Delaware and several western or mid-western states, including Nevada which has been somewhat of a pioneer in the development of LLC law, have enacted business entity rules pursuant to which an LLC organized in that jurisdiction may be authorized to create one or more organizational “series” within the LLC which are essentially separate business cells or silos within the LLC. Such Series are unlike a department or branch of a traditional business entity such as an LLC or a corporation, and are permitted to have certain organizational attributes which may create a degree of entity-like separation of each Series from the main or parent LLC and each other Series of the parent LLC.
Series LLC Acts may, among other things, provide that a Series may:
(a) Be created without the filing of separate articles of organization with the Secretary of State or (similar state authority) by the mere adoption of an operating agreement by the members of a Series;
(b) Have separate powers, rights or duties with respect to specified property or obligations of the company or profits and losses associated with specified property or obligations;
(c) Have a business purpose or investment objective separate from the parent LLC; and/or
(d) Make contracts, sell, lease and otherwise deal in separate Series assets, and sue and be sued, complain and defend, in the Series’ own name.
Series LLC Acts also typically provide that if the conditions for organization of the Series have been met, the debts and liabilities of a particular Series are enforceable against the assets of that Series only, and not against the assets of the parent LLC or any other Series.
Uncertainty arises, however, because statutes providing for Series LLCs have been adopted by only a few jurisdictions and have no counterpart in federal law. Partly because of the lack of general adoption of Series LLCs laws, as well as for other reasons, there are significant unresolved organizational questions relative to Series LLC’s. Among them:
i) Federal courts and/or courts in non-Series LLC states may not respect the limitation of collectability of debts, liabilities, obligations and expenses incurred or contracted for by a Series to the assets of that Series only, and not against the assets of the parent LLC or any other Series of the parent. Because of this concern, some Series LLC documents may provide that the Series may not directly engage in business in any state or country which does not recognize Series LLCs or with the federal or any foreign government;
ii) Because of questions relative to the powers a Series LLC may possess in comparison with those of a typical separate business “entity” such as a regular LLC or a corporation, it may face difficulties in transactions. For example, its counsel may not have a sufficient legal basis to deliver typical closing or other opinions, which may be required as part of a business transaction; and
iii) A Series may not be able to establish that it is an “entity” separate from its parent LLC and any other Series if it has taken advantage of a LLC Act that allows the Series to be created by adoption of an operating agreement and without the filing of articles of organization with the Secretary of State since, among other things, such a procedure means that the Secretary of State has no means to track the organization or dissolution of a Series and, accordingly, would be unable to issue a Certificate of Good Standing or similar instrument for the Series when and as required.
Because of the multiple uncertainties discussed above, businesses considering the possible use of Series LLCs should consult with counsel knowledgeable in the rules applicable to LLCs in advance of organization or use of a Series LLC to determine the appropriateness and risks of using a Series LLC structure for the business’ proposed purposes.
If you have any questions or would like further information, please contact William E. Elwood in the Washington D.C. office at (202) 659-6972, or any other member of the Dickinson Wright Tax Group.