What is a Series LLC?
One type of legal entity, which even some business attorneys find challenging to handle, is the series limited liability company. And, that’s understandable. While the concept of a series LLC may be fairly easily understood, forming one is not simple. Adding to the challenge is the fact that series LLCs are relatively new structures, so the sample forms and information available about them online is limited compared to other entity types, such as regular limited liability companies, corporations and even limited partnerships.
A series LLC is a special type of limited liability company authorized under the law of certain states. You can think of a series LLC as a bunch of little LLCs inside a bigger one. That’s not legally correct, since a series is not its own company. But, it’s a helpful way to think about the series limited liability company when you first encounter it. Some people like to think of individual series more like divisions (or departments) inside the limited liability company. However, unlike divisions or departments of companies, a series, if properly formed and maintained, can protect the assets inside it from claims against other series or the limited liability company itself.
An individual series of a series LLC can do all the following in its own name:
- Enter into contracts
- Acquire, hold and sell assets
- Grant liens and security interests
- Sue and be sued
Basically, a series functions like an independent LLC. And, a series may conduct business under a name separate from the parent LLC.
The Difference Between the Holding Company Approach and Series LLCs
A series LLC is similar in purpose and structure to a more traditional holding company arrangement. Historically, the holding company structure has been the preferred method for protecting and separating assets held by a common corporate group or owner. A holding company is formed by first creating a standalone company to serve as the head of the group (generally called the “parent” or the “holding company”). The parent, in turn, owns subsidiaries. A subsidiary is a separate legal entity that is owned, wholly or partially, by another entity. In other words, the holding company strategy requires the formation of multiple LLCs, corporations, partnerships, etc. – the parent and all the subsidiaries are separately formed by making filings with the Secretary of State or Corporations Division (the name of the office varies from state to state in the U.S.).
A traditional, basic holding company structure looks something like this:
In large companies, such as Google or General Electric, the entity structure diagram may include many subsidiaries. Here is a look at the Alphabet (the parent company of Google) entity diagram as of 2015.
From 2010-2013, I was Chief Legal Counsel for a publicly-trade oilfield services company with 42 subsidiaries spread across the globe. Just maintaining the entity diagram was challenging, let alone actually managing all those people and companies! Some of the entities were formed to segregate our assets from other subsidiaries (for liability protection purposes). Others were formed for tax, legal or operational purposes because we were doing business in China, Brazil, Singapore, Norway, The Netherlands – many different countries, which either required we have separate entities formed within each country or there were compelling tax or other reasons to set up all those separate entities.
The series LLC structure is like a traditional holding company structure, although it requires only one initial filing with a Secretary of State in states that allow for series limited liability companies. A series LLC is considered more efficient to create and maintain from an administrative perspective. I believe that’s true, just not to an overwhelming degree (i.e., they aren’t, in my determination, ALL THAT much more efficient than a traditional holding company structure).
A series LLC structure diagram may look like this:
The History and Terminology of Series LLCs
Delaware, which is generally on the forefront of corporate and business law development (to read more about forming an entity in Delaware, see Incorporating in Delaware? Consider This) passed the first series limited liability company statute in 1996. It took eight more years until the next state – Oklahoma – adopted the series LLC. Since then, adoption has sped up a bit, although as of 2017, only a minority of states have series LLC laws. Adoption has been a little slower than adoption of the LLC legislation originally (Wyoming passed the first LLC statute in 1977 and by the end of 1996 all 50 states had LLC legislation).
Although there are variations among the states, most states define series LLCs similar to Delaware. Delaware Code Annotated Title 6, § 18-215 provides:
“A limited liability company agreement may establish or provide for the establishment of 1 or more designated series of members, managers, limited liability company interests or assets. Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations, and any such series may have a separate business purpose or investment objective.”
The terminology surrounding series LLCs varies from state to state and even from lawyer to lawyer. The main company in a series LLC may be called many things, including:
- Holding company
The individual series are usually simply called series. Occasionally, I hear corporate lawyers refer to series as units, cells, divisions or containers (container is an interesting word for emphasizing the utility of using series to hold individual assets). I like to keep it simple and just use the word series. We will talk more about forming individual series later in this article, although you should know the terms Designation and Supplement. Both those terms refer to the document pursuant to which an individual series is actually created.
