Series LLC

Information from pioneering Delaware attorney

who teaches lawyers and entrepreneurs nationwide

about the Series LLC.

I.                   Series LLC Uses and Background

A.    How I Came to be an Evangelist for the Series LLC

 

About a dozen years ago, I was approached by an attorney in Massachusetts who wanted to set-up a Series LLC in Delaware for a client in Massachusetts. Although I was a Delaware attorney familiar with the traditional LLC, having filed thousands, I was unfamiliar with the Series LLC. Interestingly, the Series LLC was not taught in law school (even the traditional LLC remains rarely taught in law school and not tested on bar exams), and the Series LLC was not a subject covered on the Delaware bar exam. As a result, I did what any good attorney would do; I told him I would need to research the law and become familiar with it. I went to the law books and read the statute, which was one section of the Delaware LLC Act under Title 6 of the Delaware Code Chapter 18 Section 215. I then read and re-read this section multiple times; it was only a couple of pages in the code. This section was beautiful in its simplicity, and yet mindboggling in its unusual, and potentially powerful, ability to segregate assets within one LLC. The next thing I did was Westlaw search for cases that cited Section 215. To my surprise, I did not locate any caselaw citing this section. I also looked to the tax code to discover how these unusual LLCs were taxed, and once again, I found nothing. Then, I went to secondary sources, like law reviews and law digests, and still did not find anything. I did not even find anything helpful in codes outside of Delaware. Even Google, at that time, barely had any webpages indexed with any helpful information about the Series LLC.

 

Shortly thereafter, I located a book on asset protection that had an entire chapter devoted to the topic. I bought the book, dedicated to find information about the Series LLC, but still did not find anything on the topic, except for a few sparse mentions in this book. Over the next decade, I set out upon a mission to learn everything I could about the Series LLC. It was an entity unfamiliar to even Delaware lawyers who practice corporate and LLC law. Over the course of my mission to discover the intricacies of the Series LLC, I learned it was a highly specialized vehicle used for mutual funds and not much else. After about ten years, our incorporation service, Agents and Corporations, Inc., began to specialize in these obscure entities. We drafted a Series LLC Certificate of Formation and a Series LLC Operating Agreement specifically for this entity. Our specialization in this entity generated increasing interest from the entrepreneurial and real estate investment fields. I received calls from people all over the United States and other countries asking specifically for the Series LLC. I talked to these entrepreneurs and property investors to learn about their business models and to learn how the Series LLC would work for them. I also had the good fortune of “winning the race to the filing office” by being the first to register www.SeriesLLC.com.

 

Like any good lawyer running an incorporation service with the help of my team, I developed a “product” which could be bundled and sold as part of a “package.” This Series LLC package was designed to form the LLC, and also to provide a basic, yet adaptable operating agreement that could be modified by the business owner and his attorneys if needed.

 

Over the course of the last decade, I met entrepreneurs who had business ideas galore. These entrepreneurs were poster children for why Attention Deficit Disorder is termed the “CEO disease”. Like one-man venture capitalists, they had diverse product lines and services which they wanted to keep separate during the incubation stage. Capital was scarce, and these entrepreneurs did not want to form multiple business entities, but they did want to have a degree of separation between their business lines, in case one of them took-off, while the others lagged behind or had problems. They wanted the flexibility to provide a nurturing environment for their ideas. Some also had ideas about getting different investors for each series. Initially, much of the interest came out of California, where business owners did not want to pay approximately $800 per entity per year to maintain each entity. Interest also came from real estate investors at a time when financing was loosely available. Although it was not a contributing factor to the financial meltdown, the Series LLC satisfied a small segment of the market’s interest that sought to grow quickly without forming and maintaining multiple cumbersome entities. The requirements in Delaware to keep Series LLC assets separate were limited to just keeping separate records, identifying property separately with regard to which series it was in, and having an operating agreement that provided for the ownership and management of each series. It was up to the entrepreneur to maintain these records, and although entrepreneurs are not known for fastidiously following records requirements, it has been my experience that these Series LLC owners quickly figured out systems to keep properties and business lines separate. Many entrepreneurs used separate employer identification numbers, separate ledgers in their accounting software, and separately titled contracts and deeds to make it clear which assets were owned by which series.

