INTRODUCTION II. CHARACTERISTICS OF A SERIES LLC III. IS THE ACCEPTANCE OF LIMITED LIABILITY COMPANIES IN THE 1990S A HARBINGER FOR ACCEPTANCE OF SERIES LLCS? IV. CURRENT POPULARITY OF SERIES LLCSH V. TAX TREATMENT OF SERIES LLCS VI. U.C.C. ARTICLE 9 AND LENDERS' CONCERNS VII. THE RELATIONSHIP BETWEEN SERIES LLCS AND BANKRUPTCY VIII. INTERNAL LIABILITY SHIELDS IX. RESPECTING LIABILITY SHIELDS OF SERIES LLCS IN STATES OTHER THAN STATE OF ORGANIZATION X. GENERAL RULES OF COMITY AND FULL FAITH AND CREDIT XI. CHOICE OF LAWS XII. DOCTRINE OF INTERNAL AFFAIRS XIII. APPLICATION OF NON-SERIES LLC STATE LAW XIV. PUBLIC CONFUSION XV. FOREIGN LLC RISK ANALYSIS AND TEMPLATE FOR JUDICIAL CONSIDERATION XVI. RISK MATRIX FOR PROTECTED SERIES DOING BUSINESS IN STATES OTHER THAN STATE OF ORGANIZATION XVII. STATUTORY ASSOCIATION REQUIREMENTS FOR THE HONORING OF THE INTERNAL LIABILITY SHIELDS OF SERIES LLCS AND PROTECTED SERIES XVIII. CONCLUSION I. INTRODUCTION
A variation of the common limited liability company (LLC) represents the newest form of entity enterprise on the business scene today. This is the Series Limited Liability Company (Series LLC). (1) Under a Series LLC, the single LLC may establish and contain within itself separate series or cells. These cells or series are referred to by the Drafting Committee for the Limited Liability Company Protected Series Act (2) of the National Conference of Commissioners on Uniform State Laws (NCCUSL) as "Protected Series." (3 4) Each such separate Protected Series is treated as an enterprise separate from each other and from the Series LLC itself. Each Protected Series has associated with it specified members, assets, and obligations, and--due to what have been called "internal liability shields"--per the enacting statutes, if the statutory requirements are met, the obligations of one Protected Series are neither the obligations of any other Protected Series nor of the Series LLC itself. The internal liability shield and the ability to have different associated Members among the various Protected Series are the principal unique distinguishing characteristics of the Series LLC. Although cells have existed in trusts for many years, (5) and the concept is found in the Statutory Trust Entity Act, (6) the internal liability protection and potentially separate owners or beneficiaries within a business entity are unique concepts for American jurisprudence and widely used forms of business entities. The result is a single legal entity with owners associated with each Protected Series, assets associated with each Protected Series, and each Protected Series functioning in a manner analogous to a separate legal entity within the Series LLC.
