What Is the Series LLC Operating Agreement, and Why Is It Important?

The Delaware Series LLC has become increasingly popular amongst “serial entrepreneurs”. This dynamic business structure offers an efficient way to maintain multiple businesses under one entity roof. Delaware law requires Series LLCs to have a private Operating Agreement to govern the company’s internal affairs. Series LLC owners have complete freedom to customize the legal structure of their business through the Series LLC Operating Agreement. This can enable faster growth through limited liability protection.

Series LLCs are easy to set up. However, maintaining a Series LLC and preserving its internal liability shields requires attention to detail. Creating an effective Operating Agreement is key to ensuring the sustainability of a Series LLC.

We cover why the Series LLC Operating Agreement is important plus some of the best practices for creating one.

What Is a Series LLC Operating Agreement?

The Series LLC Operating Agreement is a private contract between the members of a Series LLC and the one or more members associated with each protected series. This is an internal document that is not filed with the state of formation.

The primary function of the Operating Agreement is to establish protected series and order the internal affairs of the company. Some important items listed in the Operating Agreement include:

  • Ownership Structure – Details regarding the ownership interest and management responsibilities of each member associated with the company and its protected series.
  • Voting Structure- The Series LLC Operating Agreement details the voting rights of each LLC member.
  • Amendment Process – The Operating Agreement establishes procedures for undertaking changes in ownership and governance. This includes admitting new members to the LLC, creating new economic interests in the company, and transferring or assigning existing interests.

Delaware law requires Series LLCs to have a private Operating Agreement to govern the company’s internal affairs.”

Why Is the Series LLC Operating Agreement Important?

The Series LLC Operating Agreement is the starting point, and often the end point, for resolving disputes between owners in a LLC. When considering limited liability protection, business owners typically think about shielding their personal assets from hostile creditors of the business. The truth is that most attacks on a business come from the inside in the form of partner disputes.

Delaware’s dedicated business court, the Court of Chancery, receives over 1,000 civil filings a year which include business divorces and partner disputes. Like a prenuptial agreement, a properly crafted Series LLC Operating Agreement should quell conflict amongst members by providing for fair and fast resolutions to disputes.

The Operating Agreement is important to preserving the liability shields of protected series in a Series LLC.”

The LLC Operating Agreement can either be written, oral, or implied according to the Delaware LLC Act. This means that if members neglect to draft a concrete Operating Agreement, the company’s fate will be left entirely to the discretion of a judge in the event of a partnership dispute.

In business, a single piece of equipment or a software program can serve as the heart of a business’s operations. For a Series LLC, the Operating Agreement is the veins and beating heart of its legal structure. If the Series LLC Operating Agreement does not function properly, the whole organization becomes vulnerable.

How To Create a Series LLC Operating Agreement

Series LLC experts recommend the following practices when generating an Operating Agreement:

      1.) Members of a Series LLC should be listed as members of each protected series.

It is advisable for each protected series to have the same ownership structure of the parent Series LLC. In other words, each member of the Series LLC should be associated with each protected series, and with the same ownership percentage.

Consistent ownership mitigates risk of internal conflict. Just because a member is associated with a particular protected series does not mean they have to be involved in its day to day operations. Each protected series can adopt a Separate Series Agreement which details the management responsibilities of each member pertaining to the particular series.

Each protected series is able to have different members and managers. Members can own interest in the Series LLC without being associated with each protected series therein. Separating members across protected series may seem like an easy way to delegate management duties, however, it is not recommended.

Each protected series should have the same ownership structure of the parent Series LLC, with the same ownership percentages.”

The goal of the Series LLC is to operate multiple business lines while maintaining consolidated ownership under one legal entity. Diversifying ownership across protected series carries a high risk for internal conflict. Members are vulnerable to becoming jealous of the success of other businesses in the organization if their interest is restricted to just one protected series. Successful protected series also sometimes underwrite costs for developing series, resulting in owners of the successful series becoming upset with management.

Disputes between owners threaten the internal liability shields between each protected series and the Series LLC.

     2.) Detailed Procedures For Adopting Amendments.

Members can make changes to the Series LLC Operating Agreement to address the needs of the business as it grows. These changes are achieved through adopting amendments.

