A practical guide to Series LLC

Whether you are struggling with your current company structure that does not separate assets and liabilities between your different lines of business, or have multiple companies to do this for you, the Series LLC can offer advantages over traditional methods. Here is a practical guide to this type of entity and how it can be useful to you. 

What is a Series LLC?

The Series LLC is a form of entity that offers the possibility for separate limited liability companies (“Cells”) within a master Series LLC. This structure allows the allocation of different assets and their correspondent liabilities to be segregated in a particular Cell within that same master Series LLC. Consequently, each Cell holds its own assets and carries its liabilities and obligations, which cannot be enforced against another Cell of the master Series LLC or against the Series LLC as a whole.

To implement the Series LLC structure, the corporate documents of the Series LLC company agreement needs to establish such separation of the Cells and its correspondent assets and liabilities.  Also, each Cell needs to maintain records of its own profits, losses and liabilities. Thus, to be effective, the master Series LLC and each Cell should maintain separate books and records, a unique EIN for each, separate bank accounts, and be sufficiently capitalized in order to demonstrate that each Cell keeps separate assets and liabilities from the master Series LLC and the other Cells.

Which is the traditional approach?

Traditionally, if company owners wanted to isolate certain assets of their different lines of business, they would design corporate structures with multiple separate companies. A holding company structure with multiple subsidiaries would be the typical structure. In this case, each separate company has to be formed before the applicable secretary of state, which requires the payment of filing fees, annual filings, and governance formalities for each of these companies, as well as tax duties in some cases.

Advantages and disadvantages of the Series LLC

Series LLCs are an advantageous solution for operations with multiple business segments, to segregate intellectual property ownership, to establish incentive compensation for employees, as well as for venture capital funds, hedge funds, real estate investments, among others.

It does offer liability segregation similar to the traditional structure described above, but the Series LLC is a more cost effective solution. It eliminates costs associated with filings of multiple companies, fees, annual reports, as well as, in some cases, tax return filings. From a corporate governance perspective, Series LLC also offers an effective solution since you only need one master Series LLC Agreement stating internal governance rules to be applicable for all of the Cells.

Despite these advantages, Series LLC can carry some uncertainties. Series LLC structures are relatively new. Only around 16 states, including Delaware, Texas, and Illinois have adopted this entity type. Delaware was the pioneer recognizing this structure in 1996. Thus, there are still not a robust judicial precedent to assure how courts will respect the protection of assets in each Cell, especially when there is a loan involved, a bankruptcy situation or a consumer claim being discussed under the laws of a state which has not adopted the Series LLC structure.

Conclusion

The Series LLC reduces costs and provides a compartmentalize liability between each Cell; however, any jurisdictional uncertainty needs to be balanced before its formation by considering the type of business and the jurisdictions and risks it will encompass.