Tag Archive for: Series LLC

What Are Separate Series Agreements and Do I Need Them?

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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.

 

Read More –>What Is the Series LLC Operating Agreement, and Why Is It Important?

 

 

 

 

 

Can a Delaware Series LLC Operate in Other States?

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

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

Can a Delaware Series LLC Do Business in Other States?

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

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

How to Operate a Delaware Series LLC in Other States

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

Which States Allow Series LLCs?

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

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

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

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

Why Don’t All States Allow Series LLCs?

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

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

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

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

What Case Law Is There About Series LLCs?

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

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

Tips for Operating a Delaware Series LLC In Other States.

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

  1. Maintaining Separate Records for Protected Series.

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

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

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

     2. Draft a Series LLC Operating Agreement.

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

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

The Bottom Line.

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

 

Can You Convert a Delaware LLC Into a Series LLC?

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

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

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

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

Step 1) Amend the Formation Document.

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

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

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

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

Step 2.) Amend the Operating Agreement

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

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

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

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

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

Step 3.) Maintain Separate Records for Protected Series

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

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

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

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

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

What Is a Delaware Series LLC?

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

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

What Are the Series LLC Business Benefits?

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

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

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

How Does a Delaware Series LLC Provide Protection?

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

Should You Convert an LLC To a Series LLC?

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

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

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

Delaware Series LLC vs. Holding Company

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

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

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

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

Grow Your Business With a Series LLC

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According to the Bureau of Labor Statistics, 20% of businesses fail in their first year, and only 50% will make it to their fifth year. One of the main reasons businesses fail is inflexibility. You often find inflexibility in a company’s business plan, however, it can also show up in its legal structure.

More traditional entity types, like LLCs, are not dynamic and can add friction when a company is trying to grow and expand. Successful business owners have used Delaware Series LLCs to get past this. Serial entrepreneurs are using Delaware Series LLCs as a growth hack to protect their personal assets while quickly scaling their business ideas.

The Delaware Series LLC Business Growth Hack

Forming a Delaware Series LLC can enable entrepreneurs looking to explore several business ideas in hopes of finding out what works. Here is how to use a Delaware Series LLC to accelerate business growth.

 Step 1.) Protect Multiple Businesses With One Entity

A Series LLC enables entrepreneurs to incubate different ideas or products while protecting both themselves and the business as a whole.

An entrepreneur can put different businesses into individual protected series. This keeps the assets and liabilities of each business separate from one another. If one business experience’s setbacks, or even fails, the creditors of that business cannot come after the assets of related businesses or the Series LLC in general.

Additionally, business owners also receive these protections for their personal assets. This offers entrepreneurs the freedom to put ambitious thoughts into action.

Step 2.) Spin Off Successful Businesses

Entrepreneurs trying several ideas and gaining experience are bound to find a business that takes off. Series LLC owners can spin off successful businesses held within protected series as separate LLCs.

By incubating business ideas and spinning off winners, entrepreneurs can substantially reduce their personal liability risk while achieving significant business benefits.

What Is a Series LLC?

Most entrepreneurs are familiar with the traditional Limited Liability Company, or LLC. The LLC has become the most popular entity type for small businesses. This is because LLCs are easy to set up and relatively cheap to maintain.

The Series LLC is the next evolution of the LLC. Created by Delaware in 1996, the Series LLC allows companies to provide limited liability protection for multiple businesses using just one entity.

A Series LLC has the ability to create an unlimited number of separate units called “protected series”. Each protected series can have a separate business purpose, separate business assets and even separate members or managers.

Delaware Series LLC vs. LLC

Before the Series LLC, entrepreneurs had to endure a more costly and inefficient process to protect multiple businesses from cross liability. Business owners traditionally form each new business as a separate LLC; each of which is owned by a Holding Company. Forming each LLC requires filing a Certificate of Formation, paying associated filing fees, and paying Annual Franchise Tax.

The Delaware Series LLC is great for serial entrepreneurs because it is completely flexible. The Series LLC enables entrepreneurs to create unique ownership structures that are tailored for the specific needs of their business. A Delaware Series LLC can also be more cost effective to maintain. Creating a Delaware Series LLC requires making only one filing and paying one Annual Franchise Tax for the whole entity.

