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5 Steps to Form a Registered Series

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Since 2019, the State of Delaware has allowed Series LLCs to create what are known as “registered series”. Unlike “protected series”, establishing a registered series requires making an additional public filing. By qualifying as a registered organization, registered series provide certain business benefits that protected series cannot. 

Establishing a registered series under a Delaware Series LLC is straightforward. However, there are some important points you need to consider to establish a registered series the right way. Here we cover the five steps you need to follow to form a Delaware Registered Series. 

How To Establish a Delaware Registered Series: 5 Steps

Establishing a Delaware Registered Series involves forming a Delaware Series LLC with a few additional steps. 

Step 1.)  File A Certificate of Formation

The first step is to form a Delaware Series LLC by filing a Certificate of Formation with the Delaware Secretary of State. The Certificate of Formation is the public document that brings your Series LLC to life. 

Filling out the Certificate of Formation in Delaware is simple. The Certificate of Formation for a Delaware Series LLC requires the following: 

  1. The name of the Series LLC, 
  2. the address of the company’s Registered Agent, and 
  3. an additional article providing notice of the company’s ability to establish series. 

The additional article should cite Delaware Code Chapter 18, Section 215. This section provides notice to the public that the Series LLC may establish protected and registered series with their own  liability shields. 

Step 2.) Draft an Operating Agreement

The Series LLC Operating Agreement is the internal company document that details how the Series LLC is structured. The Operating Agreement is a private contract between the members that sets forth their ownership percentages in the company and their management responsibilities in associated series. 

Members need to have a properly prepared Series LLC Operating Agreement to ensure that the Series LLC functions properly. The Series LLC Operating Agreement is the starting point, and often the end point, for resolving disputes concerning LLC ownership and liability. A well crafted Operating Agreement can act like a prenuptial agreement between LLC members that provides for fast and fair resolutions to conflicts. 

Step 3.) Draft Separate Series Agreements. 

Members should include Separate Series Agreements for each registered series as exhibits to the main Series LLC Operating Agreement. 

Separate Series Agreements are necessary to establish individual series and provide for their ownership and management. For example, a member could be a manager of one series while having no ownership or management of any of the other associated series. Members can establish these kinds of arrangements within Separate Series Agreements. 

Step 4.) Name Registered Series 

Delaware law requires registered series to follow strict naming conventions. The name of a Delaware Registered Series must begin with the name of the Series LLC followed by the name of the specific series.

Here is an example of how to name a registered series:

  • The first registered series of ABC LLC (A Delaware Series LLC) could be named “ABC LLC Registered Series 1″.  

Members of a Delaware Series LLC should maintain a complete list of the names of all associated series.  

Step 5.) File a Certificate of Registered Series

The final step to create a Delaware Registered Series is to file the Certificate of Registered Series. The Series LLC needs to file a Certificate of Registered Series with the Delaware Secretary of State for each new registered series it creates. 

The Certificate of Registered Series requires the names of both the Series LLC entity and the newly established registered series. 

Benefits of a Delaware Registered Series.

Delaware Registered Series qualify as “registered organizations” under the Uniform Commercial Code. This means that a registered series provides some specific benefits that a protected series does not. 

Here are some of the benefits of choosing a registered series over a protected series:  

  • Secured Financing for Registered Series

The primary benefit of a registered series is the ability to obtain secured financing. Since a Delaware Registered Series qualifies as a “registered organization” under the Uniform Commercial Code (UCC), lenders of a registered series can perfect their interests in business assets by filing a Delaware UCC-1 Financing Statement. 

Filling a UCC-1 allows lenders to provide public notice of their collateral interest in an asset. Lenders are require to file a Financing Statement to perfect their security interest over an asset. 

Registered series benefit from secured financing because the interests of secured creditors are limited to the business assets pledged. 

  • Obtain a Delaware Certificate of Good Standing. 

Unlike traditional, protected series, a Delaware Registered Series is able to obtain a Certificate of Good Standing from the state in its own name. A Certificate of Good Standing is an official document providing proof that a business entity has paid its franchise tax balance and is compliant within its state of formation. 

A Certificate of Good Standing serves many important purposes. For example, banks will typically require LLCs to obtain a Certificate of Good Standing before opening a business account. Many states, like New York and Texas, also require Delaware LLCs to obtain a Certain of Good Standing before they can be granted authority to do business within their borders. 

How Much Does a Delaware Registered Series Cost?

The costs associated with establishing a Delaware Registered Series under a Delaware Series LLC come in the form of filing fees and annual fees. 

Filing the initial Certificate of Formation to create a Delaware Series LLC requires paying a $90 filing fee to the Delaware Secretary of State. In addition, there is another $90 filing fee associated with filing the Certificate of Registered Series to form each registered series. 

In regards to annual fees, Delaware requires Series LLC is required to pay annual franchise tax. The Delaware Annual Franchise Tax is a flat fee of $300 due on June 1st of each year after formation. 

Delaware requires Series LLCs to make only one franchise tax payment no matter how many individual protected series they create. However, there are additional fees to maintain registered series. Delaware Series LLC owners must pay an annual fee of $75 for each registered series. This fee must be paid to keep the registered series in good standing with the state. 

Converting A Protected Series to a Registered Series

If a protected series of a Delaware Series LLC already has significant business history, the members may consider converting the existing protecting series instead of establishing a new registered series. Converting a protected series to a registered requires some additional filings and is more costly than simply creating a new registered series. However, a conversion may be necessary to maintain continuity in the business’ activity.