 

Nay-sayers were abound, concerned about Series LLCs collapsing like a house of cards, due to failure to meet the record keeping requirement or because of some creative plaintiff “piercing” the internal walls between series in a lawsuit. Many nay-sayers were waiting for the “shoe to drop”, or a court case decision that would invalidate the Series LLC. However, this case decision did not come. Instead, the Series LLC became more popular, and commonly used. More lawyers became interested in this entity, particularly regarding how they could use this entity to save clients filing fees and other troubles associated with juggling multiple entities at the same time.

 

The Series LLC was starting to prove its value in a variety of contexts, from the original application, Mutual Funds, to more exotic uses, such as oil field development during the natural gas boom. More states began enacting Series LLC laws that mostly followed the Delaware model. Many states waited for some “landmark” case that would provide comfort by validating that the internal walls would hold-up to a “stress-test” of litigation. Many states were waiting for more tax guidance from the US Treasury. Some states were waiting for US Bankruptcy Courts to rule on the series. Other states waited for the Uniform Law Commissioners to adopt a model series LLC Act to provide more guidance. Over time, none of the anticipated guidance happened; instead, only more hints at acceptance from the US Treasury came, in the form of a Private Letter Ruling and later proposed regulations. A few cases here and there that involved Series LLCs discussed this entity, but did not give a great “stamp of approval”.

 

It wasn’t positive rulings or developments that gave assurance to those awaiting such assurance; instead, it was the lack of negative rulings and absence of anecdotal problems that gave people some assurance. The wild-wild-west of LLC law in the Series LLC was becoming downright commonplace, although not entirely mainstream. It was demand from a risk-seeking, entrepreneurial community that laid the groundwork for the new and innovative uses of the Series LLC, and provided comfort to those risk-averse individuals, who eventually began to see the Series LLC as a possible advantage over the traditional LLC. Arguments have even been proposed that every LLC should be a Series LLC because only the Series LLC has the possibility of future asset segregation. If the filing fees for traditional LLCs and Series LLCs are the same, why not just file a Series LLC and operate it like a traditional LLC with the option for Members to, some day, use the Series LLC’s capabilities. The Series LLC is like a blank check that provides a method for future asset segregation, after all.

 

B.     History.

 

To understand the unique structure of a series LLC and its advantages, compared to a traditional LLC, corporation, or partnership, it is important to understand the context in which the series LLC was developed.

 

In 1996, the mutual fund industry identified a problem: redundant costs for separate SEC filings for each fund within a family of funds. Each fund within a mutual fund was treated separately by the SEC. Each fund had to pay filing fees. Each fund required extensive filings. All of this, together, was expensive and unduly burdensome. The industry’s solution was to allow for a single SEC filing for an entire family of funds by using the Series LLC.

 

This answer did not require a change in SEC regulations, but rather a change in state law because state law is what provides for the governance of internal affairs of an LLC. The goal of this legislation was to allow a family of funds to operate as a hybrid LLC, having characteristics of multiple LLCs within the confines of a single LLC.

 

The Series LLC, which was first permitted by Delaware in 1997, started as special interest legislation of the mutual fund industry. The industry sought to have the protections and benefits of multiple LLCs, while forming only one LLC. The SEC securities attorneys for the mutual fund industry are largely responsible for the enactment of the series LLC. The mutual fund industry was tired of having the expense and hassle of filing separate SEC filings for each class of funds under the mutual fund company’s family of funds umbrella. Their solution was to create an LLC that would function like a protected cell company, and that could have daughter funds all contained within one Delaware Series LLC thereby only requiring one SEC filing. However, these companies were concerned about whether this LLC would provide separate liability protection for each cell, and whether there was a right for each fund to own property independently, own property in the name of the daughter fund not being subject to the judgments against other daughter funds and be managed independently.

 

In a traditional LLC, all assets of the LLC are held in the name of the LLC, and they all rise and fall together. To create the internal segregation of assets, the solution was to add provisions to the Delaware LLC Act under 6 Del. C. Section 215. This allowed the members of the LLC to provide for notice in the Delaware Certificate of Formation that the LLC’s members have the right to create series. No further public notice is required for the designation of assets into particular protected series. Rather, it is only in the internal company operating agreement that one designates the name of each series and the members associated with a series. It is then up to each individual series to keep records of the assets designated to reside only in that series, and to avoid comingling of assets with the LLC as a whole.