Delaware Series LLC Business Benefits

In addition to asset protection, the Delaware Series LLC offers several key business benefits. These benefits include:

  • Reduced Costs

 Forming a Delaware Series LLC requires paying only one filing fee. Additionally, a Delaware Series LLC only needs to make one Annual Franchise Tax payment no matter how many protected series it creates.

  • Flexibility

The Series LLC offers flexibility through its Operating Agreement. The Operating Agreement is a private document that governs the internal affairs of a Series LLC.

The Operating Agreement allows Series LLC members to tailor a legal structure that meets the needs of their business. Members can create unique ownership structures, establish special provisions like a Right of First Refusal, and make personalized schedules for distributing profits.

Series LLC owners can easily adjust the company’s legal structure as it grows by amending the Operating Agreement. Since the Operating Agreement is a private contract, Series LLC members can make changes to the ownership structure without having to file any documents with the state.

  • Administrative Efficiency

Series LLC owners create new protected series simply by adding them in the Operating Agreement. No additional state filings are necessary after forming a Series LLC.

  • Consolidated Ownership

Members in a Series LLC can be associated with each protected series. Serial entrepreneurs can centralize decisions across multiple businesses. This enables ease of management.

How Do Series LLCs Work, Exactly?

Protected series of a Series LLC have their own asset shields, just like a traditional LLC. A Series LLC protects the business assets of each protected series from the liabilities of the other businesses. This means you can manage multiple businesses under one entity while keeping their individual assets and liabilities separate.

This asset protection strategy is called “ring fencing”. Think of a Series LLC like horses in a barn. Protected series all exist under one roof. However, internal firewalls rope off the assets and liabilities of each protected series in separate paddocks.

Additionally, the personal assets of Series LLC members are also protected from the business liabilities of any protected series and are off limits to business creditors.

Who Uses Series LLCs?

Any business holding low-risk assets can use the Series LLC to achieve asset protection. Entrepreneurs currently use Series LLCs to protect a wide range of innovative businesses, from sophisticated investment companies to savvy ecommerce businesses.

Series LLCs have taken off in popularity amongst real estate investors. Individuals and firms managing a portfolio of properties are able to reduce liability risk by holding property titles within separate protected series. This protects each property from obligations and liabilities of any other property held within the Series LLC.

 

 

What’s the Best Way to Run Multiple Businesses Under One LLC?

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If you’re a serial entrepreneur looking to maintain multiple businesses or product lines under one entity, you have several options. These include:

  1. Forming one LLC and creating multiple trade names for each business.
  2. Forming multiple LLCs managed by a Holding Company.
  3. Forming a Delaware Series LLC

Each of these strategies differ in cost and liability protections. Picking the best plan for you depends on the type of businesses you operate, your ultimate business goals, and your appetite for liability risk.

We explain the who, what, how, and how much for running multiple businesses. 

 1. MULTIPLE DBAs

 What Is A DBA?

A DBA (“Doing Business As”) is a trade name that an LLC or corporation can use other than its formal corporate name. For example, Agents and Corporations, Inc. trades under the name “IncNow®.” A DBA is also referred to as a “fictitious name.”

DBAs are useful because they provide clear public notice that a particular business is actually incorporated under a different name. Entrepreneurs use DBA’s to distinguish separate businesses that are operated by one legal entity. The Limited Liability Company, or LLC, is the most popular entity type for small businesses. 

How To Get A DBA.

Businesses acquire DBAs by filing a form with the Secretary of State in the company’s state of formation. DBAs also need to be notarized by an official notary in the state of formation.

The form requires general information about the business, such as:

  1. The corporate name,
  2.  The business address
  3. The date of formation or incorporation,
  4. The DBA trade name,
  5. Nature of business,
  6. and the members/partners of the business and their addresses.

How Much Does A DBA Cost?

 The cost of acquiring a trade name is relatively low. Filing a DBA in Delaware requires paying a filing fee of $25. There are no additional annual costs associated with maintaining a DBA.

DBA Business Protections.

 A disadvantage of the multiple DBA strategy is that there is virtually no internal liability protection. When multiple businesses are operated under one LLC, the individual debts, obligations, and liabilities of each business are not segregated from one another. This means that a hostile creditor of one business could potentially gain access to the assets of another business, or the personal assets of the LLC’s members.

Who Uses DBAs?

