In Part I, some of the history and issues surrounding series LLCs and their application were discussed; in Part II, we will investigate more recent developments, including a look at the status of the Uniform Protected Series Act currently under consideration by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”).
Which States Have Authorized Series LLCs? Presently, there are 15 states with series LLC legislation: Alabama, Delaware, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, North Dakota, Nevada, Oklahoma, Tennessee, Texas, Utah and Wisconsin. The District of Columbia and Puerto Rico also have provisions for series LLCs. California does not authorize series LLCs, but permits series LLCs formed elsewhere to register as a foreign entity and do business in California as a series LLC, provided the entity pays taxes and fees for each of its protected series.
The inconsistency in recognition and treatment of series LLCs across the U.S. supports the need for uniform legislation. In the 19 years since Delaware first authorized series LLCs, less than one-third of the states have adopted similar legislation. By contrast, within 20 years of Wyoming introducing the nation to the LLC, all 50 states had adopted LLC legislation.
Status of Uniform Series LLC Act. The first draft, originally titled the “Series of Unincorporated Business Entities Act,” was published in September 2013; the second draft followed in February 2014; and the third draft (which the committee noted to be a complete overhaul of earlier drafts) was released in November 2014. In its comments on the third draft, the committee questioned the need for series LLCs, stating that “the special advantages of protected series remain obscure.” Thus, we entered 2015 with lingering doubts about whether uniform series LLC legislation would ever exist. Nonetheless, 2015 was a year of progress. The committee produced yet another draft in March, another in July, and the most recent draft was released in November.
The latest draft not only makes significant changes to earlier drafts but also seems to take a more focused approach. Key elements of the November 2015 draft include:
- Limited Scope. The draft is given a proposed new name, the Uniform Protected Series Act (“UPSA”), with a scope restricted to limited liability companies.
- Compatibility with State LLC Legislation. The draft is intended to dovetail with the LLC statute of each enacting state, regardless of whether the state has previously enacted the Uniform Limited Liability Company Act. In other words, definitions and provisions will cross-reference to the state’s LLC act to ensure consistency.
- Possible Conversion to an Article in Existing State LLC Acts. The drafters are considering converting the UPSA to an article to be inserted into the LLC act of each enacting state, eliminating the need to cross-reference definitions from the relevant LLC act.
- Limited Liability Veil. No existing series LLC legislation addresses the issue of piercing the veil. The draft UPSA expressly acknowledges and makes applicable veil piercing in the series LLC context. In other words, it confirms that the same rules of law and equity apply to hold members of a series LLC vicariously liable for the company’s debts and to hold members associated with a protected series vicariously liable for the protected series’ debts.
- Asset Protection. Most existing series statutes permit an LLC to establish a protected series without a public filing, provided the LLC’s publicly filed formation document indicates that it may have protected series. The draft UPSA expressly requires a public filing be made in order to establish a protected series and its “horizontal” liability shield.
- Affiliate Liability. No existing series LLC statute addresses the issue of one series being held liable for the debts of another. The draft UPSA makes the rules of “affiliate liability” applicable among a series LLC and its protected series. Generally, in the absence of affiliate liability, assets owned by one entity are not subject to the enforcement of claims by creditors of any other entity.
- Association Requirement. The draft UPSA adds creditor protection against the so-called “shell game.” The draft provides that even if there is no affiliate liability, an asset owned by a protected series is available to creditors of the series LLC or another protected series unless the protected series has complied with strict record-keeping requirements, thereby “associating” the asset with the protected series.
Takeaways. While still a largely unfamiliar entity outside the investment fund context, the adoption of a uniform protected series act would likely lead to more widespread acceptance and use of series LLCs throughout the United States. Substantial progress on the uniform act has been made in the past year. While it’s uncertain whether the NCCUSL will unveil a final draft of the uniform series legislation in 2016, attorneys may still experience an uptick in client interest in series LLCs.