Series LLC

Last updated

A series limited liability company, commonly known as a series LLC and sometimes abbreviated as SLLC, is a form of a limited liability company that provides liability protection across multiple "series" each of which is theoretically protected from liabilities arising from the other series. In overall structure, the series LLC has been described as a master LLC that has separate divisions, which is similar to an S corporation with Q-subs.

Contents

The utility of a Series LLC may be explained by a comparison to the alternative. Many form an LLC in order to protect personal assets from a legal claim relating to their real estate investment or business liabilities. Additional liability protection may be gained by properly forming and maintaining a separate LLC to hold each property or business entity. By forming a separate LLC to own and hold each legally titled separate property or business entity, theoretically only the assets owned by a specific LLC would be subject to claims or lawsuits arising against that LLC. However, there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC. Another option may be to form multiple series or "cells" if permitted under applicable laws. Although each cell of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members, a Series LLC may be able to pay a single set of annual state fees and may be able to file one income tax return each year. In addition to the administrative streamlining, the key value is that liability incurred by one unit does not cross over and jeopardize assets titled in or allocated to other subsidiary units of the same Series LLC.[ citation needed ]

In several jurisdictions, the procedure for adding and deleting series is uncomplicated. Additional series can be formed or dissolved without any public filing by simply amending the Series' "limited liability company agreement" (equivalent to an operating agreement for other LLCs). Under Delaware law, any particular series may be dissolved by 2/3 approval of the ownership interests, or a simple majority if provided for in the operating agreement. Some jurisdictions, notably Illinois, [1] do have a mechanism for public publication of series. Additionally Illinois states that each series is a separate entity, whereas Delaware is silent on whether each series is a separate entity. Most states with the series LLC have followed the Delaware model, rather than the model in Illinois which requires each series to be designated with the Secretary of State.[ citation needed ]

History

The concept of the series LLC was first introduced to[ citation needed ] help the mutual fund industry avoid filing multiple SEC filings for different classes of funds. Instead the idea was to use one entity for all funds so that the SEC filing would be under one umbrella, but still permit the individual funds' activities to be conducted separately. [2] The concept is similar to that of the segregated portfolio company or protected cell company, concepts which existed prior to the invention of the series LLC. Segregated portfolio companies exist in countries such as Guernsey, the British Virgin Islands, Bermuda, the Cayman Islands, Mauritius, and Belize.[ citation needed ]

This method of liability segregation was first called the "Delaware Series LLC" because the first state to enact this legislation was Delaware (in 1996). Wisconsin passed a stripped-down version of the series LLC legislation in 2001. [3] As of April 2005, Iowa [4] and Oklahoma already had passed similar acts. Later in 2005, Illinois [1] and Nevada [5] followed. Tennessee [6] and Utah [7] passed legislation effective in 2006. Texas enacted non-entity series LLC legislation in 2009. [8] Montana enacted Series LLC legislation in 2011, since becoming a popular organizational structure for captive insurance companies. Indiana adopted its Series LLC act in 2016.

Comparison to corporation, and contrasts between states

What formalities are required to form the cells?

Illinois has restricted the rights given to the members of a series LLC to create new series because Illinois requires public filing. This has removed some of the cost savings of a series LLC. Illinois law specifically states that a series of an LLC "shall be treated as a separate entity to the extent set forth in the articles of organization," and then also provides that each series may "in its own name, contract, hold title to assets, grant security interests, sue and be sued and otherwise conduct business and exercise the powers of a limited liability company…"

Delaware further provides that to achieve the liability segregation that the series afford (the "internal shield"), the LLC must keep a separate set of records for each series, and to have a series enabling statement in its Certificate of Formation.[ citation needed ]

Are the cells persons with capacity to form contracts? Are the cells corporate-veiled and bankruptcy-remote from each other?

