What is a Series LLC?
A series LLC is a type of limited liability company which has different "series" whose assets can be sequestered from other series and the LLC itself, and protected from creditors as though the series is its own entity. In short, a series is like a separate business entity, but it is not a separate entity.
That may sound confusing, but the concept is fairly simple.
The relationship between a series and the series LLC (sometimes called the "mothership" or "master" LLC) is similar to that of an LLC owned by another LLC. The difference is that the series is not a separate entity, but it acts as though it is a separate entity (that is, it can be sued, it can own property, it has its own members, etc.).
Why use a series LLCs?
Series LLCs were tailor-made for mutual funds. They also fit comfortably with the real estate industry (especially development). Businesses that expand to cover multiple functions (for example, an engineering company that expands to heavy equipment rental) could also benefit.
How do you form a series LLC?
In Texas, you form a series LLC the same way you form a non-series LLC: you file the Certificate of Formation. For series LLCs, you will need to include the language from Tex. Bus. Orgs. Code section 101.602(a) in the "Supplemental Provisions/Information" section of the form Certificate of Formation (Form 205).
In California, you can't. But if you form a series LLC in another state, you can operate the LLC or a series of the LLC in California. But the LLC and each series operating in California must be registered as a separate LLC.
Are there any cons?
There are a few. The big ones are that 1) they can be complicated to form and maintain, 2) they're new, so a lot of other industries don't know what to do with them, and 3) currently, they can only be formed in about 15 jurisdictions.
Complexity of Formation and Maintenance
Series LLCs are not all that complicated to form (at least not in Texas). In Texas, the Certificate of Formation must contain a notice of the series protection. Tex. Bus. Orgs. Code section 101.602(b)(3). But Texas's Certificate of Formation form (Form 205) contains neither that language nor even a box to check for a series LLC. An actual disclaimer must be there for the series protection to be effective. In Texas, if you plan on registering a series, you will have to file a Certificate of Registered Series when it is formed, just as you have to file a Certificate of Formation for an LLC.
Maintenance is another issue. For limited liability entities, maintenance involves both the requisite filings (usually annual filings) and keeping accurate records. For series LLCs, the "mothership" LLC must have accurate records, and each series must have its own. Texas does not (currently) require annual filings for series. However, in the event of litigation (and attempted veil piercing), the other side is going to ask to see the series' books as well as the LLC's.
Novelty
What does a series LLC signal to third parties? Does it signal that they can expect a level of sophistication from your entity, or does it signal that you’re trying to hide something? Texas will have a series/protected series/registered series categorization, but if you only have a protected series and not a registered series, does it matter to their parties? Can a series declare bankruptcy without the LLC declaring bankruptcy?
These questions are new, and it is difficult to predict what the answer will be (in large part). Banks, other lending institutions, potential business partners or investors, and others may not be comfortable doing business with a series rather than an LLC itself just yet.
Series LLCs have been around for almost 30 years, and in Texas for over 10. But they have not been as quick to take off. As a result, the answers to the questions above are still trickling in.
Non-Series LLC Jurisdictions
Many states (including California) don't allow for the formation of series LLC. Some states (including California) allow series LLC to operate within their borders. However, California treats each series as though it were its own LLC. California's Franchise Tax Board explains the requirements of operating a series in California here. If you're going to operate one or several of your series in a state that does not allow for their formation, you will need to make sure that there is some protection in that state.
Conclusion
Series LLCs are still relatively new, and many jurisdictions are still grappling with how to handle them. They aren't available in most jurisdictions, and they bring along their own complications in maintenance. That said, it may be a good fit where the business structure warrants it, and where the business is comfortable with (or has an attorney comfortable with) maintaining the more complex corporate records.
Note: On June 1, 2022, Texas will begin categorizing the series of series LLCs as 1) series, 2) protected series, and 3) registered series. See Tex. Bus. Orgs. section 101.601(a), (b). I explained this in general terms here, and in more detail here.
Comments