 

This allowed each fund within a family of funds to sue and be sued in their own series name. It allowed each fund to contract in the name of one fund. This concept was not foreign to the law; the statutory trust already had the “series” feature at this time. Around the same time, because some funds were run as limited partnerships, the series language was added to the limited partnership section of the code as well. However, the Series LP and Series Trust remain unpopular. Series LLCs, on the other hand, have become quite popular because so many people outside the mutual fund industry began using them for ordinary businesses, such as holding land and operating multiple lines of business.

 

Since few people use statutory trust series or limited partnerships series for small businesses, those series sections have garnered little attention. The series applicability continues to be popular in the investment and asset holding community. Within the last decade, the traditional LLC has grown significantly in popularity, eclipsing the traditional corporation as the business structure of choice for small business owners. The business community has become so comfortable with the “traditional LLC” (the term I use to call an LLC without the “series” feature) that there is a demand for the formation of multiple LLCs to simply hold particular assets or business operations in each individual LLC. Sometimes, the administrative burdens and incremented costs of maintaining separate entities becomes too much. When an entrepreneur needs a solution to reduce costs and streamline administrative burdens, forming a series LLC, a vehicle that has multiple self-contained, entity-like series within one LLC, can be an attractive solution.

 

B. Definition: Series LLC

 

Although different states have differing precise definitions of a series LLC, there is an overarching, general definition that the dozen or so states that now have series legislation share. This generally shared definition includes a hybrid of each of the two following features: 1) an LLC with internal divisions and 2) multiple LLC subsidiaries owned by a common parent LLC. The interesting difference is that the “subsidiary” series do not need to be owned by the parent. In other words, an individual series can be owned by a member not associated with any other series therein, like a free-standing sister company. Often, a series LLC is described as a “mothership” LLC that has the option to set up as many “daughter” series as the members see fit. The language the Uniform Law Commissioners prefers to refer to each separate series is the “Protected Series”. The Uniform Law Commission Committee, in drafting the Series LLC Model Act, preferred to refer to the mothership as the “Series Organization”, in order to distinguish it. In keeping with the ULC’s naming convention, these materials refer to the mothership LLC as the Series Organization, and the daughter series as the Protected Series. While these materials refer to the separate series in short-hand as a Protected Series (both singular and plural), these separate series are also often referred to as a “Cell(s)” or “Series.”

 

The Series LLC differs from a traditional LLC in several important respects. First, the Series LLC is treated as a single LLC with internal dividing firewalls. Many states do not explicitly declare in their enabling legislation that each Protected Series of the Series Organization is one or more “entities” under state law. Many state laws, such as Delaware, specifically declare each Protected Series to be a separate “person”, and also itemize the attributes of the series, making Protected Series look very much like a separate entity. Therefore, as a practical matter in many states with Series LLC legislation, the Protected Series would be considered to be the de facto equivalent of a separate “entity” under state law.

 

In the traditional LLC context, a division of an LLC is a glorified “doing business as” or trade name within an LLC. Each separate division is legally connected to the single, formed entity; resulting in no brother-sister liability separation between separate divisions, or between a division(s) and the formed entity. Although the operations are conducted through different “departments,” each is regarded as merely an extension of the formed LLC.

 

In contrast, with a Series LLC, each Protected Series is associated with the Series Organization, rather than a separately filed LLC. Therefore, generally, the Protected Series do not need to register or “qualify” each of the individual cells contained within the formed Series Organization in foreign states; instead, only the formed Series Organization must qualify or register, which sweeps in all series therein. Moreover, only the formed Series Organization is on the official public record.

 

However, there are exceptions to this general rule. Illinois is an example of an exception where each Protected Series must file a Certificate of Designation that sets forth the series name. In Missouri, another exception, the Articles of Organization must contain information on every Protected Series, and must be amended if a series is added or removed. Montana requires inclusion of Series Operating Agreements in the Articles of Organization. The proposed model act for the Series of Business Organizations proposed by a committee of the Uniform Law Commissioners takes a different approach. In the draft Model Uniform Act, each Protected Series must be filed on an annual report for the Series Organization, providing a public record of each Protected Series.  

 

For the purposes of the Delaware Series LLC, when a series or cell of a Series LLC does business or takes title to property, the name is usually listed as “ABC Capital LLC, series 1”, for example. The Protected Series never loses the name of the Series Organization filed with the Delaware Secretary of State. In addition, the formed Series LLC has only one Delaware “annual report fee,” regardless of how many Protected Series it contains. Interestingly, the Series LLC does not have its own chapter in the Delaware code. Instead, most of the provisions are packed into one “magical” section of the Delaware LLC Act: 6 Del. C. Section 18-215. Therefore, at its core, all of the other Delaware LLC Act provisions apply to the series.