Common Reasons to Use Series LLCs
Let’s look more closely at the Delaware statute that authorizes series LLC:
“… Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company … and any such series may have a separate business purpose or investment objective.” (Del. Code Ann. Tit. 6, § 18-215)
The key word, used twice in those few lines, is separate. Each series is separate from the limited liability company itself and from the other series. It’s possible to give each series an entirely separate business purpose or investment objective. Each series may have separate members (owner) and managers. That separation should be well-documented in the company’s Operating Agreement and the Designations/Supplements creating the individual series. And, the records of the company – its financial statements and bank accounts – should clearly establish and evidence each series and the parent as being entirely separate and distinct from one another.
Each series is not a separate entity, it is merely a separate container. If done properly, though, from an asset protection standpoint, it accomplishes a similar goal of shielding the assets of an individual series from the other series or master (parent) LLC. In a holding company structure, separate LLCs would be needed to isolate liability at the asset level (assuming one asset is transferred into each separate company). Series LLCs are designed to achieve the same result with a more efficient structure.
Series LLCs are great for real estate holding companies. Real estate investors or developers who own many properties can benefit from transferring each property into an individual series. For example, a real estate developer might form a series LLC to hold individual properties. The developer might form a new series for each property they acquire (that’s best practice – to transfer (and hold) one property into each series). If a lawsuit arises involving one of the properties, provided the series LLC and each individual series is properly formed and maintained, the other properties would not be exposed.
Series limited liability companies may be used in other contexts than purely asset protection. Some business owners use them to separate large companies into separate divisions or departments. The terms “division” and “department” don’t have any special legal meaning. You can create a department (or a division – they mean similar things and are sometimes used interchangeably) without filing or drafting any legal agreement at all. However, some companies appreciate the formal separation that accompanies separate series. You can do the same thing for product lines, employee teams, projects, business locations and for other business components.
States That Have Series LLCs Statutes
Not every state provides for the formation of series limited liability companies. As mentioned earlier, Delaware was the first state to authorize the formation of series LLCs. That was in 1996. As of July 2017, the following 13 states have statutes authorizing series limited liability companies:
- Alabama – Code § 1 OA-5A-11.01
- Delaware – Code Ann. Tit. 6, § 18-215
- The District of Columbia – C. Code§ 29-802.06
- Illinois – 805 ILCS 180/37-40
- Iowa – Iowa Code Ann. § 489-1201
- Kansas – Stat. Ann.§ 17-76, 143
- Missouri – Rev. Stat. § 347.186
- Montana – Mont Code Ann. § 35-8-304(4)
- Nevada – Rev. Stat. 86.296.3
- Oklahoma – 18 Okla. Stat. § 18-2054.4B
- Tennessee – Tenn. Code Ann. § 48-249-309
- Texas – Bus. Org. § 101.601
- Utah – Utah Code Ann. § 48-3-1201
Under the laws of these states, the assets of a series are separate (again, there are requirements to ensure that the separate nature of each series is recognized – the formation and maintenance must be done correctly) and cannot be used to satisfy the debts of another series.
States that recognize the existence of series LLCs but don’t provide for limited liability protection for each series from each other and the parent LLC are Minnesota, North Dakota and Wisconsin. These states use the word “series” differently from the states (e.g., Texas, Delaware, Nevada, etc.) listed above. They use the word “series” more like in the context of a corporation, where a series is simply a class of equity (such as stock) with different rights. Since these states don’t provide for separate liability protection of assets held in a separate series of an LLC, you shouldn’t consider them among states that allow the formation of a true series LLC.
Then there is California, which takes the opposite approach and discourages series LLCs from even doing business in its state (forget forming a series in California, they don’t even want you to show up!). If you register a foreign (formed in a different state) series LLC to do business in California, California will charge you $800 annually per series simply for the privilege of doing business in their state (and of giving them access to other tax revenue – thank you, California!).
