Can a Delaware Series LLC Operate in Other States?

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The Series LLC originated in Delaware in 1996, and the Diamond State remains the best state to form a Series LLC today. Curious entrepreneurs often ask whether a Delaware Series LLC can operate in other states. More specifically, can a Delaware Series LLC operate in states without laws expressly authorizing Series LLCs?

The Series LLC was once unknown and relatively new. Now many entrepreneurs are comfortable using the Delaware Series LLC in non-series states. How is this entity type treated outside of Delaware? We cover what you need to know if you want to operate a Delaware Series LLC in other states.

Can a Delaware Series LLC Do Business in Other States?

A Delaware Series LLC is able to do business in any state. However, it is not abundantly clear whether each state will afford a Delaware Series LLC the same liability protections provided by the Delaware LLC Act.

States generally cannot discriminate against business entities from other states. However, some people question whether Series LLCs will be treated differently by states that have not passed laws specifically authorizing Series LLCs. This has caused some entrepreneurs to feel uncertain whether these “non-series” states will respect the internal liability protections afforded to Delaware Series LLCs.

How to Operate a Delaware Series LLC in Other States

Many states require Delaware Series LLCs with employees or offices in that state to undergo a qualification process before receiving authority to do business. This typically involves appointing a Registered Agent for the Series LLC in the foreign state.

Which States Allow Series LLCs?

Approximately 20 states currently have some kind of law authorizing Series LLCs. The most popular states to form a Series LLC in are Delaware, Texas, and Illinois. Other popular states with Series LLC laws include Nevada, Tennessee, Iowa, and Oklahoma.

Increased interest from serial entrepreneurs has motivated more states to adopt Series LLC laws. In 2020, South Dakota introduced amendments to its Uniform Limited Liability Company Act to allow for Series LLCs. Florida is another state making progress towards introducing Series LLCs.

Some states without Series LLC laws have passed legislation explicitly stating that they will recognize foreign Series LLCs from other states. One example is Pennsylvania, which requires state courts to respect the limited liability protections afforded to Delaware Series LLCs.

Other states have chosen to allow Delaware Series LLCs to do business, but currently treat protected series as separate entities. In some instances, this means separate franchise tax obligations. California is a prime example. California allows Delaware Series LLCs, however, the California Franchise Tax Board has declared it will charge an $800 fee for each protected series doing business in the state.

Why Don’t All States Allow Series LLCs?

Generally, legislation is slow to catch up with innovation. The traditional LLC was first introduced in the state of Wyoming in 1977. It took nearly 30 years for all 50 states and Puerto Rico to pass their own LLC statutes.

Series LLCs have been around for over 20 years, however, some of the complexities surrounding their ability to create protected series has slowed adoption by some states. Many lawyers and state legislatures may simply not understand Series LLC. Moreover, the business community in these states may not be showing interest in these entities.

Another roadblock is uniformity. States often draft LLC laws with the goal of making it easy for LLCs to do business in other states. This becomes challenging when laws are completely different in each state. State legislatures often turn to adopting recommendations made by the Uniform Law Commission (ULC).

The ULC has made progress towards introducing uniformity to the Series LLC space through the Uniform Protected Series Act (UPSA). Published in 2017, the UPSA combines features of Series LLC laws from multiple states and offers guidance for states to craft their own laws. Many states, including Arkansas, have adopted the Uniform Protected Series Act by implementing some of its key tenets into their own LLC Acts.

What Case Law Is There About Series LLCs?

Critics of the Series LLC point to the fact that few state courts have actually published opinions addressing Series LLCs. This creates uncertainty about how judicial systems may handle disputes involving Series LLCs.

Some legal practitioners are cautious about operating Delaware Series LLCs because they find a lack of case law makes judicial outcomes less predictable. A more positive approach is to view a lack of case law as a favorable sign that few Delaware Series LLCs have ended in disputes.

Tips for Operating a Delaware Series LLC In Other States.

Certain business practices are crucial to maintaining the liability protections between a Series LLC, its protected series and its members. These practices become even more important when operating a Delaware Series LLC in a different state:

  1. Maintaining Separate Records for Protected Series.

Maintaining separate records for protected series is critical to operating a Delaware Series LLC. Series LLC managers need to properly trace assets associated with each protected series to ensure that assets are not commingled between businesses.

Delaware’s Series LLC law imposes strict record keeping requirements for managers. The law conditions the liability protections afforded to each protected series and the Series LLC on these requirements being met.

Careless managers can leave both themselves and their business vulnerable to cross liability if assets are commingled between protected series. Records must be clear enough such that an outsider, like an accountant or judge, is able to determine which assets are associated with which protected series at a given point in time.

     2. Draft a Series LLC Operating Agreement.

The Series LLC Operating Agreement is the internal document that details how a Series LLC is structured. A Series LLC Operating Agreement lists and names all the protected series, who the LLC and protect series members are, and their individual ownership percentages.

Having a well written Series LLC Operating Agreement that is updated whenever protected series are added is important when operating a Delaware Series LLC in other states.

The Bottom Line.

A business can operate a Delaware Series LLC in any state. A Delaware Series LLC is the best option to maximize predictability, flexibility, and protection. Delaware LLCs have a favorable record of being well respected across the country. Entrepreneurs can be confident that forming a Series LLC in Delaware provides them with the most advanced Series LLC law offered by any state.

 

Can You Convert a Delaware LLC Into a Series LLC?