Until recently, Delaware did not clearly state that each series could sue, enter into contracts, etc. on its own, without the entire company being named in the lawsuit. Delaware clarified its legislation that a series can now enter into contracts, hold title to assets, grant liens and security interests and sue or be sued. In several other respects, series are not treated by Delaware as separate entities. For example, series are not separately registered and they cannot merge or consolidate with other entities, convert into other entity types or domesticate to another jurisdiction. The Delaware Division of Corporations will not provide a separate certificate of good standing for each series, but it will provide a certificate of good standing saying that the entire company is a series LLC (and not just a traditional LLC).[ citation needed ]

In 2015, Texas amended Section 1.201(b)(27) of the Texas Business & Commerce Code to clarify that a series of a Texas series LLC falls within the definition of a legal "person." [9] This clarification is important because the definition of "person" is also incorporated in the Texas Uniform Commerce Code's definition of "debtor." This incorporation means that if an individual series of a Texas series LLC owns assets secured by a debt, then the individual series can be named on the UCC-1 financing statement that is required to perfect a lender's security interest. Before this update to the Business & Commerce Code, lenders often listed the series LLC instead of the individual series on UCC-1 financing statements, which exposed the series LLC to the debts of the individual series. [10]

Other states that have enacted series legislation do not treat series as separate entities and do not allow series to enter into contracts or sue or be sued.

Full faith and credit by other states that do not have series LLC laws

There is uncertainty as to whether the liability shield between LLC series is fully effective in states that do not have series LLC laws. In the 2013 case of Alphonse v. Arch Bay Holdings, LLC, 548 F.App'x 979 (5th Cir. 2013), the United States Court of Appeals for the Fifth Circuit interpreted the application of the Louisiana Unfair Trade Practices Act to alleged violations by a Delaware series LLC. The court held that Louisiana law (which does not recognize the series LLC concept) would apply to determine whether a particular series of an LLC or the entire LLC would be the proper party to the litigation. [11]

Tax treatment

The series LLC is becoming more widely used as a liability segregation technique as its tax treatment becomes clearer and its use spreads. To date, the inter-jurisdictional efficacy of portfolio segregation has not been widely tested and the lack of precedent in federal bankruptcy court in particular is a significant source of uncertainty. At the same time, tax treatment is becoming clearer. On January 18, 2008, the Internal Revenue Service issued Private Letter Ruling 200803004, [12] which ruled that the Federal tax classification (i.e., disregarded entity or partnership or taxable association) is determined for each series independently. So, for example, if there is only one owner of series A, then series A can be a disregarded entity (assuming it does not elect to be taxed as an association). And if series B has two owners, then it will be treated as a partnership. The proposed Treasury Regulations § 301.7701-1(a)(5) published in September 2010 [13] should have become effective in 2012, though it did not. The regulations are expected to provide that each series will be treated, for tax purposes, as a separate entity regardless of whether the series is considered a legally distinct entity under local law. This clarity has been welcomed by the legal and tax community. California has taken the position that it will only tax income from those series conducting business in California but that each such series will owe the annual franchise fee. [14]

Although the structure of LLCs vary in important ways, commentators have advanced opinions on how to minimize the chances of one series being held liable for liabilities of the entity as a whole or of another series. But they are just opinions and have not been held up in court:[ citation needed ]

States and territories where a Series LLC can be formed


statestatuteyearinitial fee for top-level LLCnaming req’ts for cellformation of cellsinter-cellannual feeannual report for top-level LLCannual report for cellsother
Alabama [15] 200no100
Arkansas [16] 45150
California [14] California does not permit series LLCs. However, California requires that each cell of a foreign series LLC that does business in California must pay the annual franchise fee.
Delaware [17] 199690note 6300no
D.Columbia [18] 99note 1note 2300/2 yrs
Illinois [1] 2005150note 1note 275yes
Indiana [19]
Iowa [4] 50note 1no45no
Kansas [20] 150note 1note 250
Minnesota155note 5
Missouri [21] 201350note 1note 40nono
Montana [22] 201170note 220
Nevada [5] 2005425no350
No. Dakota [23] 135note 550
Ohio [24] 202299no
Oklahoma [25] 100no25no
Puerto Rico [26]
So. Dakota [27] 15050
Tennessee [6] 2006300no300no
Texas [28] 2009300note 30yesnote 3
Utah [7] 200670note 1no20no
Virginia10050
Wisconsin [3] 2001130note 525
Wyoming [29] 10060
Bahamas
Belize
Cayman Is.
Marshall IslandsSame statutes as Delaware
Mauritius