Most state limited liability company laws are based on the model put forth by the Uniform Law Commission. The Revised Uniform Limited Liability Company Act (RULLCA) was promulgated (that’s the fancy lawyer term for creating and promoting something) in 2006. Many states have adopted RULLCA and, since RULLCA does not authorize series LLCs, states need to adopt their own series LLC laws by separate legislation. That may change soon with the adoption of the Limited Liability Company Protected Series Act, which is being created by the Uniform Law Commission (as of July 2017). Perhaps we will see more widespread adoption of series LLC statutes once the Limited Liability Company Protected Series Act is introduced.
Creating a Series LLC in Texas
I am a business lawyer with offices in Austin and Houston (licensed in Texas and Delaware). While I work for clients all over the country, if you are establishing a new relationship with a business attorney you want to represent you in all corporate or business transactional-type matters going forward, you may want a local attorney. That decision is mainly a matter of preference, although there are unique issues of state law at times where you need a lawyer licensed in your state. Again, it depends. For this article, we will focus on Texas where most (60%+) of my law firm practice takes place.
Texas is one of the states that recognize series limited liability companies. A Texas series LLC can carry on any business, purpose or activity that is not prohibited by Texas LLC law (contained in the Texas Business Organizations Code).
Section 101.601(a) of the Texas Business Organizations Code authorizes the creation of series LLCs. That provision reads:
“(a) A company agreement may establish or provide for the establishment of one or more designated series of members, managers, membership interests, or assets that:
(1) has separate rights, powers, or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations; or
(2) has a separate business purpose or investment objective.
(b) A series established in accordance with Subsection (a) may carry on any business, purpose, or activity, whether or not for profit, that is not prohibited by Section 2.003.”
This statute suggests all you need to do is add some language to the Company Operating Agreement. Be careful, though, because the statute is a little misleading. You can’t simply add those provisions to the company’s Operating Agreement. You need to include them in the Certificate of Formation of the LLC when you file it with the Texas Secretary of State. This is critical! The Certificate of Formation (this document is called different things in different states – Certificate of Organization, Articles of Organization, etc.) is the document you file with the Texas Secretary of State to form an entity – in this case, a limited liability company. Since Certificates of Formation are publicly-filed, this is how the public is aware (put on notice) that a particular LLC is a series LLC.
A few thoughts on Company Operating Agreements … A Texas limited liability company is not required by law to have an Operating Agreement (also called a Company Agreement or Company Operating Agreement). That said, if you have multiple members (owners), you should have one. The Operating Agreement is the key document that sets out the rights and obligations of the members (and managers if the LLC is managed-managed) to each other and controls how the company will function and be governed. Even if you only have one member in a regular (not series) LLC, it’s not a bad idea to have an Operating Agreement anyway. An Operating Agreement is one additional item to show a court that you took seriously the process of forming and maintaining the entity if ever someone were to sue your LLC and try to “piece the veil” of the liability protection provided by the LLC. A series LLC should definitely have an Operating Agreement. The Texas statute references it in a manner that suggests it is required for a series LLC, even one with only one member.
To form an individual series in a Texas series LLC, you draft and sign an amendment to the Operating Agreement. I call this a Designation of Series. Other business lawyers call it a Supplement or Amendment. I have seen Texas business attorneys create a separate Operating Agreement for each series. Unless the series were being used as entirely separate, fully-functioning ventures (i.e., nothing to do with each other, separate owners and investors, etc.), I think it’s overkill to create separate Operating Agreements for each series. In a typical use case, where the series LLC is being used primarily to protect assets, a simple one or two-page Designation/Supplement is almost certainly sufficient.
In some states, it’s necessary to file paperwork with the Secretary of State to form a series. It is not required in Texas. This means that, while the Secretary of State records should always indicate when separate series are authorized (by putting the key language directly in the Certificate of Formation, which is publicly available), the Texas Secretary of State records will not always indicate whether any series have actually been created under the parent.
