Many business owners familiar with traditional LLCs know that LLCs are controlled by an Operating Agreement. An LLC Operating Agreement is a private contract between an LLC’s members establishing their ownership percentages and management responsibilities in the company.
Series LLCs also use Operating Agreements. However, managing a Series LLC the right way requires preparing an additional set of documents called “Separate Series Agreements.” Separate Series Agreements are important for preventing disputes between Series LLC members and protecting company assets.
We cover what Separate Series Agreements are, what they should include, and why they are important.
What Are Separate Series Agreements in a Series LLC?
A Separate Series Agreement is essentially a mini-Operating Agreement for an individual protected series under a Series LLC. These Agreements are private contracts signed by the Members of a Series LLC who are also Members associated with that particular protected series.
A Series LLC is able to establish an unlimited number of separate cells, called “protected series”. A protected series has its own limited liability shield, similar to an LLC. If members properly associate business assets with a particular protected series, these assets receive protection from the liabilities of each other protected series therein and the Series LLC as a whole.
“Separate Series Agreements are important for clearly defining the ownership and management responsibilities of everyone involved in a Series LLC.”
For example, a serial entrepreneur operating multiple e-commerce websites can associate each online store with its own protected series. This way, the assets of any individual store, like its inventory, should not be subject to the liabilities of a separate store.
How to Prepare a Separate Series Agreement.
A well prepared Separate Series Agreement should include the following:
List the Series Members.
A Separate Series Agreement should list which Series LLC members are associated with a particular protected series. The Agreement should also detail each member’s individual ownership percentage in the protected series.
Series LLC members are able to structure the ownership of their company in any way that they want, so long as all members consent to the arrangement. This also applies to protected series. A member can maintain ownership in the Series LLC company as a whole without having ownership of any protected series.
It is advisable to include all members as owners of each protected series proportional to their percent interest in the Series LLC company as a whole. This simplified arrangement can reduce the likelihood of disputes between business partners.
Members of a Series LLC can be susceptible to becoming jealous of the success of other businesses held by separate protected series. By including all members in the ownership of each protected series, Series LLC owners can better align incentives and avoid internal conflicts.
“A Member can maintain ownership in the Series LLC company as a whole without having ownership of any protected series.”
List the Series Managers
Separate Series Agreements should name the managers of the protected series. Managers are authorized to carry out specific actions on behalf of the series. These may include:
Opening and closing business bank accounts;
Managing associated business assets;
Buying and selling property, and
Making necessary legal decisions.
Series LLC members themselves can be managers of a protected series. However, members can also appoint third party managers. A protected series can even list a business entity, like another LLC, as its manager. Series LLC members can maintain ownership in a protected series without having any management responsibilities pertaining to that series.
Separate Series Agreements should clearly define the management responsibilities of each individual involved in a protected series. Properly documenting the distinct responsibilities of each member or manager becomes increasingly important as the Series LLC organization grows and adds more protected series.
“Series LLC Members can maintain ownership in a protected series without having any management responsibilities pertaining to that series.”
Identify the Purpose of the Series
A Separate Series Agreement can include a “purpose” clause that limits the use of a protected series to certain activities.
A typical LLC Operating Agreement authorizes a company to engage in any lawful business activities. However, Series LLC members often establish protected series for specific purposes, whether it be to maintain an operating business, own a piece of machinery, or hold title to an income producing property.
Series LLC members can reduce the risk of conflict by limiting how a protected series can be operated. Members can achieve this by including a purpose clause in the Separate Series Agreement.
Why Are Separate Series Agreements Important?
Separate Series Agreements are important for clearly defining the ownership and management responsibilities of everyone involved in a Series LLC. Separate Series Agreements, paired with a well prepared Series LLC Operating Agreement, can plug certain holes that could potentially turn into costly disputes.
Entrepreneurs are often thinking about protecting their personal assets from business liabilities when deciding to form business entities. The truth is that most attacks on a business come from the inside, in the form of partner disputes.
Operating Agreements are typically the start and the end point for resolving disputes between Series LLC owners. Written agreements are an important piece to mitigating disputes between business partners. Business organizations require more agreements as they grow to mitigate risk.