Note 0. Arkansas, Virginia, Nebraska, and Iowa have passed the Uniform Protected Series Act [30]

Note 1. These states have rules for naming the cells. A typical rule requires that (a) each cell must include the name of the top-level series LLC in the cell's name, and (b) the names for each cell must be clearly distinguishable from each other.

Note 2. In the District Columbia, Illinois, Kansas, and Montana, each cell must be formed by a separate operating agreement and/or Articles of Organization or similar paperwork filed with the Secretary of State (as opposed to allowing creation of cells in the LLC's operating agreement).

Note 3. Texas requires a Certificate of Assumed Name for each cell, and that certificate must be renewed every 10 years.[ citation needed ]

Note 4. In Missouri, Articles of Organization must contain information on every Protected Series, and must be amended if a series is added or removed.

Note 5. In Minnesota, No. Dakota, and Wisconsin, the cells are not bankruptcy-remote (that is, liabilities of one cell may become liabilities of others), and cells cannot individually contract, only the top-level LLC.

Note 6. In Delaware, a cell can enter into contracts, hold title to assets, grant liens and security interests and sue or be sued.

Related Research Articles

<span class="mw-page-title-main">Limited liability company</span> US form of a private limited company

A limited liability company is the United States-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation under state law; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership, and, under certain circumstances, LLCs may be organized as not-for-profit. In certain U.S. states, businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a similar entity called a professional limited liability company (PLLC).

<span class="mw-page-title-main">Joint-stock company</span> Business entity which is owned by shareholders

A joint-stock company is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares. Shareholders are able to transfer their shares to others without any effects to the continued existence of the company.

<span class="mw-page-title-main">Incorporation (business)</span> Legal process to create a new corporation

Incorporation is the formation of a new corporation. The corporation may be a business, a nonprofit organization, sports club, or a local government of a new city or town.

<span class="mw-page-title-main">Limited company</span> Type of business entity

In a limited company, the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. In a company limited by shares, the liability of members is limited to the unpaid value of shares. In a company limited by guarantee, the liability of owners is limited to such amount as the owners may undertake to contribute to the assets of the company, in the event of being wound up. The former may be further divided in public companies and private companies. Who may become a member of a private limited company is restricted by law and by the company's rules. In contrast, anyone may buy shares in a public limited company.

<span class="mw-page-title-main">Limited liability partnership</span> Partnership in which some or all partners (depending on the jurisdiction) have limited liabilities

A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities. It therefore can exhibit elements of partnerships and corporations. In an LLP, each partner is not responsible or liable for another partner's misconduct or negligence. This distinguishes an LLP from a traditional partnership under the UK Partnership Act 1890, in which each partner has joint liability. In an LLP, some or all partners have a form of limited liability similar to that of the shareholders of a corporation. Unlike corporate shareholders, the partners have the power to manage the business directly. In contrast, corporate shareholders must elect a board of directors under the laws of various state charters. The board organizes itself and hires corporate officers who then have as "corporate" individuals the legal responsibility to manage the corporation in the corporation's best interest. An LLP also contains a different level of tax liability from that of a corporation.