However, I highly recommend filing an assumed name certificate with the Texas Secretary of State to register the name of each series you create. This is also puts the public on notice that the series was created – not a requirement, but a very good thing to do. Typical naming conventions look like this:
- Series 28 Main Street, a separate series of XYZ, LLC
- XYZ, LLC – Series A
- XYZ, LLC – Series 28 Main Street
Best practice is to name each series in a way that identifies or describes the assets it holds. So, for a series LLC that holds individual real property, it’s a great idea to name the series after the address itself, e.g., “28 Main Street.” This is not critical, but it is best practice. Doing this puts the public, including any creditors, on clear notice of what the series assets are and, by implication, what they are not. By doing this, you make it much harder for a creditor to argue to a court that they ought to have access to the assets of all the series.
The Limited Liability Company Protected Series Act, which is being created by the Uniform Law Commission, requires that series begin or end with the name of the parent LLC and that each series name contains the words, “Protected Series” or just “P.S.” While not a requirement today (as of July 2017), when the Limited Liability Company Protected Series Act is put into place, it will likely be widely adopted by states, which means this may one day soon be a requirement in your state.
For now, I believe the key is to do two things when naming series –
1) reference the name of the “parent” LLC (this is a requirement in some states); and
2) clearly identify the series by using the word “Series” and an individual name (naming convention)
One interesting, niche issue that comes up sometimes when forming series LLCs and individual series is whether a member of a particular series must also be a member of the parent LLC. This is required in some states, including Alabama, and is expected to be a requirement in the Limited Liability Company Protected Series Act. This issue is not directly addressed in the Texas Business Organizations Code. I take the stance that a member of an individual series may be necessarily considered a member of the parent (even if my client prefers that not be the case) and draft the documents accordingly. This is a safe approach given the answer to this issue is unclear. If you take the position that a series member is not a member of the parent and that position turns out to be wrong, you may find yourself in a situation where series members have control of the parent through sheer numbers. There are ways to draft around this issue from the start and avoid the risk entirely.
Drawbacks and Risks of Using Series LLCs
The major benefit of a series LLC is the ability to protect each series and its asset(s) from the liabilities of other series and the master LLC. If one series is sued, assuming you set up the LLC and each series properly and that you maintain them properly, the plaintiff or any creditor who has a claim or judgment against the series cannot pursue the other series or the parent LLC to satisfy their claim or judgment. The creditor can only look to the assets of the series against which the creditor has a claim. Given this is the key reason to use a series LLC, it’s critical that the individual liability protection of each series be recognized.
If you are forming a series LLC that will do business in states other than where you organize (another word for form) it, including one of the many states that does not recognize series limited liability companies at all, there is a risk that a court in that other state may choose to look through (invalidate) the separate nature of the series. Recall that a common use of series LLCs is for real estate holdings – often, a very localized endeavor where owners of series LLCs only hold property in one state.
A similar risk (open question) of the liability shield of each series not holding up comes up in the context of bankruptcy. Attorneys speculate that a federal bankruptcy court judge or trustee may choose to pool the assets of the entire series LLC by ignoring the separate nature of the individual series. Even if that doesn’t happen specifically, it may be impossible to keep all the series out of a bankruptcy that includes the parent or another series (i.e., even if the liability shield of each series holds up, they may all be subject to the time, cost and administrative headache of a bankruptcy involving one of them).
Also, you MUST keep clear, consistent, separate records for each series. You should have a separate bank account for each series. This is absolutely crucial – do not commingle the finances of each series. Granted, you may have assets or expenses that are applied to more than one series. For example, if you run a series LLC, you may have only one office. That makes sense. It would be expensive to have a separate office for every series. You should apportion the cost of the office among the series and the master in a logical, defensible way. Treat each series as though it had entirely separate owners (members) who required all the dealing among the series and the master LLC to be at arms-length – on fair, reasonable, market terms. This isn’t necessarily a drawback, more of a warning, because the same issue exists if you choose to use a traditional holding company structure for asset protection instead of a series limited liability company. Separate record keeping is an important aspect of ensuring no court will ever allow a creditor or plaintiff to “pierce the corporate veil,” which means to look through the entity to you personally.
If you want to talk about forming a series LLC or any other aspect of business transactional law (creating companies, merging them, raising capital, etc.), if you’re in Texas, Delaware or anywhere else, I’d be happy to talk to you about what you might need and whether we’d be a good fit to work together.
Author: Brett Cenkus
Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.