Adopting Separate Series Agreements is an easy step that Series LLC owners can take to ensure that their organization functions properly. The Delaware LLC Act does not require Separate Series Agreements, however, it is best practice to have these agreements in place.
https://seriesllc.com/wp-content/uploads/2023/01/shutterstock_418286614-scaled.jpg17072560Matt Dochnalhttps://seriesllc.com/wp-content/uploads/2018/06/series-llc-delaware-logo.pngMatt Dochnal2023-01-19 20:27:472023-06-20 15:20:34What Are Separate Series Agreements and Do I Need Them?
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”.
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.
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.
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.
https://seriesllc.com/wp-content/uploads/2022/12/shutterstock_739242352.jpg53047952Matt Dochnalhttps://seriesllc.com/wp-content/uploads/2018/06/series-llc-delaware-logo.pngMatt Dochnal2022-12-07 22:49:082022-12-09 18:24:31Can You Convert a Delaware LLC Into a Series LLC?
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.
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 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 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.
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.
https://seriesllc.com/wp-content/uploads/2022/09/shutterstock_543880450.jpg6671000Matt Dochnalhttps://seriesllc.com/wp-content/uploads/2018/06/series-llc-delaware-logo.pngMatt Dochnal2022-09-27 14:54:362022-11-04 16:38:03What Is the Series LLC Operating Agreement, and Why Is It Important?
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:
Your businesses only holdassets involving little to no risk;
You benefit from lower startup and annual costs;
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.
https://seriesllc.com/wp-content/uploads/2022/09/shutterstock_1102252025-scaled-e1663012186895.jpg12992560Matt Dochnalhttps://seriesllc.com/wp-content/uploads/2018/06/series-llc-delaware-logo.pngMatt Dochnal2022-09-12 19:50:492023-06-20 17:56:26Should I Use An Umbrella LLC or A Series LLC?
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.”
https://seriesllc.com/wp-content/uploads/2022/09/shutterstock_1170167155-scaled.jpg19172560Matt Dochnalhttps://seriesllc.com/wp-content/uploads/2018/06/series-llc-delaware-logo.pngMatt Dochnal2022-09-12 19:04:082023-06-27 14:45:38What does a Series LLC Have to Do Under the Corporate Transparency Act?
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:
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.
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.
https://seriesllc.com/wp-content/uploads/2022/09/shutterstock_141189550-scaled.jpg17092560Matt Dochnalhttps://seriesllc.com/wp-content/uploads/2018/06/series-llc-delaware-logo.pngMatt Dochnal2022-09-12 18:59:052023-06-20 19:42:24What are the Record-Keeping Requirements for a Series LLC?
I need you to suspend your disbelief just for a second and imagine I am Mick Jagger. I am on a tour playing in small venues across the United States. I’ve just arrived in Wilmington, Delaware, where we’re performing a concert at the sold-out Queen Theater. While they’re serving cold beverages in the back, they’re also serving hot coffee. Someone orders a hot coffee, walks through the crowd, bumps his elbow and drops the cup of coffee on concert goers and staff resulting in minor burns. So, what happens next?
We’re in America, so people get sued. Those with the temporary discomfort of a cup of hot coffee to the skin decide to sue—and sue everyone they can. They sweep the streets. The allegedly injured see dollar signs and decide to sue the artist, the touring company, and the Queen Theater venue all as defendants, in addition to the man carrying the coffee. The man carrying the coffee is broke and essentially judgement proof, which is the reason so many get sued. The other defendants who may be indirectly to blame are thought to be wealthier or insured. This makes them attractive targets for the lawsuit.
You may think, “Really, do musicians get sued that often?” There are literally millions of lawsuits filed every year in the United States for all types of problems, whether real, exaggerated, frivolous, or laughable. The wealthy deep pockets of business and high net worth individuals including celebrity musicians can be the prime targets. Even Bruce Springsteen decided to call his tour in 1977 the “Lawsuit Tour” after a dispute with his business manager resulted in a protracted lawsuit. In terms of pre-litigation planning, the best time to prepare is before anyone gets hurt. It is best to plan ahead to prepare for these hypothetical judgement creditors, to avoid giving future judgment creditors a windfall. An ounce of prevention is better than a pound of cure. Taking prophylactic measures can make lawsuits less attractive to bring by turning what would have been deep pockets without planning into very shallow pockets with advanced planning. That can make defendants less attractive targets for a lawsuit.
