What Is A Registered Series And How Is It Different?

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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. 
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How Series LLCs Benefit Investment Companies

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To start an investment company, such as an open-end or closed-end fund, you first need to choose a form of entity. A Delaware Series LLC is often preferred for many reasons.

Why the Delaware Series LLC Is Designed for Investment Companies

The Delaware Series LLC is a good fit for investment companies because it offers flexibility and protection.

Investment companies have engaged in segregating classes of assets into separate funds as far back as the mid 20th century. They first used vehicles known as statutory trusts. For example, high-risk, high-yield investments could be allocated to one trust, and lower performing ten-year notes in another. The trusts issue freely transferable ownership interest to investors. Investors are afforded limited liability proportionate to their investment given they do not participate in management. A group of these funds is effectively known as a “statutory trust series”.

Prior to any supporting legislation, this process was both cumbersome and costly. Despite being part of a single fund family, statutory trusts were treated as being truly separate. Mutual funds were required to complete a costly SEC registration for each statutory trust within the series.

This changed with the Investment Company Act of 1940. The Act legally recognized statutory trust series and enabled companies to maintain separate funds under central management.

The 1990 Delaware Statutory Trust Act further developed the statutory trust series and helped propel the mutual fund industry, enabling the segregation of funds and providing limited liability to investors.

What makes the Delaware Series LLC an evolution of the statutory trust is the addition of legal personhood. At the time, the Delaware Statutory Trust Act did not grant series trusts any of the typical characteristics of legal personhood. For example, trusts did not have the power to sue or be sued, and they could not contract or hold property in their own name. These are all powers that protected series were purpose-built to have. This makes the Delaware Series LLC adaptable for many different business types.

What is a Series LLC?

series llc provides ring-fence asset protectionCreated by the Delaware General Assembly in 1996, the Series LLC is the next evolution of the ever popular Limited Liability Company. Under a Series LLC, one entity is created by filing a  Certificate of Formation with the Delaware Secretary of State. This single LLC has the ability to create an unlimited number of separate cells, known as “protected series”, through its operating agreement. Each protected series can have a separate business purpose, separate associated assets, and even separate members.

Assets of each protected series are firewalled off in two directions: vertically, at the company level, and horizontally, between the other protected series. This type of asset protection structure is often labeled “ring-fencing”.

Every protected series associated with a single Delaware Series LLC is considered to be a legal person. As a result, each protected series has many of the same rights and powers of a traditional LLC. A protected series can contract in its own name, own or hold title to assets or property, grant loans, obtain an EIN number, and open a bank account.

“Each protected series can have a separate business purpose, separate associated assets, and even separate members”.

 Series LLC vs. a Holding Company

Many investment companies may consider using multiple LLCs to form a holding company structure.

The traditional Delaware LLC is an extremely popular entity structure amongst businesses of all sizes. It is a reliable means of providing limited liability for members and predictable governance for ownership and management.

One way of structuring an organization is to use a Delaware LLC as the single member and manager of a number of operating LLCs also filed in Delaware. Often, this has been accomplished by creating separate LLCs, known as subsidiaries, for different lines of business or separate business assets. The main entity is referred to as a holding company. The holding company is named as the member of each subsidiary LLC and is issued all of the membership interest. This results in an ecosystem where multiple businesses are connected, however, their individual debts, liabilities, and obligations are separate from one another.

How Does the Series LLC Improve Upon the Holding Company?

The holding company structure is sound in providing limited liability between business assets. However, there are drawbacks, mainly in the form of administrative burdens and costs. Micro-entrepreneurs and solo-entrepreneurs are burdened with the time and monetary costs of forming multiple entities and maintaining each entity’s associated filing fees. Each LLC has an annual franchise tax and a duty to maintain a Registered Agent in the state of formation.

The Delaware Series LLC came along in 1996 as special interest legislation for the mutual fund and regulated finance industries. This was a benefit because multiple classes of funds only needed one SEC filing. In Delaware, a Series LLC with protected series only pays one annual franchise tax and only needs to pay a single Registered Agent fee. This has made the Series LLC popular among small time “serial entrepreneurs” looking to incubate many business ideas simultaneously to see which will thrive.

The Delaware Series LLC enables founders to create unique and innovative ownership structures through the Operating Agreement. These structures can include different classes of members with differing rights, responsibilities, and voting capacities. For example, this allows investor A to be a member associated with the assets of protected series 1 only. Then investor B can be a member associated with the assets of protected series 2 only, and so on.

“The Delaware Series LLC came along in 1996 as special interest legislation for the mutual fund and regulated finance industries”.

How Do You Structure an Investment Company as a Series LLC?

Here is an example of how an investment company operating as a closed-end fund can be formed as a Series LLC:

 

Under this structure, the company itself serves as the “management service organization”, or  MSO. The express purpose of the MSO is to manage the funds held by each protected series.

Each protected series is set up as a special purpose entity created to hold individual associated assets. An investment company can isolate financial risk utilizing the internal firewalls in place between each protected series. This can keep one particular asset from becoming a contagion that infects the entire fund family.

With the creation of each protected series, separate series agreements would be drafted to name individual investors as non voting members of the protected series associated with their chosen investment(s).

When an investment reaches maturity, the protected series could be terminated and its assets liquidated. Distributions can be made to investors proportionate to their share outlined in the separate series agreements.

“An investment company can isolate financial risk utilizing the internal firewalls in place between each protected series”.

How Do I Start a Delaware Series LLC?

steps to form a series llc in delaware: file certificate of formation, draft the series llc operating agreement, appoint a registered agent, draft separate series agreeements

Creating a Delaware Series LLC starts with filing a Certificate of Formation with the Delaware Secretary of State. The Certificate of Formation requires little information about the company, other than its name. It does not need to include the names of the members.

It is important that the Certificate contains specific language citing Delaware Code Chapter 18 Section 215. This establishes notice of the limited liabilities of a series, which is a prerequisite for the internal liability shields to be honored in court.

A Delaware Series LLC only needs to appoint one registered agent no matter how many protected series it creates. The name of the registered agent is also included in the Certificate of Formation.

The next step is to draft the Series LLC Operating Agreement. This is an internal document that will serve as the foundation of your Series LLC. This internal document governs how ownership and responsibilities will be managed throughout the life of the company. In the event of a disagreement amongst LLC members, the operating agreement serves as the guide for resolving disputes in a swift and just manner. Additionally, Separate Series Agreements must be drafted to establish each protected series.

Every entity must maintain a physical address in the state of Delaware in order to receive legal notices, such as lawsuits. To comply with this provision, you must appoint a registered agent. A registered agent operates an office in Delaware and is responsible for receiving “service of process” on behalf of your company.

 

Consult with an Attorney

The investment fund industry is well regulated, and you should engage an experienced securities attorney to assist you with the process. Almost all securities attorneys will be familiar with the Delaware Series LLC as a tool to help you accomplish your goals efficiently under one entity umbrella that is purpose built for this application.