 

The Delaware LLC Act allows a Series Organization to multiply internally, allowing a Series Organization to have an unlimited number of “tentacles” (Protected Series), each having a separate purpose and separate assets and liabilities. This allowance is like a blank check from the Secretary of State, empowering one to create as many entity-like Protected Series under one umbrella of the Series Organization, without any additional state filings or incremental fees.

 

The Series Organization’s operating agreement can function like a parent with wholly-owned subsidiaries; each Protected Series can be set up with each Series Organization member being associated with each Protected Series in the same percentage ownership with the same management structure. Alternately, the Series Organization can decide to hold some assets through Protected Series owned by members not associated with other Protected Series therein.

 

Under Delaware law, the Series Organization is allowed to designate which members are associated with which Protected Series. Then, each Protected Series, and even the Series Organization, can contract in its own name and sue and be sued in its own name. Recent tax guidance suggests that Protected Series can even obtain separate tax ID numbers and even make separate tax elections (“check the box” elections on IRS form 8832 or 2553). It is possible for one Protected Series to be taxed like a partnership, another an s-corp, and another a c-corp!

 

Series Organizations can generally designate the members to be associated with one or more Protected Series, and restrict membership interests to apply only to a particular Protected Series or several Protected Series. Therefore, to use a simple example, ABC Capital LLC can be a one member LLC with Able Adams as a member. Ben Burns could be a single member on ABC Capital LLC, series 1; Christopher Curtis as the single member on series 2; David Downing on series 3; and Elizabeth Emery as the member of series 4. This example is NOT a parent-child relationship; instead, it is more akin to 5 separately filed LLCs under one roof. For various reasons, we do not suggest this diversity of ownership because it is unwieldy and runs a high potential for conflict.

 

The above example is extreme, but it illustrates that the members associated with a Protected Series can own an interest in the Series Organization with or without being a member associated with all Protected Series therein. Conversely, members associated with a Protected Series do not even need to be members of the Series Organization. Therefore, in the “cascade of power”, the power does not necessarily flow down from the top after the Protected Series are established. Instead, each Protected Series is, in many respects, autonomous, depending on how the Series LLC operating agreement and particular Protected Series operating agreement addendums are written.

 

This brings up the question, “what happens when the Series Organization is cancelled?” By extension, the affairs all Protected Series tethered to the Series Organization also are cancelled. This raises interesting questions on drafting the operating agreement to provide for the ability of a Protected Series to carry on its affairs, or to give it the power to revive the Series Organization. This is one example of a conflict, supporting why it is not advisable to mix and match owners of Protected Series within one Series LLC.

 

C.    One LLC vs. Multiple LLCs vs. Series LLCs

 

The Series LLC is superior to a Traditional LLC because, even if the internal firewalls fail, the main LLC veil, should survive, leaving the exterior of a Traditional LLC with a burned out carcass inside. This means the Series LLC is at least as good as a single LLC, but also has the added features of strong internal segregation arguments based on the enabling law not available to traditional LLCs. These arguments are not just “arguments” or internal “features,” but real benefits under real law. This means that the internal compartments have the weight of Delaware law on their side. Judges, in general, are reluctant to rule against black letter law of another state, unless there is a strong public policy concern at stake. If judges make their own law, then they are more likely to be overruled on appeal. Most judges are motivated by their batting average to have their decisions upheld on appeal, and the safe bet is to follow the statute, especially if the statute is from a state like Delaware that has a reputation as the Bergdorf Goodman of the corporate world. After all, when corporate law is taught in law schools across the country, it is Delaware corporate law which is taught, often to the exclusion of all other states’ laws.

 

The Series LLC protection is not generally thought to be superior to multiple LLCs. The traditional approach is to set-up separate LLCs for each asset. This is tried-and-true protection. However, many ideas and assets do not have enough value or “zeros” to justify this cost. This is why the Series LLC has been described by some to be the “poor man’s LLC” to the extent a Member can have segregation without filing and paying filing fees for multiple entities. There are a few rare instances where the Series LLC is superior to multiple LLCs. Some have argued, unsuccessfully, that those should be the only instances where these entities should be permitted. These instances are in very “safe” contractual entities, like captive insurance companies and mutual funds. Some of these proponents may be motivated by continuing the safest “survival” strategy to allow the series LLC only to be used by special interests and not the masses.

