While series LLCs have gained in popularity and use among states that have authorized them, the lack of state uniformity in the treatment and acceptance of series LLCs has led more conservative attorneys, advisors and clients to avoid them, believing that the uncertainties and potential risks outweigh the perceived benefits.
In the last year, however, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) has been hard at work and there are encouraging signs that a uniform law for series LLCs may be forthcoming.
In Part I of this two-part series, we’ll cover some of the background and issues surrounding series LLCs. In Part II, we’ll review more recent developments, including the current status of the NCCUSL’s series LLC uniform law initiative.
What Is A Series LLC? A series LLC is a limited liability company with internal “series” or “cells,” each of which may have separate members, managers, assets and liabilities, business purposes or investment objectives. The assets of each series are shielded from the liabilities of the other series and the LLC itself. In other words, each protected series has its own separate veil of limited liability protection.
Initially created under Delaware law to serve as business structures for mutual funds, series LLCs are now being used in the context of other business enterprises for purposes of asset protection.
They often appeal to those with different lines of business, different categories of assets, or different types of property they wish to manage and operate separately, under the umbrella of a “master” LLC. Real estate developers may establish a series LLC to segregate various properties within their own protected series; a taxi company may utilize a series LLC to keep each taxi in a separate, protected series, segregating it from the liabilities associated with any other taxi in the fleet. Estate planners also commonly use series LLCs to segregate assets for different beneficiaries.
Uncertainties Surrounding Series LLCs. As one of the newest forms of business entity, series LLCs lack the benefit of some of the more established business entities that offer guidance in the form of well-developed statutes and case law. Among the uncertainties surrounding series LLCs that have troubled commentators and practitioners alike are:
1) Choice of Law. If a series LLC is sued by a third party in a state that does not authorize the formation of series LLCs, then it is possible that the law of that state would be applied. If that state does not respect the liability shield of the series LLC structure, the lawsuit could potentially put the assets of all series and the master LLC at risk.
2) Bankruptcy. The U.S. Bankruptcy Code does not recognize series LLCs; thus, it is not possible to say with certainty how series LLCs would be treated in the event of bankruptcy.
3) Corporate Governance. The records and bank accounts of each protected series must be separately maintained. But whether there can be any overlap among the protected series in the context of daily operations (e.g., sharing of insurance coverage, training programs or administrative support services) is untested in court. Given the lack of case law, it is not possible to say whether series LLCs are under greater risk of having their veil of limited liability pierced than any other related LLCs.
4) Tax Treatment. Important tax questions, both federal and state, remain unanswered. For example, no formal guidance exists on employment taxes or employee benefits; therefore, a protected series with employees has little way to determine whether it can offer employee benefit plans or how to comply with the rules applicable to those plans. State taxation of series LLCs is even less clear. For instance, some states indicate they will tax each series consistent with its federal tax classification; others provide for default partnership taxation of series LLCs
5) Secured Transactions. With respect to secured financing transactions that are governed by Article 9 of the Uniform Commercial Code, there is uncertainty with respect to the proper identification of the debtor on a financing statement. In most states with series LLC legislation, the individual series are not separate and distinct entities, and therefore those states will not issue good standing certificates for individual entities. Thus, while an individual series may be able to hold assets and grant security interests pursuant to relevant state law, it is not clear if the individual series can be a “debtor” under the UCC.
While questions and uncertainties continue to surround series LLCs, there’s reason to be hopeful, thanks to the work currently underway by the NCCUSL and its series LLC uniform law initiative. Stay tuned for Part II.