By now you may have heard of this strange and wonderful creature called the “series LLC,” and wondered just what that is, and whether it is right for your business. Well, wonder no more. Although series LLCs are actually quite complex entities, we can offer some general observations that will help to clear up much of the mystery.
Let’s say we have a business owner who owns several real estate properties which he uses for investment purposes. Perhaps he renovates and flips them (like on HGTV), or maybe he rents them out, or maybe he just lets them sit while the area appreciates in value. Whatever the case, he has a substantial amount of his money tied up in these properties. And lets also say that he has created an LLC to hold these properties — each property is owned by the LLC. That’s smart because the LLC acts as a shield, protecting our business owner’s personal assets (his home, his car, his wife’s jewelry, Aunt Edna’s good china, etc.) from being sold to pay for any liabilities arising from his real estate business.
Now let’s say that somebody is injured on one of the business properties. That person is going to sue the LLC (and probably the business owner personally, but let’s ignore that), in an attempt to recover damages for the personal injury our plaintiff suffered on one of the LLC properties. If that lawsuit is successful and the plaintiff is awarded a judgment for damages, then all of the LLC properties are at risk of having to be mortgaged or sold to pay the judgment.
The way we used to get around this (and sometimes still do) is to create a separate LLC for each property, so that the business owner would wind up owning multiple LLCs (i.e. Property A LLC, Property B LLC, Property C LLC, etc.). Whereas this does have the substantial benefit of shielding each individual property from any liabilities of the other properties, it doesn’t take long to see that this solution can have some substantial drawbacks as well. I have a client who owns close to 30 properties. You can see how having an LLC for each of those properties could wind up being unwieldy and difficult to manage. It can also become expensive to form a new LLC every time a new property is purchased, and to dissolve it every time a property is sold.
The good news is now we have a new vehicle for these types of situations. Behold: the series LLC!
The best way to think of a series LLC is like a number of small LLCs all grouped under the umbrella of one master LLC. (That’s not technically what it is, but it is a convenient way to understand it.) You actually only have one LLC, but it is divided up into a number of series. Each series operates more or less independently from the other series, and even from the LLC in general.
So, for example, each series can have its own distinct ownership. Any given individual can be a member of a Series A, but not Series B or C. Or, an individual may be a member of Series A and Series C, but not a member of Series B, D, E or F. As you might imagine, that necessarily means that each series can also have its own membership requirements, economic rights and responsibilities, including profits, losses, distributions, capital accounts, required contributions, etc. In fact, each series can have its own management structure, with its own managers, and its own separate business purpose or objective, rights, powers, duties, and obligations.
The most important feature of a series LLC — its most significant reason for being — is that, like the multiple individual LLCs mentioned above, each series is shielded from any liabilities of any of the other series in the LLC. So, if Series A gets hit with a lawsuit and judgment, although any property owned by Series A will be at risk, all of the properties owned by Series B, Series C, and Series D are protected, and can’t be held accountable for that judgment.
If this sounds like a good idea for your business, the next logical questions would be: how do I set up a series LLC? Good question. First, you don’t want to try this on your own — get a good business attorney who understands series LLCs to do it with you. Keep in mind that series LLCs are pretty brand spanking new, and most attorneys — even most business attorneys — don’t really have a handle on them yet, so make sure you’re working with someone who really knows this area of the law.
If you already have an LLC, turning it into a series LLC is as simple as filing an Article of Amendment to your current Articles of Organization (Certificate of Formation), and there you go — you now have a series LLC. But, that’s not all that you’re going to need to do. You will also need to update your Operating Agreement to address the myriad of issues created by having multiple series within the company. Depending on the business, membership requirements, economic rights, and a whole host of other considerations, you may also need to draft individual series operating agreements for each specific series. These agreements will detail how each series is to be run, just like the LLC operating agreement details how the LLC is run.
You will also need to take steps to transfer all of your series property into its designated series. That means that if your real estate is currently owned by “ABC, LLC” (your LLC), then you will need to have ABC, LLC deed the property into “ABC, LLC, Series 1.” Keep in mind that, when it comes to real estate, many banks (if there is a mortgage or other encumbrance on the property) and title companies are not comfortable with series LLCs yet, and they may have some discomfort with this arrangement. Your attorney may need to help you get them comfortable, if possible.
You will probably also need to change how your accounting is done. Each series is required to account for its property, income, distributions, expenses, etc. separately from the other series, and separately from the LLC in general. This could possibly be done in a common set of financial books (or software), and the law doesn’t require a separate set of books for each series, but more often than not it just makes sense to keep a separate set of financial records (books) for each series.
Although we have used real estate as the example in our discussion, series LLCs make a lot of sense for LLCs that have nothing to do with real estate. Various other types of investment property, business property, and even personal collectible assets may benefit from this type of structure.
Be aware that because series LLCs are so new to the American legal system, there could be some drawbacks to operating under that business form. For instance, most states have not yet enacted laws providing for series LLCs. If you do business in those states, their legal system may not recognize your series LLC, and may go ahead and lump all of the LLC property, regardless of series, into one big pile of assets, from which to pay a judgment.