How do you form a Series LLC and form or establish a series?
The state laws governing the formation and operation of a Series LLC vary greatly. In general, a Series LLC is formed in the same manner as a traditional LLC. That means it files a document generally called either Articles of Organization or a Certificate of Formation with the state’s business entity filing office, such as the Secretary of State.
The main difference is that the formation document will have to include a statement that the LLC may establish series which are protected from the liabilities of other series and the LLC itself. Some states have separate forms for Series LLC formations. Some do not.
A Series LLC is subject to all of the provisions of the LLC law as a traditional LLC except for those that specifically apply to Series LLCs—such as the recordkeeping and liability limitation provisions. That means, for example, a Series LLC will be required to appoint and continually maintain a registered agent and file an annual report.
There are three basic approaches the states take to forming a series. In some states the series is established in the Series LLC’s operating agreement. No filing is required. In other states a series is formed by filing a document, called, for example, a certificate of designation or a certificate of registration, with the state filing office. Delaware takes a third approach. It has two types of series—“protected series” which are established in the LLC agreement with no filing required, and “registered series” which require the filing of a certificate of registration with the Delaware Secretary of State.
Naming requirements for a series also vary by state. In general, the states that require a filing have naming requirements. Typically, the name of the series will have to contain the name of the Series LLC and the series’ name itself will have to be distinguishable on the state records from the names of other series and other domestic and foreign entities.
Other notable differences in the state laws include whether each series will have to file an annual report and pay an annual fee, whether a certificate of good standing can be issued for a series (which might make it easier to get loans or business partners) and how process can be served. (Although in general the Series LLC’s Registered Agent is the Registered Agent for each series.)
Perhaps the most important provisions of the Series LLC laws are those that set forth what has to be done in order for a series to have that liability shield. Again, you have to check the specific statute but in general (1) the formation document must provide notice of the limitation of liability of the series the LLC may establish, (2) the operating agreement must state that the assets associated with a series are the assets of that series only, and (3) the books and records of the Series LLC and each series must account for the assets associated with each series separately from the assets associated with the Series LLC itself or any other series.
Failure to properly maintain separate books and records can result in a loss of the liability shield. (This is why the Series LLC has been said to be a poor choice for people who are bad at bookkeeping or don’t have good accounting advice.)
What are the main reasons for forming a Series LLC?
There are a few common reasons why organizations choose to form a Series LLC. These include the following:
One of original advantages of using a Series LLC rather than forming separate LLCs was the savings in formation costs. This can still be the case with the recent trend in state laws requiring the filing of a document, and the payment of fees, to form each series. But this may not be the advantage it once was.
There can still be savings, though. For example, in the mutual fund field it is thought that obtaining the regulatory approvals for a fund within a series can be done with less time and expense than if each fund was a separate entity.
One of the major advantages of an LLC over other entity choices is that it is so flexible—giving the members many options in deciding how to split the management and financial rights, with few statutory mandates. That flexibility exists in the Series LLC and in each series.
Holding company opportunities
The Series LLC structure is a logical option for holding companies, which typically own but do not operate their portfolio businesses. With a Series LLC, a holding company can hold all individual businesses under a single umbrella while mitigating the risk of one business’ assets being used to satisfy the debts or liabilities incurred by another of its businesses.
Real estate liability protection
Series LLCs can also be a useful tool for real estate investors who own multiple properties. Under this scenario, each property can be associated with a separate series within the Series LLC. If one series is involved in litigation—say, for example, hazardous wastes are found there—the assets of the series associated with the other properties cannot be used to pay for clean-up costs. Or so the theory goes.