Of course, insurance is also good to purchase. The problem with insurance is when coverage is denied or the amount of coverage is inadequate, excess liability results. Everything the policy gives you in the big print they take away in the small print. Therefore, business organization planning needs to be a primary consideration. It is best to minimize their negative financial impact up front, whether these future creditors are voluntary creditors who signed a contract with you or involuntary creditors who are injured without a contract signed in advance.
Incorporating Can Protect Your Personal Assets
One way to plan ahead is to incorporate. This creates a shield between your personal assets and the company’s liabilities. Limited liability is a wonderful thing we often take for granted. Even though the musician owns the touring company, the musician hasn’t done anything wrong directly. The musician is protected from liability because he formed his touring company as a Delaware Limited Liability Company, so although the LLC may be a proper party, the musician himself is not personally responsible, and the musician can be removed from the lawsuit. Had the touring company not incorporated, the musician and possibly all of his bandmates would be personally liable for all actions and liabilities of the touring company. If the company is incorporated, a negative judgment would only be against the company and not against the owner-musician personally. The LLC has a shield to protect its owners from this liability.
Nevertheless, even if incorporated, the other revenues of the LLC from the whole tour in every city may be exposed. The revenue from the very profitable concerts which the touring company organized since the LLC was formed could be available to the judgment creditor. That’s a much bigger pool of assets to which the creditor may have access, compared to only the revenue from the show at the Queen Theater.
What if there was a better way to set up the LLC to protect the revenue from the other cities and only expose the revenue from the Queen Theater? What if there was a way to turn one big pocket into many small pockets?
The Series LLC Allows You to Separate Your Assets
There’s a conventional way to separate these assets to prevent many assets from being exposed to any given creditor liability. Many attorneys and business owners know the conventional way. To turn a big pocket into little pockets, the touring company could set up many separate LLCs. Each venue’s revenue would be in its own LLC “box”. This could be dozens of LLCs. For example, the Queen Theater would be in its own particular LLC under the touring company. This way, only the revenues associated with the Queen Theater are available to the judgment creditor because that is where the injury took place and the other venues are separately incorporated. The creditor would not have a right to collect against any of the other assets from the performances in other cities. This approach is proven but it has drawbacks. It requires many filing fees and organization to maintain dozens of short-lived single-purpose LLCs. This can become really cumbersome to set up and maintain. In reality, not many touring companies go out of their way to set up dozens of LLCs for a band’s US tour.
There is an alternative streamlined way to have this type of limited liability without many LLCs. A Series LLC is a particular type of LLC that the Delaware legislature invented in 1996 that lets you take one LLC and break it down into its component parts. Instead of having just one overarching shield to protect owners from the liabilities of the company they own, one Series LLC allows you to establish an unlimited number of protected shields associated with assets of the company. That way if you have a problem with one aspect of the company, then you have pre-isolated and partitioned assets each into their own protective series, fenced off from other assets. Therefore, the entire Series LLC and every other one of its particular protected series aren’t necessarily responsible when something goes wrong with any one ring-fenced protected series of that series LLC. For instance, if a coffee burn occurs at the Queen Theater, the injured plaintiffs should not be able to sue both the Series LLC and all of its other protected series. Only the Queen Theater series should be exposed to the creditor. The series LLC may be a practical way to limit the plaintiffs to suing only one protected series that only holds the revenues from the Queen Theater and other related parties whose actions or inactions gave rise to the transactions or occurrences. This should work because each protected series within the Series LLC is a “legal person” in the eyes of the law. The protected series can sue and be sued separately. The other protected series are unrelated to the injury and could be dismissed, even if named in the lawsuit.
The exciting thing about the Series LLC is that it’s not limited to just Delaware. Delaware was the first state to have the Series LLC, thirteen states have since adopted it. The Uniform Law Commission, which is an organization that gets together and creates proposed laws across the US, just finalized an act with the objective to unify the way these laws are created by other states. This is no longer an obscure type of business entity. More states are adopting the Series LLC. Virginia and Arizona are proposing to be the next two states to adopt the laws.