It is important to clearly outline necessary provisions for adopting amendments to the Operating Agreement. Members can agree on a voting structure for enacting amendments, whether it be a simple majority, supermajority, or unanimous consent.

Amendments to the Operating Agreement should not impact the waterfall of compensation to owners without their consent. The controlling member’s may breach their “duty of loyalty” by doing so. Other members could consider this to be “self dealing”. A vote should not look like the wolves voting whether to eat the sheep.

Clearly outlining amendment procedures is crucial to preventing internal conflict. Series LLC Operating Agreements are incredibly flexible at the outset. However, once a set of provisions is put in place, the concrete hardens, and they can only be changed through the amendment process. Failing to clearly detail amendment procedures can confuse members, stoke conflict, and ultimately jeopardize the liability shields of each protected series.

     3.) Adopt Separate Series Agreements

Each protected series in a Series LLC should have its own internal document called a “Separate Series Agreement”. The Separate Series Agreement should restate the ownership interests plus detail the management responsibilities of each associated member for that particular protected series.

Each Separate Series Agreement should include the name of the protected series and its stated business purpose. For example, to own and manage a particular piece of real estate or to own and manage one product line.

Each protected series can adopt a Separate Series Agreement which details the management responsibilities of each member pertaining to the particular series.”

Not All Operating Agreements Are the Same

A few incorporation services provide sample Series LLC Operating Agreement templates which companies can fill out and use. These resources may be useful, however, legal professionals may advise against using these types of agreements as the foundation for a business organization. As many as 300 choices may need to be considered before finalizing an Operating Agreement draft. The default choice is often not the best choice.

Benefits of a sound Series LLC Operating Agreement include:

  • Reliable, internal liability protection between protected series and the main Series LLC;
  • Reduced risk of internal conflict between Series LLC members, and;
  • Fast and fair resolution to internal disputes.

A strong Series LLC Operating Agreement functions like a prenuptial agreement enacted in the honeymoon phase of the business. An attorney who has experience dealing with Series LLCs can generate an Operating Agreement tailored to the specific needs of a business and its owners. For example, a Series LLC Operating Agreement should include a dispute resolution process, such as binding arbitration, in compliance with the rules of the American Arbitration Association.

A professionally prepared agreement can account for unforeseen contingencies that can impact a business and mitigate certain types of financial and liability risk.


What Is A Registered Series And How Is It Different?

In 2019, the Delaware General Assembly adopted amendments to the state’s Series LLC law allowing for the creation of “registered series”. A Delaware Series LLC is able to establish both registered series and protected series concomitantly. One entity umbrella can house an unlimited number of each series type. 

The Delaware Registered Series is a giant improvement. The new amendments make the Series LLC a more capable entity with the potential to better benefit ambitious entrepreneurs.

What is a Delaware Registered Series exactly? We cover the details of registered series and how they can benefit your business.

What Is A Series LLC?

In 1996, Delaware amended its LLC Act to give LLCs the power to create an unlimited number of cells separate from the main LLC. These would later be known as “protected series”. 

Each protected series can have a separate business purpose, separate associated assets and even separate members. These protections are contingent on the company’s Certificate of Formation and Operating Agreement which must containing proper language for establishing the limited liability of a series. 

“Pursuant to the Delaware LLC Act § 18-215 (b), the “debts, liabilities, obligations, and expenses” of each series are enforceable against the assets of that series only. The assets of each protected series are effectively off limits to creditors of any other protected series or the company.”

Forming a Delaware Series LLC requires filing only one Certificate of Formation with the Secretary of State. A Delaware Series LLC can freely create protected series through its private Operating Agreement without making any additional filings or paying additional state fees. 

What Is A Registered Series?

Registered series function similarly to protected series, however, they have unique legal characteristics. A registered series benefits from being recognized as a “registered organization” under Article 9 of the Uniform Commercial Code. This gives a registered series the right to pledge its associated assets separately from the main LLC in secured financing transactions. 

Serial entrepreneurs who operate multiple businesses often anticipate that one product may take off while others lag behind or experience set-backs. The Series LLC enables these entrepreneurs to separate and protect multiple businesses or product lines during an initial incubation period. With a registered series, it is possible to spin-off a successful product into a separate LLC. This provides entrepreneurs with even more freedom and flexibility to test various business types and explore opportunities. A registered series is like a baby bird that can then leave the nest, spreading its wings to fly on its own. 

