separate business purposes. A cell can be terminated without affecting the other cells of the LLC. A cell can make distributions to its own members without regard to the financial condition of the other cells.

Complex business arrangements can sometimes be better managed by the use of a Series LLC.  States which have adopted Series LLCs are:

  • Delaware
  • Iowa
  • Illinois
  • Oklahoma
  • Nevada
  • Tennessee
  • Utah

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.

Delaware was the first state to enact Series LLCs. The Delaware statute protects the assets of one cell from the liabilities of another cell. Other states which have enacted series LLCs stop short of these internal walls, but still give each cell what amounts to a separate business entity having separate rights, powers and duties from the other cells, as well as different rights or obligations to participate in profits or losses.

Each cell of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, a Series LLC pays one filing fee and files one income tax return each year, if each member of each cell is also a founding member of the LLC.

When non-founding members are added to a newly created cell within the Series LLC, that new cell should file a separate partnership tax return for that cell. Furthermore, liability incurred by one unit does not cross over to jeopardize assets titled in other subsidiary cells of the same Series LLC.

The procedure for adding and deleting cells is simple. Additional cells can be added by simply amending the Series' “limited liability company agreement” (the equivalent of an operating agreement for standard LLC’s). Under Delaware law, any particular cell may be dissolved by two-thirds approval of the ownership interests, or by a simple majority if provided for in the operating agreement.

To minimize the chances of one cell being held liable for liabilities incurred by another cell within the series, the owners of a Delaware Series LLC should do the following:

  • Maintain a separate bank account for each cell;
  • Sign all contracts, deeds, notes, etc. in the name of the cells, using “[LLC Name] LLC, [Cell Name] Series only”, for example “ABC LLC, XYZ Series only”;
  • Document properly any loans between cells;
  • Conduct any transactions between cells in an arms’-length manner at fair market. prices, using appraisals;
  • File a fictitious business name statement on behalf of each cell in each county where the cell owns property, using a name that emphasizes ownership by that cell, I.e., “[LLC Name] LLC, [Cell Name] Series only”, for example, “ABC LLC, XYZ Series only”. This convention serves to put creditors on notice;
  • Keep the assets and operations of each cell separate from the other cells in the LLC, such that each asset is owned solely by one cell;
  • Ensure that each cell is adequately capitalized.