CHARACTERISTICS OF A SERIES LLC
In the preamble to the Proposed Treasury Regulations (7) that provide guidance for the federal taxation of Series LLCs, a Series LLC is described as the following:
In general, series LLC statutes provide that a limited liability company may establish separate series. Although series of a series LLC generally are not treated as separate entities for state law purposes and, thus, cannot have members, each series has 'associated' with it specified members, assets, rights, obligations, and investment objectives or business purposes. Members' association with one or more particular series is comparable to direct ownership by the members in such series, in that their rights, duties, and powers with respect to the series are direct and specifically identified. If the conditions enumerated in the relevant statute are satisfied, the debts, liabilities, and obligations of one series generally are enforceable only against the assets of that series and not against assets of other series or of the series LLC. (8) Delaware defines its series LLC as the following:
A limited liability company agreement [that] establishes] or provide[s] for the establishment of one or more designated series of members, managers, limited liability company interests or assets. Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations, and any such series may have a separate business purpose or investment objective. (9) Many analogize a Series LLC with the separate Protected Series to a parent corporation and its subsidiaries. (10) The analogy may be somewhat accurate and useful in those instances in which there is a single member or the same or substantially same members of the Series LLC each having the same as or similar proportionate association with each Protected Series. Even under those conditions, the analogy is not completely accurate as distributions do not actually flow through the Series LLC as they would in a parent subsidiary structure but generally are made directly to the associated members. Likewise, income, gain, and loss are allocated directly to the associated members of the Protected Series as opposed to the Series LLC itself. Often some of the Series LLC associated members will have varying interests in the various Protected Series and some may not even have an interest in one or more, or even any, of the Protected Series. Economically, the Series LLC itself may or may not even be financially "associated" with one or more, or even any, of the Protected Series. Only those members "associated" with each specific Protected Series have an economic interest in such specific Protected Series and perhaps almost have the full control of the operations of the Protected Series. (11)
Another analogy describes the Series LLC as the legal entity "wrapper" in which the different Protected Series exist with separate rights, powers or duties with respect to specified property or obligations of the Series LLC, different profits and losses associated with such specified property or obligations, potentially different associated members, and may have different business purposes. The legal entity as a "wrapper" is consistent with the concept that the Series LLC contains within itself the Protected Series. With apologies to Forrest Gump, the Series LLC is like a box of chocolates. The Series LLC itself may be seen as the box and each Protected Series is a separate chocolate within the box. Each of the Protected Series have their own flavor and ingredients--the internal shields separate each of the different chocolates and the different associated assets, liabilities, members and purposes, and other unique aspects of each of the Protected Series provide the different flavors.
The concept of a single legal entity having various Protected Series which are each firewalled from the others and from the Series LLC itself at this time also causes some conceptual confusion and raises the specter of nefarious activities and secrecy. This specter of potential abuse has created a concern in many within the legal community. Conceptually, for Delaware Series LLCs that choose to voluntarily identify each Protected Series in the public filings of the Series LLC, there would largely be the same information concerning the Protected Series as that provided for a Delaware corporation. (12) In originally choosing to not include provisions for Series LLCs in the Revised Uniform Limited Liability Company Act 2006, the NCCUSL commissioners cited the conceptual difficulties with Series LLCs as one of the reasons in the Preface, stating: "How can a series be--and expect to be treated as--a separate legal person for liability and other purposes if the series is defined as part of another legal person?" (13)
Intuitively, many feel that a single Series LLC with its various Protected Series is a fertile ground for fraud and nefarious actors. California Senate Bill 323 as introduced in 2012 to adopt the Revised Uniform Limited Liability Company Act included provisions for the creation of Series LLCs (Article 12). (14) These provisions were "dropped from the Bill at the request of the California Secretary of State on the grounds that the series provide 'additional veils of secrecy to the LLC assets and liabilities, ' which 'could create an avenue for an LLC to avoid legitimate responsibilities to third parties and/or members.'" (15) Similar concerns were raised in Maine (16) and in Florida, (17) with the result that their statutes presently do not provide for Series LLCs to be created under their laws. A foreign Series LLC qualifying to do business in Maine must provide in its filing a statement that the Series LLC is governed by an agreement that establishes or provides for the establishment of designated series having separate rights, powers, or duties with respect to specified property or obligations of the foreign LLC, or profits and losses associated with specified property or obligation. (18) In addition, the statement must declare whether the debts, liabilities, and obligations incurred, contracted for or otherwise existing with respect to a particular series, if any, are enforceable against the assets of such series only, and not against the assets of the foreign LLC generally or any other series thereof, and whether any of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the foreign LLC generally or any other series therefore enforceable against the assets of such series. (19) It was the intent of the bar drafting committee to permit one or more Protected Series of a Series LLC formed under the laws of other states to properly qualify to do business in Maine and for the internal liability shields to be honored. Whether this intent is achieved is presently unclear. Interestingly, Florida law provides that the Florida Department of State may require each individual Protected Series of a foreign Series LLC that transacts business in Florida to make a separate application for certificate of authority, and to make such other filings as may be required...
Challenges of Multi-State Series and Framework for Judicial Analysis.
|Author:||Gonzales, Alberto R.|
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