<span class="mw-page-title-main">Private limited company</span> Type of company used in many jurisdictions

A private limited company is any type of business entity in "private" ownership used in many jurisdictions, in contrast to a publicly listed company, with some differences from country to country. Examples include the LLC in the United States, private company limited by shares in the United Kingdom, GmbH in Germany and Austria, société à responsabilité limitée in France, and sociedad de responsabilidad limitada in the Spanish-speaking world. The benefit of having a private limited company is that there is limited liability. However, shares can only be sold to shareholders in the business, which means that it can be difficult to liquidate such a company.

<span class="mw-page-title-main">Corporate law</span> Body of law that governs businesses

Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

<span class="mw-page-title-main">Limited partnership</span> Form of partnership

A limited partnership (LP) is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited partner. Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

<span class="mw-page-title-main">General partnership</span>

A general partnership, the basic form of partnership under common law, is in most countries an association of persons or an unincorporated company with the following major features:

<span class="mw-page-title-main">Limited liability limited partnership</span>

The limited liability limited partnership (LLLP) is a relatively new modification of the limited partnership. The LLLP form of business entity is recognized under United States commercial law. An LLLP is a limited partnership, and it consists of one or more general partners who are liable for the obligations of the entity, as well as or more protected-liability limited partners. Typically, general partners manage the LLLP, while the limited partners' interest is purely financial. Thus, the most common use of limited partnership is for purposes of investment.

A gōdō gaisha (合同会社), or gōdō kaisha, abbreviated GK, is a type of business organization in the Companies Act of Japan modeled after the American limited liability company (LLC), hence its nickname as the "Japanese LLC". It is a type of mochibun kaisha distinguished by offering limited liability for all investors.

<span class="mw-page-title-main">Registered agent</span> Someone designated to receive service of process in a legal action

In United States business law, a registered agent is a business or individual designated to receive service of process (SOP) when a business entity is a party in a legal action such as a lawsuit or summons. The registered agent's address may also be where the state sends the paperwork for the periodic renewal of the business entity's charter. The registered agent for a business entity may be an officer or employee of the company, or a third party, such as the organization's lawyer or a service company. Failure to properly maintain a registered agent can affect a company negatively.

Foreign corporation is a term used in the United States to describe an existing corporation that conducts business in a state or jurisdiction other than where it was originally incorporated. The term applies both to domestic corporations that are incorporated in another state and to corporations that are incorporated in a nation other than the United States. All states require that foreign corporations register with the state before conducting business in the state.

Asset protection is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments. The goal of asset protection planning is to insulate assets from claims of creditors without perjury or tax evasion.

<span class="mw-page-title-main">Low-profit limited liability company</span> Legal form of business entity in the US

A low-profit limited liability company (L3C) is a legal form of business entity in the United States. Commonly referred to as a hybrid structure, it has characteristics of both for-profit and non-profit entities. L3Cs were created to comply with the Internal Revenue Service (IRS) program-related investments (PRIs) rules which allow most typically private foundations the ability to maintain tax-exempt status through investments in qualifying businesses and/or charities. With a social mission as the primary objective and a secondary objective of profit generation, the L3C legal form is considered a viable option for businesses seeking a reputation or marketability for being a social enterprise.

<span class="mw-page-title-main">Delaware statutory trust</span> American business structure

A Delaware statutory trust (DST) is a legally recognized trust that is set up for the purpose of business, but not necessarily in the U.S. state of Delaware. It may also be referred to as an Unincorporated Business Trust or UBO.

Captive insurance structures can be classified into three main categories: Single Parent Captives, Group Captives, and Core Cell Captive Insurance Companies, also known as Cell Captives or Core Cell Companies.

<span class="mw-page-title-main">Benefit corporation</span> Type of for-profit entity

In the United States, a benefit corporation or B corporation is a type of for-profit corporate entity, authorized by 35 U.S. states and the District of Columbia, that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals, in that the definition of "best interest of the corporation" is specified to include those impacts. Laws concerning conventional corporations typically do not specify the definition of "best interest of the corporation", which has led to the interpretation that increasing shareholder value is the only overarching or compelling interest of a corporation. Benefit corporations may not differ much from traditional C corporations. A C corporation may change to a B corporation merely by stating in its approved corporate bylaws that it is a benefit corporation; however in certain jurisdictions, the terms "public benefit corporation" or "PBC" are also required to be in the legal name of B corporations.

