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Incorporate a Series LLC or a Traditional LLC: Membership issues at start-up/set-up/formation.

By John Williams | Published June 24, 2012

Chances are you have heard of a Series LLC and are looking into possibly forming one. You have heard that they allow for internal firewalls between assets. They allow for disparate owners. I just looked up the definition of “disparate” to make sure it was the right word to use. TheFreeDictionary.com provided theses two definitions:
1. Fundamentally distinct or different in kind; entirely dissimilar.
2. Containing or composed of dissimilar or opposing elements.

These differences in ownership were only possible before with separate LLCs.  The Series LLC is revolutionary in that it gives the business owner a license (without subsequent filings with the secretary of state) to create cells on-his/her-own which look a lot like separate entities.

A series LLC is a subset of limited liability company. It is not a separate entity type. Instead it is a traditional LLC with features not offered to traditional LLC owners.  While the possibilities are endless, the limitations and problems a series LLC can run into are also boundless and most of them are undecided by the courts, meaning that each problem may present novel issues of law for courts to review upon “first impression”. This uncharted territory means that the series LLC should only be used carefully and with much planning to avoid problems later. Particular attention should be paid to drafting your Series LLC Operating Agreement. It is especially advisable to hire a Delaware lawyer who specializes in the series LLC. Better yet, if there is a reluctance to face these potential risks, separate LLCs should be used.

While disparate owners are possible, we recommend that the series LLC be restricted to one set of owners. Mixing and matching owners can create a recipe for jealousy and suspicion of the people running this business venture, especially when the member of one series sees his or her series failing and others succeeding under the same umbrella. That dissatisfied member may be inclined to accuse the management of mismanaging that unprofitable series.

When forming the series be sure to plan for this eventuality by keeping the members’ names and ownership percentage across all series mirror images of each other. If you want different members involved, we suggest forming additional entities, whether they be other series LLCs or just additional traditional LLCs.

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