Entrepreneurs running small scale or early stage businesses may benefit the most from the multiple DBA strategy. In this stage, the general liability risk of the business is low. 

An example would be an at home entrepreneur running multiple ecommerce sites selling different types of products. Each online store can have its own trade name and exist under one LLC.

2. FORMING A HOLDING COMPANY.

What Is A Holding Company? 

A holding company is an entity created for the purpose of owning and managing other individual companies. Businesses owned by a holding company are known as subsidiaries. Each subsidiary can have its own business operations while keeping its assets and liabilities separate from other related businesses.

How To Form A Holding Company. 

Setting up a holding company starts with forming each business as an LLC. This is done by filing Certificates of Formation with the Secretary of State for each entity. The Operating Agreements of each subsidiary LLC will name the general holding company as the sole member.

How Much Does A Holding Company Cost? 

Forming an LLC in Delaware requires a $90 filing fee. Each LLC will also have to pay an annual fee to appoint its own Registered Agent.

Additionally, Delaware requires each LLC pay the Delaware Annual Franchise Tax. This is a $300 payment due annually on June 1 each year after formation.

Holding Company Business Protections.

A holding company benefits from liability protections by operating each subsidiary as a separate LLC. The holding company is not subject to the debts, liabilities, or obligations of any subsidiary LLC. This means creditors of a subsidiary cannot access company assets of any other business. The personal assets of the LLC owners are also protected from business liabilities of any subsidiary.

Who Uses Holding Companies? 

A holding company can benefit businesses holding assets with low to moderate levels of financial risk. The relatively high overhead costs of forming a holding company can be worthwhile if the structure keeps the failure of one business from sinking the entire enterprise.

Holding companies are popular amongst real estate investment firms owning and maintaining multiple properties. Traditionally, each subsidiary LLC is used to hold title to an individual property. while a parent LLC manages the properties. This allows the company to acquire separate financing for each property while shielding them from cross liability.

3. FORMING A DELAWARE SERIES LLC

What Is A Delaware Series LLC?

A Delaware Series LLC is able to create an unlimited number of protected series fenced within one entity. Each protected series can function like a mini LLC with a separate business purpose, assets and members. A protected series can be spun off into separate LLCs once the business takes off. 

The Series LLC’s key feature are the internal firewalls separating each protected series. The Delaware LLC Act provides protected series with limited liability protection between one another, as well as the main LLC. Series LLC owners achieve these protections without having to make any additional filings.

How To Form A Delaware Series LLC. 

Only one Certificate of Formation needs to be filed to create a Delaware Series LLC. This is one advantage that the Series LLC has over the holding company.  It is important that the Certificate of Formation includes appropriate language establishing the limited liabilities of a series.

The parent LLC can then create an unlimited number of protected series without incurring any additional costs. A Delaware Series LLC creates and dissolves protected series by amending its internal Operating Agreement. 

How Much Does A Delaware Series LLC Cost?

Setting up a Delaware Series LLC can be significantly more cost effective than forming a holding company with multiple subsidiaries. Forming a Series LLC in Delaware involves paying the typical state filing fee.

Delaware requires Series LLC to make only one Delaware Annual Franchise Tax payment each year after formation. Protected series are not required to pay Delaware Annual Franchise Tax. A Delaware Series LLC can create an unlimited number of protected series at no additional costs to maintain them. 

Who Uses Delaware Series LLCs? 

The Delaware Series LLC is the cutting edge in asset protection structures. The entity benefits entrepreneurs looking for the freedom to explore opportunities and incubate multiple business ideas.

From a small local farm owning multiple pieces of equipment, to large scale investment companies managing segregated mutual funds, the Series LLC is a dynamic structure that grows along with the business. Low startup costs and internal liability protections make the Delaware Series LLC a viable vehicle for holding a range of asset types, from simple cash assets to leveraged securities. 

Series LLC Considerations

Operating a Series LLC requires diligence and organization. Delaware’s LLC laws include specific record keeping requirements that need to be met for the internal liability shields of protected series to be valid.  

As easy as it may be to set up a Delaware Series LLC, it is also easy for members and managers to inadvertently impose cross liability upon themselves and their businesses. The most successful entrepreneurs use systems to manage separate records and adhere to these requirements.

 

 

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?"

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.