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

Step 1.) Vote on a Plan of Conversion

All members associated with the particular series must approve a conversion to a registered series.

Series members can prepare a Plan of Conversion document to include with the Separate Series Agreement to document the approved conversion.

Step 2.) File a Certificate of Conversion

After the conversion is approved, members need to file a Certificate of Conversion with the Delaware Secretary of State.

Step 3.) File a Certificate of Registered Series

Next, a Certificate of Registered Series must be filed with the state. This document creates the public record of the registered series. Keep in mind that the name of the registered series needs to follow the naming conventions filed under Delaware law.

Step 4.) Amended the Operating Agreement and Separate Series Agreements

Finally, the Series LLC Operating Agreement should be amended to include the new registered series. In addition, the Separate Series Agreement should also be amended to reflect that the series has been filed as a registered series.

How the Series LLC Helps Captive Insurance Companies.

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The Delaware Series LLC is often used in sophisticated industries. Examples include regulated finance, real estate investment, and oil field financing. Captive insurance is another application where the Delaware Series LLC has become popular.

The captive insurance industry has been able to benefit from using the Delaware Series LLC as a means to separate liability under one regulated entity. We discuss how to structure a captive insurance company as a Series LLC, as well as some of the history behind series insurance captives.

What Is Captive Insurance?

Insurance captives are complex entities that allow a group of companies to insure themselves against their own business risk. Captive insurance is different from commercial insurance where companies simply buy into a fund pool. Policyholders in an insurance captive wholly own the insurance company.

Policyholders can exercise control over the insurer’s operations and even benefit from underwriting profits. The captive insurance model can promote greater efficiency in coverage and lower insurance premiums.

How To Structure a Series LLC Captive Insurance Company

The Series LLC fits well with creative approaches to legal structures because of its flexibility. State laws typically abide by a core licensing approach for licensing captive insurers. This approach licenses the Series LLC entity, referred to as a “core” entity, as a special purpose captive.

The core captive has the ability to grant individual insurance licenses to associated protected series under its own Certificate of Authority granted by the state Insurance Commissioner. The core captive then uses protected series to hold the funds of individual policyholders as associated assets to protect them from cross-liability.

The Delaware Series LLC and Captive Insurance

In 2010, Delaware licensed the first Series LLC as a captive insurance company and created the Series Captive Insurance Company (SCIC). The statute was later revised in 2015 to formalize the licensing, taxation, reporting, and governance requirements for SCICs.

The Series Captive Insurance Company is often described as a “hub in spoke” structure. The business of providing insurance to individual policyholders is conducted strictly through the protected series.

The Series LLC functions as an administrative hub. Fees and policy premiums pass through the Series LLC entity down to the protected series. The main Series LLC represents a management service organization, or MSO. The MSO is tasked with managing the individual protected series.

The Delaware statute treats each protected series in a SCIC as a separate insurance captive. This means that each series is required to comply with regulatory requirements.

Requirements include:

  • Maintaining a resident manager;
  • Hosting annual meetings; and,
  • Adopting a conflict of interest policy.

The MSO can fulfill these requirements for all protected series.

Additional Filings for Insurance Captives

The Delaware Secretary of State does not require Series LLCs to file annual reports. However, Delaware’s Department of Insurance now requires Series Captive Insurance Companies to file separate annual reports for each protected series.

If a protected series of a series captive is managed by a separate board, then the protected series is required to hold its own annual meeting. Under the statute, the financial condition of each series must be accounted for through an audit.

Delaware Series Captives vs. the Protected Cell Companies

Prior to the Series LLC, captive insurance companies tried implementing Protected Cell Companies (PCCs) to separate the liabilities of individual captive insurers. A PCC is similar to a Delaware Series LLC in that it provides segregation of assets through asset chamber “cells”.

Each cell is capable of operating independently from one another while ownership is consolidated under a core entity. Separate cells which encapsulate the business of insuring policyholders, while the core insurance company acts as an administrator. Individual cells of a PCC can be regulated in conjunction with the core entity.

How Protected Series Improve Upon the Protected Cell Company

The cells of a Protected Cell Company are less empowered than the protected series of a Delaware Series LLC. The PCC statute does not allow individual cells to contract in their own name. These restrictions limit the Protected Cell Company’s ability to provide asset protection. Cells of a PCC must have the core entity contract for them. Legal practitioners see this as being unnecessary liability exposure for the core entity.

In contrast, the Delaware LLC Act provides protected series of a Series LLC with legal personhood. Protected series are able to contract, sue or be sued, own separate assets and hold title to real property entirely in its own name.

The ability of protected series to enter into contracts provides significant advantages for captive insurance. For example, protected series enable insurance captives with better access to reinsurance markets. The PCC structure would only allow insurance captives to achieve reinsurance by forming and maintaining additional entities existing outside of the captive. This strategy not only incurs greater cost, but also greater liability. Captive insurance companies can promote administrative efficiencies by implementing the Delaware Series LLC. This can result in both cost savings and superior liability protection.

Adoption of The Series Captive

Delaware’s innovation in creating the Series Captive Insurance Company has influenced other states to adopt similar laws. Montana now permits Series LLCs to be licensed as special purpose captives. Tennessee has also amended its Limited Liability Company Act to allow a “series protected cell” structure.

 

 

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

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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.

 

Next: "What Are The Record-Keeping Requirements For A Series LLC?"

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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Should I Use An Umbrella LLC or A Series LLC?

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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.

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

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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. 

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

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.