How To Form A Delaware Registered Series.

A Delaware Registered Series is established by completing three steps:

     1.) Form a Delaware Series LLC.

First, a Delaware Series LLC is formed by filing a Certificate of Formation with the Delaware Secretary of State.

Note: The Certificate of Formation must include specific language providing for the limited liability of a series.

     2.) List Registered Series In The Series LLC Operating Agreement.

Next, registered series are established in the Series LLC’s private Operating Agreement.

     3.) File A Certificate of Registered Series

Finally, a Certificate of Registered Series is filed with the Delaware Secretary of State. The Certificate includes both the name of the Series LLC (company) and the newly created registered series.

Naming Conventions for Registered Series

The Delaware LLC Act requires that specific conventions be followed for naming a registered series. The name of a registered series must begin with the name of the LLC followed by the name of the series.

In general, the name of a registered series must be distinguishable from that of any other series or qualified business entity existing in the state record.

How Is A Registered Series Different?

Registered series differs from the original “protected series” in several ways. 

In addition to being established through the Operating Agreement, creating a registered series requires a separate public filing . This amendment was inspired by the Illinois Series LLC statute which requires each protected series to file a Certificate of Designation.

The addition of registered series language to the DE LLC Act increases the utility of the Delaware Series LLC. A registered series is able to obtain a Certificate of Good Standing from the Delaware Secretary of State.  This Certificate states that an organization has paid its franchise tax within its state of formation. A Certificate of Good Standing has many important uses. For example, a bank may require a Certificate of Good Standing in order to open a business bank account, or obtain certain business loans.  

A registered series qualifies as a “registered organization”. This allows lenders to perfect security interest in assets of that registered series which are pledged as collateral for credit. This is achieved by filing a UCC-1 Financing Statement. 

Converting A Protected Series To A Registered Series.

The Delaware Series LLC statute allows a protected series to be converted to a registered series, and vice versa.

The following steps are required to convert a protected series to a registered series:

     1.) Members Vote On The Conversion

First, the conversion must be approved by any associated members of the series with voting privileges.

     2.) File A Certificate of Conversion

After gaining approval from members, a Certificate of Conversion must be filed with the Delaware Secretary of State.

     3.) File The Certificate of Registered Series

Next, a Certificate of Registered Series must be filed with the state.

     4.) List Registered Series In The Operating Agreement

Finally, the Operating Agreement must be amended to include the new registered series.


Converting a registered series to a protected series is done through a similar process:

     1.) Members Vote On The Conversion

Associated members must vote to approve the conversion.

     2.) File A Certificate of Conversion

Then, a Certificate of Conversion must be filed with the Secretary of State. 

     3.) Amend The Operating Agreement

The Series LLC Operating Agreement should be amended to ensure that the status of the series is accurate in all internal documents.

How Much Does a Delaware Registered Series Cost?

Creating a Delaware Registered Series involves additional costs compared to the protected series. Here is a break down of the initial start-up and maintenance costs for a registered series:

     1.) Filing Fees

There is a $90 filing fee associated with each registered series.

     2.) Annual Fees

Additionally, there is an annual fee of $75 to maintain each registered series and keep it in Good Standing.

The company as a whole is required to pay one Delaware Annual Franchise Tax of $300. This is due on June 1 of each year after formation.  

A Series LLC with multiple registered series must maintain a Registered Agent for each registered series. This could result in additional Registered Agent fees. 

Comparing Costs: Protected Series vs. Registered Series

There are no additional state fees associated with forming or maintaining any number of protected series. A Delaware Series LLC can freely create and dissolve an unlimited number of protected series without making any additional filings. A protected series is also not required to pay any annual fees.

Even with additional filing fees, operating registered series can still be more cost effective than traditional asset protection strategies, like using holding companies. Creating a holding company involves forming several subsidiary LLCs. Each LLC is an individual operating business with separate assets.

Forming a holding company requires paying filing fees to set up each entity. Additionally, each subsidiary LLC would need to pay Delaware Annual Franchise Tax in addition to an annual fee to maintain its own Registered Agent. 