South Dakota Adopts Series LLC: What You Need to Know

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Originating in Delaware, the Series LLC has become a popular legal entity amongst entrepreneurs looking to gain an edge for their business. Demand for the Series LLC has inspired other states to adopt this entity structure into their own laws. Twelve US states now allow for their own versions of the Series LLC. South Dakota is now one of these Series LLC destinations. 

In 2020, The South Dakota state legislature introduced amendments to section 47-34A-101 et seq., of the state’s Uniform Limited Liability Company Act allowing LLCs to establish protected series. The state’s Governor signed the amendments into law in March of that year. 

How is South Dakota Series LLC different from the Delaware Series LLC? We cover the ins-and-outs of South Dakota’s Series law and what it could mean for the future of the Series LLCs. 

What Is A South Dakota Series LLC?

South Dakota used the Illinois Series LLC as the model for its own Series LLC law. The statute allows a Series LLC to own assets either in its own name, or through one of its protected series. South Dakota requires additional filings to be made in order to create individual protected series. Each protected series must file a “Certificate of Designation” with the South Dakota Secretary of State. 

Like Illinois, South Dakota also allows protected series to be considered separate legal entities. The LLC’s formation document, called the “Articles of Organization”, must state this designation. Most states rarely include this provision in practice. 

South Dakota also imposes strict naming conventions for Series LLCs. The law explicitly requires the entire name of the LLC to be part of the name of each protected series. The purpose for this is to avoid confusion by ensuring every protected series is distinguishable from any other entity listed in the public record.

“Each protected series must file a “Certificate of Designation” with the South Dakota Secretary of State.”

Series LLC Models: Illinois, Delaware, and the Uniform Protected Series Act

In the Series LLC space, there are two preeminent models which states tend to follow: the Illinois Series LLC and the Delaware Series LLC. 

The Delaware Series LLC

A majority of states have chosen to follow Delaware’s lead when adopting Series LLC laws. Delaware introduced the first Series LLC law in 1996. The state legislature has since revisited and amended the law several times. The Delaware Series LLC remains the cutting edge for all legal entities today. 

Core to the Delaware Series LLC is the ability to establish an unlimited number of protected series without requiring any additional public filings. LLC members can continuously create and dissolve protected series simply by amending the LLC’s internal Operating Agreement. This allows LLC members to seamlessly implement substantial changes to the company’s legal structure as the business grows and changes. 

The Illinois Series LLC

Illinois’ Series LLC mirrors the original Delaware law by providing Series LLCs with internal liability protection. However, Illinois has chosen to implement several key differences.

First, forming an Illinois Series LLC requires an additional set of filings. Illinois requires each protected series to file a “Certificate of Designation”. This filing makes the protected series an entity of the public organic record. There is a $50 filing fee associated with creating individual protected series in Illinois. 

Illinois also imposes specific naming conventions for protected series. The name of each protected series must include the full Series LLC name. For example, a protected series for “Illinois Example LLC” could have a name along the lines of “Illinois Example LLC Series 1”. 

“Illinois requires a $50 filing fee for creating individual protected series.”

The Uniform Protected Series Act

The Uniform Law Commission drafted the Uniform Protected Series Act (UPSA) in 2017 with the intent of enhancing the Illinois approach to the Series LLC. The goal of the UPSA is to provide uniformity across state level Series LLC laws. This serves to promote further adoption of the Series LLC, as well as make it easier for protected series to operate across different jurisdictions. Several states have adopted the UPSA to represent their own Series LLC law. Some of these states include Tennessee, Colorado, Arkansas, Virginia, Iowa, and Nebraska. 

The UPSA is more prescriptive than both the Delaware and Illinois models. The Act includes more rules and requirements aimed at preventing proprietors from abusing the Series LLC to harm innocent creditors. It can be said that the Illinois Series LLC is a middle-ground between the Delaware Series LLC and the UPSA.

How Does South Dakota Treat Foreign Series LLCs?

South Dakota’s law allows Series LLCs from other states to operate in South Dakota by filing a “Certificate of Authority”. This is also known as a foreign qualification. It is important to note that a Series LLC cannot obtain a Certificate of Authority on behalf of its protected series. Each protected series of a foreign Series LLC is required to complete its own foreign qualification in order to do business in South Dakota. 

“Each protected series of a foreign Series LLC is required to complete its own foreign qualification in order to do business in South Dakota.”

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?"