The Way the Series LLC Works Is Simple
A Series LLC is like safe deposit boxes in a vault. If you go into a vault you might see shelves of locked boxes on the walls. A Series LLC lets you establish an unlimited number of little boxes with keys within this one company. That way, if a creditor has a judgment against one protected series, that creditor just has a judgment against that one particular protected “box”. It’s a way to segregate out and partition other assets from any given liability.
Real estate investors are using the Series LLC to set up, for example, ten properties in ten protected series. The investors may form a Series LLC and establish ten protected series in the name of protected series one, protected series two, etc. The owners can internally establish these protected series without having to go back to the secretary of state and file a new Certificate of Formation. The records of protected series establishment are all internal under the Series LLC Operating Agreement.
The protected series are legal persons. This is first time in United States history where private citizens have been empowered to establish an unlimited number of persons with only one Certificate of Formation. It is blank check to establish as may legal persons as you would like. How amazing is it that you can decide to wake up one day and establish new protected series as separate persons without even a trip to the filing office to designate series or an additional fee after the initial Certificate of Formation filing?
There are about 100,000 Series LLC’s in use across the country in the 13 states that now allow them. Each Series LLC may have only one or two protected series. Some may have dozens, hundreds, thousands, or even millions of protected series established in any given Series LLC. While this large number may be disconcerting, most are being used safely and not being sued. Very few cases have involved Series LLCs or their protected series. This is a wild world we’re moving into with business entities.
Many Types of Businesses Can Use the Series LLC
This Series LLC can be beneficial to all types of businesses. Serial entrepreneurs who want to incubate different businesses, real estate investors, and even big businesses can use it. The power brokers who initially created the legislation for the Series LLC are the ones who want to keep this for themselves and not for the common man. They are using these Series LLCs for mutual funds, private equity, and captive insurance companies.
One example of a company with a high number of protected series within a single Series LLC is a fleet of autonomous vehicles. Every vehicle could be in its own protected series. Or Getty Images—they have millions of copyrights. Every image could go into its own protected series to have them licensed separately by separate owners. This is one way to reduce enterprise-wide risk down into specific risk vectors and separate them legally.
The Series LLC is a way to revolutionize the way we think of entities. Entities don’t have to be static. Entities can constantly evolve. The organization can automatically establish a new protected series to itself as it acquires assets. It may not even be people who establish these new protected series within the Series LLC. It may be the companies themselves automating this process with computer software to establish rules and triggers through artificial intelligence. Those rules could say that as the Series LLC acquires new assets, it will dynamically establish a new protected series, fund the protected series, and keep track of the records in the protected series for each new asset it acquires.
The Future of the Series LLC
We may even use further technology to bulletproof the series protection. You wouldn’t want people accusing your Series LLCs of mischief or playing a shell game. The series LLC could use Blockchain technology that puts asset ledgers on a public or private distributed ledger that no one person can change. This way, anyone can know what assets were owned by any protected series at the time when someone drops the coffee. This allows the business owner to prove definitively what assets were owned by which protected series. It’s a real innovation in mitigating the risks associated with deep pockets. It allows businesses to do things that are beyond the scope of what they’ve ever been able to do before. Every asset is tagged and tracked to easily report on its ownership at any point in time.
Surprisingly only 1% of the new Delaware LLC’s now are taking advantage of the Series LLC provisions available in Delaware. Thirteen other states have the Series LLC law. Most are copying the Delaware version of the law to avoid losing business to Delaware. In addition, just recently the Uniform Protected Series Act was adopted when the Uniform Law Commission approved it in July 2017. This is an invitation in neon lights for the other 37 states to adopt a Series LLC act.
You haven’t heard about the Series LLC yet because they don’t teach it in law schools, business schools, and it doesn’t appear in entrepreneurship books. I invite you to look into the series LLC to determine if it would be a good fit for you or someone you know. The limit on the number of protected series is your imagination and your ability to keep track of the records.
https://seriesllc.com/wp-content/uploads/2022/07/Capture.jpg7881204Matt Dochnalhttps://seriesllc.com/wp-content/uploads/2018/06/series-llc-delaware-logo.pngMatt Dochnal2022-07-13 17:09:202023-06-20 19:52:56The Series LLC: Not Your Average Business Entity
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