Who Is A Registered Series For?

The registered series may be better suited for companies requiring secured capital financing. One of the primary benefits of a registered series is the ability to perfect security interests in assets through a UCC financing statement. Choosing a registered series over a protected series can be beneficial to bigger companies with larger balance sheets.

Why a Registered Series?

The motivation behind the registered series stems from discrepancies between the original Delaware Series LLC statute and the Uniform Commercial Code (“UCC”). 

When seeking out credit, debtors often want to avoid over collateralizing a loan with unrelated assets. This means they want to limit a secured creditor to perfect their interest in the assets pledged by the borrower’s registered series and not any other company assets. This can be achieved by filing a Delaware UCC-1 Financing Statement listing one registered series as debtor. Properly filing the UCC-1 allows the lender to provide public notice of their interest in the asset and gives them security over these assets in the event of a dispute. 

Language in the Article 9 secured transactions does not allow a protected series to separately qualify as a “debtor” on any credit extended to it. Instead, the debtor is the entire LLC. 

Further questions concern the location of the organization as a debtor. According to the UCC, a financing statement filed on behalf of a debtor which is a registered organization is filed in the state where the entity is organized. Therefore, a registered series filed in Delaware means the UCC-1 would be filed in Delaware

The Registered Series Amendment is A Step Forward.

Clarification about how the Delaware Series LLC interacts with the UCC will encourage further adoption of the Series LLC by other states. This in-turn will further grow the entity’s popularity with entrepreneurs and business owners. 

Other states have already begun adopting the registered series since its introduction by Delaware in 2019. On June 1, 2022, Texas amended its own Series LLC allowing for a Series LLC to have both protected and registered series. These entities are often used in oil exploration financing. 

Work has been done outside of Delaware law to progress the adoption of Series LLC legislation in other states. In 2017, the Uniform Law Commission (“ULC”) published the Uniform Protected Series Act (“UPSA”). The UPSA creates prescriptive rules aimed at ensuring that Series LLCs are used responsibly.  

The fact that the Delaware General Assembly continues to revise their Series LLC law demonstrates the legislature’s commitment to the continued success of Series LLCs. Delaware has shown that it is willing to continue refining its laws to support the world’s most ambitious entrepreneurs and innovators by enabling them to profit from this powerful and innovative entity. 

Should I Use An Umbrella LLC or A Series LLC?

Serial entrepreneurs often explore multiple business opportunities simultaneously. Did you know that you may not need a whole new LLC to start a new line of business? You can use your current LLC and maintain different lines of business under one entity. This practice is often referred to as forming an Umbrella LLC structure.

Using an Umbrella LLC for multiple business lines does have its advantages. However, it is not a one-size-fits all solution for all entrepreneurs. There are several factors to consider before deciding whether an Umbrella LLC is right for your business. You may come to realize that there is a better option.

Consider the following when deciding on whether to use multiple entities for your business:

Umbrella LLC Advantages: 

  • The business entity is already created;
  • Lower overhead costs (one annual fee instead of multiple);
  • Less oversight is required to keep assets separate since they are held within the same company;
  • Having multiple “incubators” for business lines can accelerate innovation, experimentation, and growth through diversification;
  • Better suited for activities that are low risk and well insured.

Umbrella LLC Disadvantages:

  • Possibility of cross-collateralizing liabilities when mixing business lines through poor record keeping;
  • Having all eggs in one basket means you must watch it carefully;
  • Often requires multiple Trade Name filings to open new bank accounts (AKA DBAs “Doing Business As”).

Should I Form an Umbrella LLC?

An Umbrella LLC refers to a structure where one parent LLC has ownership of several other LLCs that are below it called “subsidiaries”. The parent LLC is often referred to as a “holding company”. A holding company typically does not conduct business operations. Rather, the company exists solely to manage and consolidate ownership amongst the subsidiaries.

Forming an Umbrella LLC may be suitable for you if:

  1. Your businesses only hold assets involving little to no risk;
  2. You benefit from lower startup and annual costs;
  3. And you are able to maintain separate records for each business.

“An Umbrella LLC is not a one-size-fits all solution for all entrepreneurs.”

