A Primer on Series LLCs

A Primer on Series LLCs

As a teenager and young adult, I spent several summers at Interlochen Arts Camp. Interlochen was started 95 years ago as a music camp but now boasts programs in numerous arts disciplines, including music, drama, dance, theatre, visual arts, and creative writing.

Given the wide variety of performing arts programs, not surprisingly, Interlochen boasts several performance venues. For large orchestral and band performances, the Interlochen Bowl, constructed in 1928, can accommodate audiences on open-air benches and lawn seating. Kresge Auditorium provides an outdoor covered venue that can accommodate an audience of nearly 4,000. And the 467-seat outdoor Upton-Morley Pavillion hosts Shakespearean plays.

Indoors, Corson Auditorium, which seats more than 1,000, often is used for theatre and dance productions. Among the smaller performance venues are the 174-seat Phoenix Theatre, which provides a black box performance venue, and the Dendrinos Chapel and Recital Hall, which contains pew seating for up to 200.

Due to the number of venues, on any given day, visitors can take their pick among performances, both large and small. Sometimes, there may be several performances at the same time. And no matter which performance venue hosts a summer performance, it is part of Interlochen. 

Series limited liability companies (Series LLCs) can be compared to summer music programs like Interlochen Arts Camp. Like Interlochen, a Series LLC may have numerous and diverse series, but all are part of the same legal entity. This article is the first in a series (of articles) and provides a basic primer on Series LLCs, which have become popular in Delaware and a handful of other states.

What are Series LLCs?

A Series LLC allows the creation of separate "series" within a single limited liability company (LLC) umbrella. Series LLCs can be utilized only if authorized by state law. So far, only 20 jurisdictions, including Delaware, the District of Columbia, Nevada, Texas, Virginia, and Wyoming, allow the formation of a Series LLC. In states where Series LLCs aren't permitted, the law may vary regarding whether the state will recognize a Series LLC formed elsewhere.

Each series in a Series LLC can operate like a separate business or have its own purpose and own its own assets, liabilities, members, and business activities. One benefit of Series LLCs is that the debts and liabilities of one series are usually limited to that series and don’t affect any other series in the Series LLC.

Why Form a Series LLC?

The series within a Series LLC can serve different business purposes, such as segregating assets, separating business activities, or creating distinct investment vehicles. For example, a real estate developer could create separate series within the LLC for different properties, thereby isolating the liabilities and risks associated with each property.

One of the primary advantages of a Series LLC is the potential for cost savings and administrative simplicity. By operating multiple business ventures or assets within a single LLC, owners can avoid the need to set up and maintain separate legal entities for each venture.

 However, because Series LLCs are relatively new, the legal framework for and treatment of Series LLCs varies from state to state. While some states recognize and provide explicit statutory provisions for Series LLCs, others have no specific legislation in place and may not recognize each individual series as separate from the others. Therefore, it's important to consult with an attorney familiar with Series LLCs to understand the law regarding forming or operating a Series LLC in a particular state.

What Are the Drawbacks of Series LLCs?

Series LLCs Aren’t Recognized Everywhere

Although Series LLCs may be an excellent option for a business operating in a single state, interstate businesses may find it challenging to use Series LLCs because only some states recognize Series LLCs. Plus, there is no uniformity among state laws and limited case law.

So, a Series LLC formed in one state may not meet the requirements of another state. And some states don’t recognize Series LLCs and will treat all of the series as one LLC. Therefore, I recommend that clients utilize a different business structure if they plan to conduct business in a state that does not recognize Series LLCs.

Uncertainty in Legal Interpretations

Because Series LLCs are a new form of business entity, even in states that recognize Series LLCs, there isn't a large body of law addressing them. Limited legal interpretation creates uncertainty regarding how Series LLCs and each series will be treated when they encounter new legal situations.

Series LLCs May Cost More than Separate LLCs

While Series LLCs can offer cost savings by consolidating multiple entities into one, they can also involve higher formation and ongoing costs than multiple single-entity structures. Forming a Series LLC and adding a series requires using a business attorney. And ongoing maintenance and compliance may require additional internal resources and outside accounting and legal advice. Additionally, certain states may impose additional fees or requirements for each series within the LLC, increasing administrative costs.

Individual Series Must Remain Completely Separate

Although Series LLCs can offer operational flexibility, they are complicated. Managing multiple series within a Series requires the maintenance of separate financial records and legal documentation for each series. Since failure to maintain each series as separate from the others might eliminate the liability protection benefits of a Series LLC, the Series LLC must ensure separation between series.

Lenders and Counterparties May Not Want to Deal with Series LLCs

Because Series LLCs are relatively new, complex, and not universally recognized, some financial institutions may be hesitant to work with Series LLCs. Lenders often have investment criteria, which may not include making loans to Series LLCs, making it challenging to secure financing or negotiate favorable loan terms for a Series LLC. Also, parties unfamiliar with Series LLCs may require guarantees from all series in the Series LLC for the debt of one series, eliminating the liability protection of having the Series LLC.

Alternatives to Series LLCs

Series LLCs aren't for everyone and pose additional risks if the business conducts business in a state that doesn't recognize Series LLCs. The following more traditional structures can replicate many of the benefits of a Series LLC without the risks associated with the newness of the Series LLC structure:

Holding Company

A Series LLC shares many characteristics with a holding company, which is a well-established business structure. A holding company has a single parent company (often a corporation but sometimes an LLC). The parent company owns several subsidiary companies, each of which operates a different business unit. The holding company can be a part owner of subsidiaries, as might be the case with a Series LLC. Although holding companies are mainstream, that structure may be more complex than some businesses want.

Separate Entities

Businesses that want to avoid a complicated holding company arrangement can form different entities with common ownership. These entities could be LLCs, partnerships, corporations, or several types of entities depending on each business's needs. Since each series in a Series LLC is an LLC, separate entities, therefore, may provide more flexibility than a Series LLC. By using entity types recognized in every state, business owners will have certainty regarding liability protection and the rights and responsibilities of the owners.

Joint Ventures

Parties who want to engage in different business segments with each other can combine the separate entity approach above with a joint venture agreement, which outlines an overarching joint venture structure. The joint venture can be but need not be a separate legal entity. Instead, the parties can contract to work with each other in multiple transactions on pre-defined business terms.

Trusts

Parties desiring to combine business ownership with estate planning might form a trust to own the separate entities described above. Although less common, business trusts can be used similarly to a holding company to operate different entities under the same umbrella.

A major difference between trusts and the other options is that the trustee overseeing the entities would owe a fiduciary duty to the owners. Depending upon the circumstances, this may be a positive or a drawback of a trust structure. 

Trusts open the possibility (or, in the case of some statutory trusts, the requirement) of an unaffiliated corporate trustee overseeing operations. Although corporate trustees can be costly, they are a professional, objective decisionmaker, which can be beneficial for family businesses or other situations where objectivity is desirable.

 

© 2023 by Elizabeth A. Whitman

Any references to clients and their legal situations have been modified to protect client confidentiality

DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice. No one should take any action regarding the information in this blog without first seeking the advice of an attorney. Neither reading this blog nor  communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless a written contract is signed by all parties.