 

Nevertheless, the Series LLC may have other unique applications outside these areas where it is superior to multiple LLCs. One example is in regards to having a Series LLC as a parent company to separately filed, wholly owned holding company LLC. Amazingly, it is possible to even use a series LLC to segregate the assets of a business down to all of its component parts, so that every asset in the business and every contract belong to its own series. It is just this level of “Frankenstein” weirdness which scares some off. In this theoretical world of hyper asset segregation, aided by dynamic automation of asset holding and automated maintenance of records, a revolution in the way businesses operate is possible. For this, I have filed a patent application for this system and method of dynamically segregating business assets. However, this use is not yet used in practice, but it could lead to a brave new world in business protection through asset segregation.

 

The concerns from Treasury about the Series LLC seem to be regarding lack of transparency of series assets and members, and therefore, potential for abuse among people that play a shell game with assets. However, these concerns are theoretical because they have not materialized in any case to date. Of course, moving assets between series to avoid creditors is a recipe for disaster from a fraudulent transfer perspective and is not advisable.

 

II.                Series LLC Agreement Structure

A.    Operating Agreements

The Delaware LLC Act provides for “maximum flexibility” and “freedom of contract” with regard to LLC operating agreements.

 

In the majority of Series LLC operating agreements, the agreement provides for a top-tier level of Series Organization membership, known as “Founders”, and a second-tier level of Protected Series membership termed “Separate Series Members”. I suggest that the top-level founding members be the same people as the second-tier members for a “mirror-image” of ownership to prevent problems, such as rogue members owning slivers of interest of one Protected Series, but not others, assuming that these rogue members may be more prone to litigating against the other members, and therefore, tying up all the assets of the Series Organization and Protected Series in a litigation that should be limited to particular assets held by particular Protected Series. While it is theoretically possible to remove the unrelated Protected Series, and even the Series Organization, from the lawsuit if they are not properly tied to the dispute, as a practical matter, the cost of briefing such motions to dismiss may be burdensome and have an uncertain outcome.

 

B.     Amendments

In a traditional LLC, as well as a Series LLC, any changes to the operating agreement are accomplished through amendments. While amendments are usually in writing and executed by every member of an LLC, it is possible for different Protected Series to have different provisions for amendment, such as requiring a supermajority, unanimous consent or simple majority of members associated with a Series Organization plus approval of the members associated a Protected Series. Delaware’s maximum deference to freedom of contract given to the Series LLC operating agreements provides Series LLCs the flexibility to choose whichever amendment procedure they believe is best at the outset. However, this “freedom of contract” ends when the series LLC is agreed upon; it is set in concrete, unless amended under its terms. The Delaware Series LLC should be established with a very specific Series LLC Operating Agreement to allow for needed flexibility when it comes to operating its business and amending the operating agreement.

 

III.             Key Considerations

A.    Series LLC in Delaware versus other states

 

The Delaware Series LLC is the most cutting-edge entity on the market. The Series LLC is a product of the Delaware legislature, the most highly regarded body for drafting corporate laws. When forming a company, business formers have a choice of jurisdiction. Many knowledgeable entrepreneurs and real estate investors choose Delaware because of its low costs, business-friendly courts, innovative laws, developed legal precedent from the Chancery Court, and dependable liability protection.

 

Keeping beneficial owners’ and managers’ names off of public filings is another benefit of the Delaware Series LLC. Only the name of the LLC and the LLC’s registered agent are listed with the State of Delaware (not member names). Only the registered agent’s information will be filed with the Secretary of State. This provides owners and managers with a large degree of comfort. The registered agent must maintain a contact name, email, phone number and address of a contact person for only the Series Organization. However, other states, such as Illinois, require that each separate Protected Series file a Certificate of Designation, naming members or managers; the Certificate of Designation becomes public record.

 

Another one of the main advantages that the Delaware Series LLC has over Series LLCs filed elsewhere is the Delaware Court of Chancery, a dedicated equity court for business disputes. Only two other states in the U.S.A. have dedicated equity courts (Tennessee and Mississippi). New Jersey has equity divisions in its municipal court system. This has given Delaware one of the highest volumes of precedent for decisions about business disputes. With Delaware’s highly developed case law about LLCs, it is likely that court opinions around the country on the Series LLC will be based on cases decided in Delaware.