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Forming an LLC is an important first step of any business venture. The sooner you choose a legal entity for your business, the sooner you protect yourself from personal liability. If you feel that your business has outgrown its legal structure, you may wonder if you can convert a Delaware LLC into a Series LLC.

Depending on the type of business, you may benefit from separating business assets using a Delaware Series LLC. Here’s how to convert an LLC to a Series LLC, plus some important points to consider.

How To Convert an LLC Into a Delaware Series LLC: Three Steps

Follow these steps to convert an existing LLC into a Series LLC in Delaware:

Step 1) Amend the Formation Document.

The first step to convert an LLC into a Series LLC is to file an amended version of the LLC’s Certificate of Formation.

Owners need to add a new article to the Certificate that includes specific language providing statutory notice of the company’s ability to create protected series.

A Series LLC’s Certificate of Formation should cite Delaware Code Chapter 18, Section 215. This section details the internal liability shields provided to protected series.

Note that this filing is technically an “Amendment” and not a “Conversion”.

Step 2.) Amend the Operating Agreement

Owners must also amend the LLC’s Operating Agreement to reflect the new entity structure.

The Operating Agreement is the private contract between an LLC’s members that governs the company’s internal affairs. An LLC Operating Agreement details each member’s ownership interest, their management responsibilities and procedures for adopting changes.

Members create the initial protected series by naming them in the new Series LLC Operating Agreement.  The Series LLC Operating Agreement should also provide a framework for creating or terminating protected series in the future.

Tip: It is important that members include an exhibit in the Series LLC Operating Agreement listing each protected series.

Each protected series should also have its own, mini-Operating Agreement. These are called “Separate Series Agreements”. Separate Series Agreements specify which members are associated with a particular protected series as well as their percentage ownership in the series. Series Agreements also designate the series managers and list any special or limited purpose of the protected series.

Step 3.) Maintain Separate Records for Protected Series

Maintaining separate records for each protected series is not just recommended, it is required by law. Delaware’s LLC Act includes stern record-keeping requirements for Series LLCs.

Managers must meet these requirements to preserve the internal liability shields between protected series and the parent Series LLC.

Avoiding the commingling of assets across protected series is crucial to operating a Series LLC. Series LLC owners can leave assets vulnerable to creditors of other related businesses if they fail to properly associate the assets with a particular protected series.

Each protected series should have a separate asset ledger, financial records and contracts. The asset ledger should provide details that allow someone to easily trace the asset ownership. This may include the date the asset was acquired, the quantity and the date disposed of.

Experts recommend not to combine the finances of a protected series in a joint account, like a law firm escrow account with a cash management agreement. The best practice is to establish separate bank accounts for each protected series. Separate bank accounts can be easier to manage and can provide better protection for business assets.

What Is a Delaware Series LLC?

The Delaware Series LLC is an innovative type of legal entity that allows you to protect the assets of multiple businesses.  A Delaware Series LLC is able to create separate asset chambers called “protected series”. Each protected series has its own limited liability shield that can protect its assets from the creditors of other related businesses, or the general LLC.

The Delaware Series LLC uses an asset protection strategy called “ring fencing”. Think of ring fencing like horses in a barn. With a Series LLC, entrepreneurs can manage multiple businesses  under one roof, however, their individual assets and liabilities are fenced off from one another in separate stables.

What Are the Series LLC Business Benefits?

Serial entrepreneurs can benefit from reduced startup costs and better administrative efficiency by using a Series LLC.

The Delaware Secretary of State requires only one Certificate of Formation to be filed to create a Series LLC. A Series LLC can then create an unlimited number of protected series through its private Operating Agreement without making any additional filings. A Delaware Series LLC is also only required to make one Annual Franchise Tax payment no matter how many protected series it establishes.

The benefits of a Series LLC are clear when compared to the traditional method of forming multiple LLCs which requires paying filing fees and owing Annual Franchise Tax for each entity.

How Does a Delaware Series LLC Provide Protection?

Delaware law considers each protected series to be a separate legal person. Protected series are allowed to enter into contracts and be sued in their own name without involving general LLC.

Should You Convert an LLC To a Series LLC?

Many business owners may find the process of converting a Delaware LLC to a Series LLC to be daunting. Converting to a Series LLC involves properly distributing business assets of the original LLC across the newly established protected series.

Business owners can be prone to making mistakes during this process. For example, if it requires changing title in real property to reflect updated ownership. Converting an LLC can be made even more challenging if the company has extensive contractual obligations or outstanding debt.

Another option is to form a new entity as a Series LLC, then carry out an asset transfer from the existing LLC to the protected series.

Delaware Series LLC vs. Holding Company

A single LLC can be used to manage multiple portfolio businesses under one entity. This practice is known as forming an “Umbrella LLC”. Many entrepreneurs use Umbrella LLCs, however, this strategy can come with significant liability risk.

Operating a single LLC for multiple businesses is like having all your eggs in one basket. It may be administratively convenient, however, if one business experiences issues, every single egg could crack. Many entrepreneurs achieve liability protection by forming multiple LLCs that are all owned by a single company. This is referred to as forming a holding company.

A holding company often does not own any assets directly. Instead, the company owns membership interests in individual operating businesses. This structure allows entrepreneurs to consolidate the ownership and management of multiple businesses while keeping their assets and liabilities separate.

Forming separate LLCs for individual assets can provide better liability protection; however, this is not economically practically for every business. The Series LLC can provide the legal benefits of a holding company structure with only one filed entity, lowering startup and administrative costs.