Balancing the needs of your bottom line with protecting your company’s individual assets often comes down to personal risk tolerance and a cost-benefit analysis. Instead of generating multiple lines of business under one LLC, many business owners prefer to have separate LLCs to better protect their business assets.

Separate LLCs provide for a much cleaner break between individual lines of business. This clustering strategy gives you a stronger protection against potential creditors, preventing one creditor from accessing the assets of other unrelated companies. Instead, a creditor of one LLC can only access the assets of the company in which they have an interest.

While having multiple LLCs comes with additional overhead costs (such as the Annual franchise tax fees for each LLC), the strategy can be invaluable if the liability protections prevent one troubled business from sinking the entire enterprise. It is also easier to spin-off or sell a business held within its own entity.

Consider The Series LLC

If you are inclined to keep multiple lines of business under a single LLC due to the costs, you may consider the Delaware Series LLC . The Series LLC is a hybrid approach that allows one juridical entity to establish an unlimited number of protected series. The Series LLC law considers protected series to be legal persons, meaning they have their own asset protection shield.

While the asset protection shield between protected series is not as predictable as separate LLC’s, the cost savings are significant. Forming a Series LLC requires making just on public filing and paying one filing fee. In Delaware, a Series LLC is only required to make on annual franchise tax payment.

The series LLC is often an idea worth considering for low-risk, well-insured assets, like residential rental units. Series LLCs can even be used by serial entrepreneurs needing to incubate several business ideas with the ability to spin-off successful ones into free standing businesses later. Whether you decide to form one LLC, multiple LLCs, or a Series LLC, your Registered Agent can help you get started.

South Dakota Adopts Series LLC: What You Need to Know

Originating in Delaware, the Series LLC has become a popular legal entity amongst entrepreneurs looking to gain an edge for their business. Demand for the Series LLC has inspired other states to adopt this entity structure into their own laws. Twelve US states now allow for their own versions of the Series LLC. South Dakota is now one of these Series LLC destinations. 

In 2020, The South Dakota state legislature introduced amendments to section 47-34A-101 et seq., of the state’s Uniform Limited Liability Company Act allowing LLCs to establish protected series. The state’s Governor signed the amendments into law in March of that year. 

How is South Dakota Series LLC different from the Delaware Series LLC? We cover the ins-and-outs of South Dakota’s Series law and what it could mean for the future of the Series LLCs. 

What Is A South Dakota Series LLC?

South Dakota used the Illinois Series LLC as the model for its own Series LLC law. The statute allows a Series LLC to own assets either in its own name, or through one of its protected series. South Dakota requires additional filings to be made in order to create individual protected series. Each protected series must file a “Certificate of Designation” with the South Dakota Secretary of State. 

Like Illinois, South Dakota also allows protected series to be considered separate legal entities. The LLC’s formation document, called the “Articles of Organization”, must state this designation. Most states rarely include this provision in practice. 

South Dakota also imposes strict naming conventions for Series LLCs. The law explicitly requires the entire name of the LLC to be part of the name of each protected series. The purpose for this is to avoid confusion by ensuring every protected series is distinguishable from any other entity listed in the public record.

“Each protected series must file a “Certificate of Designation” with the South Dakota Secretary of State.”

Series LLC Models: Illinois, Delaware, and the Uniform Protected Series Act

In the Series LLC space, there are two preeminent models which states tend to follow: the Illinois Series LLC and the Delaware Series LLC

The Delaware Series LLC

A majority of states have chosen to follow Delaware’s lead when adopting Series LLC laws. Delaware introduced the first Series LLC law in 1996. The state legislature has since revisited and amended the law several times. The Delaware Series LLC remains the cutting edge for all legal entities today. 

Core to the Delaware Series LLC is the ability to establish an unlimited number of protected series without requiring any additional public filings. LLC members can continuously create and dissolve protected series simply by amending the LLC’s internal Operating Agreement. This allows LLC members to seamlessly implement substantial changes to the company’s legal structure as the business grows and changes. 

The Illinois Series LLC

Illinois’ Series LLC mirrors the original Delaware law by providing Series LLCs with internal liability protection. However, Illinois has chosen to implement several key differences.

