Article, 1016 UTBJ, Vol. 29, No. 5. 24

Author:Bruce H. White, J.
 
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Vol. 29 No. 5 Pg. 24

Utah Bar Journal

October, 2016

September, 2016

Utah Series LLC – The Risk of Use Continues to be Uncertain

Bruce H. White, J.

A few months ago a colleague came into my office asking about the bankruptcy risks of using a Utah series limited liability company in the formation of a new company that would hold several different property interests. He said the client wanted to keep the risk of default separate on each property because each series would hold property that would likely have different lenders and investors, so that if one property were to have problems, it wouldn’t drag the others down. I admitted I was not familiar with a series limited liability company structure, so I dug into the books to advise him on the possible bankruptcy risks in using such an entity.

The series limited liability company (Series LLC) has actually been in existence since 1996, when Delaware enacted the first Series LLC statute. Since that time, only eleven other states (including Utah), the District of Colombia, and Puerto Rico have authorized Series LLCs. These jurisdictions are Alabama (Ala. Code §§ 10A-5A-11.01 to 16), Delaware (Del. Code Ann. tit. 6, § 18-215), District of Columbia (D.C. Code § 29-802.06), Illinois (805 Ill. Comp. Stat. 180/37-40), Iowa (Iowa Code § 489.1201), Kansas (Kan. Stat. Ann. § 17-76,143), Missouri (Mo. Rev. Stat. § 347.186), Montana (Mont. Code Ann. § 35-8-304), Nevada (Nev. Rev. Stat. § 86.296), Oklahoma (Okla. Stat. tit. 18, § 2054.4), Tennessee (Tenn. Code Ann. § 48-249-309), Texas (Tex. Bus. Org. Code § 101.610-622), Utah (Utah Code Ann. § 48-3a-1201), and Puerto Rico (P.R. Laws Ann. tit. 14, § 3967). Several other jurisdictions authorize the establishment of separate series-of-membership interests within an LLC, but the resulting series do not have the attributes of separate entities that give rise to similar bankruptcy risks.

What is a Series LLC?

Under Utah law, a Series LLC is a single entity with different cells, divisions, or series (hereinafter, we will simply refer to as series) within the company and each series is provided statutory limited liability from the other series in the company.

Assume that Donald Stump, a large real estate tycoon that is new in town from New York, wants to purchase several properties through a newly formed Series LLC entity that he calls Monopoly Properties Series LLC (MPS LLC) (he always puts his name on his properties and really wanted Stump as the name of the new entity, but it was taken by a local stump removal service that would not authorize him to use the name). Mr. Stump wants each series to hold property that would likely have a different lender and different investors. Mr. Stump has had to file bankruptcy in the past on four unrelated projects in New Jersey, so he is extremely concerned about making sure that liability on one property, if it defaults, will not impact the other properties in the other series. Initially, MPS LLC will buy three properties as illustrated below: Under Utah law, a single series of the Series LLC may, separate and apart from the limited liability company, hold or have associated assets, incur or have associated liabilities, and have separate management associated with that specific series. Utah LLC law also shields the assets of each individual series from the liabilities of the other series and the limited liability company itself.

A series within a Series LLC can hold property in its own name separate from the property of the Series LLC and the other series in the LLC. Utah Code Ann. § 48-3a-1201(1). A series may incur liabilities independently of other series or the Series LLC itself, and, if appropriate corporate formalities are observed, creditors may look, pursuant to Utah law, only to the series incurring the liability to satisfy their debts. Id. § 48-3a-1201(2).

Under Utah law, series within a Series LLC are not subsidiaries of the Series LLC, as they have no existence independent of the Series LLC and will dissolve upon the dissolution of the Series LLC under which they are organized. See id. § 48-3a-1208(3). In addition, the membership interests in each series need not be owned by the Series LLC itself and may be owned by any combination of persons or entities irrespective of whether they are the holders of membership interests in other series or the Series LLC. See id.

One benefit of using the Series LLC would be to minimize the cost and administrative burden of separate corporate filings and to limit liabilities associated with separate asset holdings or lines of business. See Shannon L. Dawson, Series LLC and Bankruptcy: When the Series Finds Itself in Trouble, Will It Need Its Parent to Bail It Out? 35 Del. J...

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