 

Finally, Delaware series LLCs only have to pay one franchise tax for the Series Organization every year, rather than having to pay a separate fee for each Protected Series. This will lower the overhead costs of a Series LLC, compared to opening and paying a filing fee and an annual fee for multiple traditional LLCs. Additionally, Agents and Corporations, Inc., as well as a few other registered agent services, will only charge a single yearly registered agent fee for a Series LLC, rather than multiple fees for multiple traditional LLCs.

 

B.     Names of Managers, Members and “Cells”

The Series Organization can create and name Protected Series, as well as include some basic provisions, in its operating agreement. However, each Protected Series should draft and execute its own operating agreement, separate from the Series Organization’s operating agreement. In addition, each Protected Series can draft and execute an addendum agreement that includes the Protected Series’ name and purpose, and also sets out the members and managers of the Protected Series, who are likely different from the members and managers of the Series Organization. As a practical matter, each Protected Series’ name should contain the name of the Series Organization within it; additionally, each Protected Series may consider filing a d/b/a for additional protection and to select an alternate trade name.

 

C.    Membership Interests – Admission of Members, Creating New Interests, Transfer/Disposition of Interests

Like a traditional LLC, the requirements and procedures for admission of new members, creating new interests in the LLC, and transferring or assigning interests will be set forth in the operating agreement of a Series LLC.

 

It is unusual to have different provisions regarding adding members or transferring their interest between Protected Series within the same Series Organization. Commonly, the Series Organization operating agreement requires both sets of members, members of the Series Organization and members of a particular Protected Series, to approve of any new member. In the absence of a provision requiring pre-approval of new members, such interests are freely transferrable. Other transfers are subject to a right of first refusal by the Series Organization first, and the Protected Series members second. Many series operating agreements contain a “supremacy clause” where, in the event of a conflict between the Protected Series agreement and the Series Organization agreement, the Series Organization agreement controls.

 

D.    Distribution of Profits and Losses

Because the Series Organization and each Protected Series could have different members and a different ownership structure, each Protected Series could have a different plan for distribution of profits and losses set forth in its operating agreement. LLCs generally default to distribution of profits and losses in proportion to ownership or capital contribution; but, Series Organizations and Protected Series are free to agree to alternative allocations.

 

E.     Dispute Resolution

Series LLC operating agreements often contain a provision that requires each Protected Series and the Series Organization to submit to binding arbitration, governed by the rules of the American Arbitration Association in the event of a dispute. Regardless, providing a dispute resolution process in the operating agreements of a Series LLC could save hassle in the event of disputes. The inclusion of alternate dispute resolution clauses in Series LLC operating agreements has probably led to fewer reported cases on the Series LLC.

 

F.     Liability and Fiduciary Duties

Under the Delaware LLC Act, members are not liable for the liabilities of either a Protected Series or a Series Organization. However, Delaware and most other states do allow for a member to be designated as liable for the liabilities of the LLC in either the LLC’s Certificate of Formation or its operating agreement, but almost no LLCs choose to do this. Additionally, as the Delaware LLC Act provides, the Series Organization is not generally liable for the liabilities incurred by its Protected Series; and Protected Series are generally not liable for liabilities incurred by other Protected Series of the Series Organization. When the rubber hits the road and there is a problem, it is possible that bad facts may make bad law. In the event of fraud, or other limited circumstances, it is possible for a judge to get creative to allow a creditor recourse against all Series LLC assets. To avoid problems, it is best to keep your Series LLC free of unscrupulous activities, or any activity that may be a lightning rod for liability. The Series LLC, in general, is better suited to “cold assets”, assets that are passive and unlikely to result in injury to a third party. It is also wise and advisable to have (1) a well-crafted operating agreement, (2) a history of recording transactions into separate Protected Series records, and (3) documentation of agreements between series for transactions conducted between Protected Series and the Series Organization.

 

Regarding the fiduciary duties that members and managers owe to both the LLC and each other, Delaware allows for fiduciary duties to be reduced or heightened in the operating agreement. However, members of a Protected Series are subject to the same default fiduciary duties in Series LLCs as they would be in regular LLCs. It should also be noted that it is possible for a majority of controlling members of one Protected Series to owe duties, not only to the minority members of that Protected Series, but possibly to members of other Protected Series, depending on how the series is organized. There may be separate cross duties of loyalty and care between cells to look out for. For example, a manager of a Series Organization may wear many hats as manager of each individual Protected Series, and should be aware of conflicts that could arise.