First, forming an Illinois Series LLC requires an additional set of filings. Illinois requires each protected series to file a “Certificate of Designation”. This filing makes the protected series an entity of the public organic record. There is a $50 filing fee associated with creating individual protected series in Illinois. 

Illinois also imposes specific naming conventions for protected series. The name of each protected series must include the full Series LLC name. For example, a protected series for “Illinois Example LLC” could have a name along the lines of “Illinois Example LLC Series 1”. 

“Illinois requires a $50 filing fee for creating individual protected series.”

The Uniform Protected Series Act

The Uniform Law Commission drafted the Uniform Protected Series Act (UPSA) in 2017 with the intent of enhancing the Illinois approach to the Series LLC. The goal of the UPSA is to provide uniformity across state level Series LLC laws. This serves to promote further adoption of the Series LLC, as well as make it easier for protected series to operate across different jurisdictions. Several states have adopted the UPSA to represent their own Series LLC law. Some of these states include Tennessee, Colorado, Arkansas, Virginia, Iowa, and Nebraska. 

The UPSA is more prescriptive than both the Delaware and Illinois models. The Act includes more rules and requirements aimed at preventing proprietors from abusing the Series LLC to harm innocent creditors. It can be said that the Illinois Series LLC is a middle-ground between the Delaware Series LLC and the UPSA.

How Does South Dakota Treat Foreign Series LLCs?

South Dakota’s law allows Series LLCs from other states to operate in South Dakota by filing a “Certificate of Authority”. This is also known as a foreign qualification. It is important to note that a Series LLC cannot obtain a Certificate of Authority on behalf of its protected series. Each protected series of a foreign Series LLC is required to complete its own foreign qualification in order to do business in South Dakota. 

“Each protected series of a foreign Series LLC is required to complete its own foreign qualification in order to do business in South Dakota.”

What does a Series LLC Have to Do Under the Corporate Transparency Act?

The Corporate Transparency Act regulates “filed” entities, which includes the Series LLC. Since a Delaware Series LLC represents only one filed entity, the CTA should require only one FinCEN filing. A Series LLC establishes protected series by private Operating Agreement. Although protected series are separate legal persons, they are part of one juridical entity. In Delaware, protected series are created without any additional public filings.

If FinCEN were to require Delaware Series LLCs and all protected series to file separate beneficial ownership reports, the burden on businesses would be unreasonable. A beneficial owner of a Series LLC could have control over dozens, or even thousands of protected series. An overwhelming volume of beneficial ownership filings coming from Series LLCs could contribute to issues with administrative registries. This could lead to unfair penalties for innocent parties and duplicative reporting requirements. Additionally, the benefit to financial institutions and investigators would be minimal. 

IncNow®’s Suggestions to FinCEN

In April 2021, FinCEN issued an Advance Notice of Proposed Rulemaking to solicit public comment on a wide range of questions related to the beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA). IncNow provided four responses. Our responses addressed the Series LLC and whether the Series LLC should be covered by the CTA.

IncNow argued that only the “mothership” Delaware Series LLC should be required to file a CTA report with FinCEN. Each “daughter” protected series should not have to file a report because they are established only by private Operating Agreement. They are not filed or formed.

We proposed that any controlling party or beneficial owner of the entity, whether only owning 25% of any given protected series or 25% of the mothership, simply be filed as part of the “mothership” filing. Thinking of this like horses would “rope in” all its protected series into one umbrella filing “paddock”. This would be more efficient and helpful than cordoning off the protected series into separate “barns” with a multitude of separate filings.

“IncNow argued that only the “mothership” Delaware Series LLC should be required to file a CTA report with FinCEN.”



What are the Record-Keeping Requirements for a Series LLC?

A Series LLC allows you to take one LLC and break it down into its component parts. One parent LLC has the ability to form an unlimited number of separate, protected series. Each of these protected series is a legal person capable holding assets. Series LLC statutes shield the assets of each protected series from the liabilities of other protected series or the LLC itself. 

Forming a Series LLC can be a cost effective way to achieve limited liability protection for multiple businesses using one legal entity. However, there is a catch. The liability protections of protected series are dependent on two conditions being met:

     (1) Each protected series must be properly established, and; 

     (2) Each protected series must keep separate records

Series LLC statutes have stern record-keeping requirements. Managers must meet these requirements in order to maintain the internal shields between protected series and the parent LLC. A member or manager can incidentally impose cross-liability on sister protected series if they are not diligent about maintaining records.

