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:
- 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.
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.