 

G.    IRS (Tax Issues)

In 2010, after a number of states had already adopted Series LLC provisions, the IRS noticed that these provisions posed a problem for taxpayers. While it was already settled that a traditional LLC can elect to be taxed in a variety of ways through “check the box” regulations, it was uncertain whether individual series would qualify as distinct legal entities that could elect their own treatment for tax purposes and be taxed separately by doing so; or if the Protected Series would assume the tax classification of the Series Organization and each Protected Series be taxed separately; or if every series would assume the tax classification of the Series Organization, collectively, would be taxed together as one entity. Consequently, the IRS issued a private letter ruling, in which the IRS expresses that different Protected Series are allowed to choose their own treatment for tax purposes, based on their individual businesses and membership structures (disregarded entity, partnership, C-Corp or S-Corp). Thus, each Protected Series can elect how it is to be treated for Federal Income Tax purposes, effectively being taxed as a business entity distinct from the Series LLC and the other Protected Series of the same Series Organization.

 

In 2010, the IRS circulated a proposed revenue ruling that provided taxpayers guidance on the Series LLC (2010-22793). In it, the IRS indicated that it deemed the Protected Series to be separate taxable entities. This gave the Series LLC a great deal more certainty about how to file returns. However, this rule may require filing an additional partnership tax return (1065) for each series. Some considered the ability to file a single consolidated return, while having multiple, independent series, an advantage of Series LLC, but it now appears as though this consolidation may not be the preferred method. To date, as of the time for the deadline of these materials on July 9, 2015, the IRS has not finalized this proposed revenue ruling. It is expected that Treasury will issue this final Revenue Ruling in a matter of weeks.

 

H.    Bankruptcy

In the case where a single Protected Series is insolvent, would the Protected Series need to be associated with the petition for bankruptcy, or can individual Protected Series file for protection? So far, only one Delaware Series LLC, Dominion Ventures LLC, has been in bankruptcy court. Here, the Series Organization and all of its Protected Series filed for Chapter 11 and the Court appointed a trustee by consent of all parties. This case started in the Court of Chancery. It went through court-ordered arbitration that resulted in no liability, but did require production of books and records. Because this business was investing in mobile home parks and could not get more investors or more loans, and because of litigation costs, it had to file for protection. This “test case” shows the competency of the court to handle the unique issues presented by the Series LLC. The Court of Chancery mediation in this case was appealed by the company, and is currently stayed, pending a final determination by the Bankruptcy Court.

 

These questions are currently being considered by the Uniform Laws Committee. While Delaware’s statute does provide that dissolution of a Protected Series does not affect other Protected Series or the Series Organization, there still needs to be a consistent precedent for Bankruptcy Court to follow.

 

The Bankruptcy Court has ruled that “[An LLC] is a form of legal entity that has attributes of both a corporation and a partnership...corporations and partnerships are allowed to be debtors, and because an LLC draws its character from both of those...an LLC is similar enough to those entities that it may be a debtor under this code”.[1] Combining the fact that a Protected Series is arguably a legal entity and has characteristics similar to existing entities that are allowed to be debtors (such as LLCs themselves), it would appear that a Protected Series could be a debtor under the Bankruptcy Code. Provided that the Protected Series and Series Organization, along with all of its Protected Series, were not cross-collateralizing assets, but instead, treating each other at arm’s length and keeping separate records, then the Protected Series should be regarded and not consolidated into a single bankruptcy estate.

 

IV.          Series LLCs Doing Business in “Non-Series” States

 

When Protected Series do business in non-series states, it is best that they limit their activity and exposure. A majority of Protected Series that were surveyed by us use their Protected Series in more than one state. One idea is to establish a Protected Series of the LLC in each state where you do business, and be particularly careful when you use multiple LLCs in any particular state without series provisions, with the understanding that, should there be a lawsuit, you will need to explain the series concept to a judge that is likely unfamiliar with the concept.

 

Should you wish to form a Series LLC, we would be glad to help you! Good luck as you become more familiar with the Series LLC. After reading these materials, you likely know more about the Series LLC than 99% of lawyers in this country.