<span class="mw-page-title-main">Loan-out corporation</span>

A loan-out corporation, also known as a loan-out company, or personal service corporation, is a form of US business entity in which the creator is an 'employee' whose services are loaned out by the corporate body. The creator of the corporation is typically the sole shareholder, and thus the corporation is used as a means to reduce their personal liability, protect their assets and exploit taxation advantages. Loan-Out corporations are especially prominent in the entertainment and professional sports industries, as the creator's services are typically performed on individual contract bases, and receive large, irregular sums of income throughout the year.

References

  1. 1 2 3 Public Act 094-0607, Illinois General Assembly, House Enrolled Act 1336, 805 ILCS 180/37-40, Illinois Secretary of State information page, Archived 2012-02-08 at the Wayback Machine
  2. See, e.g., Thomas E Rutledge, Again, for the Want of a Theory: The Challenge of the "Series" to Business Organization Law, 46 Am. Bus. Law J. 311 at 313-15 (Summer 2009).
  3. 1 2 Wis. Stat. §183.0504. Wisconsin allows series LLCs, but does not specifically provide for a liability shield between the different series.
  4. 1 2 Iowa Code §490A.305
  5. 1 2 Nev. Rev. Stat. §86.296, ,, "2005 Statutes of Nevada, Pages 2177-2276". www.leg.state.nv.us.
  6. 1 2 Tenn. Code §48-249-309
  7. 1 2 Utah Revised Limited Liability Company Act §48-2c-606 Archived 2008-07-11 at the Wayback Machine
  8. "Bus. Org. Code § 101.601 et seq".
  9. "Texas Business & Commerce Code". State of Texas. State of Texas. Retrieved 8 December 2019.
  10. "Texas Series LLCs". Fair Law Group, PLLC. Fair Law Group, PLLC. Retrieved 8 December 2019.
  11. Hebert, Laura E. (30 March 2016). "Pros and Cons of the Series LLC". Lexology. Retrieved 31 March 2016.
  12. Liquerman, Melissa C. (January 18, 2008). "Private Letter Ruling 200803004" (PDF). Internal Revenue Service.
  13. "Series LLCs and Cell Companies". 14 September 2010.
  14. 1 2 "California FTB Filing Guidelines for Series LLCs".
  15. Code of Alabama Section 10A-5A-11
  16. Code of Arkansas Chatper 4, Subchapter 3, Chapter 37
  17. 6 Delaware Code Ann. §18-215, (Limited Liability Company Act,
  18. District of Columbia Code Ann. §29-802.06
  19. Indiana Secretary of State Corporations
  20. Kansas Statutes Annotated 17-76,143 (2012)
  21. Mo. Rev. Stat §347.186.1, Missouri Secretary of State Information Page
  22. Montana Ann. Code §35-8-304 et seq, Montana Limited Liability Act
  23. No. Dakota Cent. Code §§10-32-17.5, 10-32-48, 10-32-56.5.a,10-32-56.7.
  24. Ohio Revised LLC Act - Effective 2022
  25. 18 Okla. St. Ann. §§2005(B), 2054.4
  26. Puerto Rico Laws Ann. Title 14, §3426(p)
  27. So Dakota division of business services
  28. Texas Business Organizations Code §§101.601 to 101.621, 21.152(A),(C),(D), 21.153(A), 21.361(A)(2)
  29. Wyoming Limited Liability Company Act, Wyoming Secretary of State's rules, Secretary of State's Series Limited Liability Company Instructions
  30. "Protected Series Act - Uniform Law Commission". www.uniformlaws.org. Retrieved 2019-12-21.