Here is what you need to know about the record-keeping requirements, including tips for maintaining the firewalls between your Series LLC assets.

Series LLC Record-Keeping Requirements

Series LLC laws clearly outline the conditions for maintaining records of associated assets. The most important condition is that internal records effectively keep the assets of each protected series separate from one another. Records must objectively describe an asset, distinguishing it from those associated with other protected series, or the parent LLC.

Records should determine when and from whom the asset was acquired. Managers should organize assets by specific listing, category, type, quantity, or allocational formula including the percentage shares of an asset associated with a protected series.

“Assets records for a Series LLC should be thorough, but easy to manage.”

Series LLC statutes require asset records to be well detailed. However, it is important that asset records are understandable to an outsider looking in. Many statutes include a threshold for specificity. Records should describe assets in a manner that they could be distinguished by a “disinterested, reasonable individual”. 

This may sound vague, however, here is some clarification. The law describes a reasonable individual as having a base understanding of business records. It does not require however that they have familiarity with generally accepted accounting principles. Ideally, it should not take a trained, forensic accountant to distinguish what assets are associated with any protected series

Consequences of Commingling Assets 

Careless managers can incidentally commingle assets across multiple protected series in a Series LLC. This could potentially negate the entity’s internal liability shields, making each protected series vulnerable to attacks by hostile creditors.

Series LLC statutes often consider asset exposure on an “asset by asset” basis. Business assets can fall into a category of being “non-associated” if record-keeping formalities are not met. A non-associated asset is potentially up for grabs to creditors of any of the other protected series or the parent LLC. Assets can only receive liability protections if they are properly associated through adherence to record-keeping conditions. 

“A Series LLC member or manager can incidentally impose cross-liability on sister protected series if they are not diligent about maintaining records.”

Record-Keeping Tips For Series LLCs

When it comes to maintaining the internal liability shields of protected series, there are some best practices to follow.

  1. Open Separate Bank Accounts

Establishing separate bank accounts for each protected series is an effective strategy for avoiding commingling. It is not recommended to combine the finances of each protected series in joint accounts. This would require accounting for these assets within separate ledgers. An example of this would be an attorney trust account. The burden of avoiding commingling can become overwhelming when using joint accounts. 

One way to handle this is through a cash management agreement between protected series. The agreement allows protected series to pool assets with internal records or internal tranches. Sometimes, this can be achieved simply through having separate asset ledgers within QuickBooks.

“Separation is crucial if the assets held by each protected series are fungible.”

    2. Maintain Meeting Minutes

States do not require members or managers to hold meetings, however, this is a way to go “above and beyond” to show adherence to formalities. Maintaining meeting minutes and resolutions can be beneficial to thorough record-keeping. This could be done for each protected series, as well as the parent LLC. Maintaining records of organizational decisions, especially if they concern associated assets of the LLC or any protected series, will make it more difficult for a creditor to challenge your records in court. 

     3. Delegate Responsibilities

Series LLC statutes stipulate that the owner of an asset, whether it be the general LLC or a protected series, is responsible for meeting the record-keeping requirements. This is true unless the responsibility for record-keeping is delegated to a manager or a records governor in the Series LLC Operating Agreement.

A decentralized method of record-keeping might be the default system, but it could be a potential trap. Based on the number of protected series established, it could take a significant amount of collaboration between members associated with a series to ensure against any incidental commingling between protected series. Miscommunication and inconsistency regarding a particular asset could result in loss of liability protection for that asset.

 To avoid incidental commingling, members often delegate record-keeping responsibilities of the LLC and all series to one manager. This manager should be thoughtful and knowledgeable about the ongoing need to maintain record-keeping discipline.

“Adopt systems to streamline the association and management of assets for each protected series.”

Oftentimes, managers who are new to the Series LLC will quickly figure out a system to ensure they have a record of which assets are associated with each protected series. This reduces the chances that the internal firewalls of the Series LLC are pierced by a hostile creditor in court. The system the manager establishes should allow an outsider to objectively determine which assets are associated with its protected series