From its origins in Delaware, the Series LLC structure has now been adopted in a handful of states. While the Series LLC provides some unique benefits, those who implement the Series LLC structure encounter a world filled with uncertainties. Some of those uncertainties include whether the internal liability shields between series will be respected, how a series will be treated in the bankruptcy context, how a series will be taxed, and how a series would be treated under the UCC. These uncertainties have been aggravated by the lack of uniformity among the states that have adopted the Series LLC structure. While some attempts at uniformity have been made, planners are currently stuck with the proverbial chicken and the egg conundrum: clarity and certainty may only come with increased use of the Series LLC structure, while increased use may only come with additional clarity and certainty. This article will explain the Series LLC structure and its uncertainties, examine the efforts at uniformity, and explore how the Series LLC could be implemented in South Dakota.
Series LLCs have been described in a multitude of ways, from "the future of the unincorporated form" (1) to "an attractive nuisance that will lure clients and advisors to economic disaster." (2) As with most things in life, the truth likely lies somewhere in the middle. This article will briefly describe what a Series LLC is, some of the benefits provided by the Series LLC structure, as well as some of the risks involved with the structure. It will then briefly explore the attempts that the American Bar Association and the Uniform Laws Commissioners have taken to provide uniformity. Finally, it will look briefly at what the future may hold for Series LLCs in South Dakota.
A Series LLC is basically a limited liability company with internal compartments called "series" or "cells." (3) The assets of each series are shielded from the liabilities of the other series and the LLC itself. Each series of the LLC may have separate members, managers, assets and liabilities, business purposes, or investment objectives. Conceptually, a Series LLC is like wrapping multiple LLCs inside one legal wrapper.
Series LLCs were initially created in Delaware for use in the mutual fund industry. (4) By using Series LLCs, fund managers were able to reduce the regulatory burdens on their portfolios by allocating specific investments or models inside separate series. Since that time, their use has slowly developed in other areas as well, particularly in regulated industries such as the captive insurance industry.
SERIES LLCS: PURPOSES AND BENEFITS
The main benefit of the Series LLC is the ability to segregate assets and their associated liabilities into separate series that shield the liabilities of one series from the assets of another series, all while maintaining the administrative simplicity and efficiency of a single LLC. Series LLCs can be used to separate different lines of business, different categories of assets, or other differing risk levels within an organization. For example, a trucking company may create a Series LLC and hold each semi-truck or trailer in a separate series to protect the liabilities associated with one truck or one driver from the other company assets. Owners of multifamily housing units may establish a Series LLC to compartmentalize the risks associated with multiple properties, with each housing unit or complex owned by an individual series, while being able to manage all the properties as one business entity. Estate planners may use Series LLCs, with each series owning a separate asset such as a parcel of farm ground, to allocate specific series to specific beneficiaries at death. The uses available for Series LLCs are likely limited only by the imagination of business people and their lawyers (and of course, government regulation).
Without the Series LLC structure, the current preferred method for segregating liabilities is the formation of multiple single-member LLCs owned by a parent LLC or multiple LLCs under common ownership. While the administration of those multiple LLCs is by no means a herculean task, the annual filing fees, bookkeeping, tax returns and other filings can add up to a significant expense. Currently, the benefit of segregating potential liabilities from unrelated assets is often weighed against the administrative cost of establishing and maintaining multiple LLCs. The availability of Series LLCs would drastically alter that current analysis.
UNCERTAINTY SURROUNDING SERIES LLCS
Similar to when Wyoming sparked the LLC revolution in 1977, there is substantial uncertainty surrounding the Series LLC structure. Since Delaware first approved it in 1996, only a handful of states have adopted the series LLC structure. (5) In addition, states have taken different approaches to how a Series LLC is formed and to the protections afforded to each series. This lack of widespread adoption and lack of uniformity are the main reasons for much of the uncertainty surrounding Series LLCs. (6)
NOTICE TO THOSE DOING BUSINESS WITH THE SERIES LLC
One of the main issues with which commentators and states have wrestled when it comes to Series LLCs is how to achieve the asset protection and ease of administration objectives while still providing notice to those that are doing business with one or more series. Delaware law allows any LLC to create a protected series simply by providing for separate series in its operating agreement, by titling assets in the names of the respective series, and by including a notice in the certificate of formation that the LLC may have multiple series. (7) With this structure, the public is given notice that the LLC may have multiple series, but very little notice need be provided about the actual series or the assets owned by the series. Thus, it is difficult for third parties to know anything about the series with which they are actually dealing. For example, if a party is about to enter into a transaction with an LLC that has indicated on its...