Why the Series LLC Is the Ultimate Subsidiary Factory

By IncNow | Published June 25, 2018

SubsidiaryIn the summer of 1987, “make your own sub day” was so popular in the Camp Tockwogh mess hall, that we all sang “I feel like makin’ SUBS!” This was a subtle substitution of one word in the classic rock lyrics, Feel Like Makin’ Love by Bad Company. I still love making subs, but nowadays those subs are subsidiaries. It’s no longer the bad “Bad Company”; it’s now literally a “new company” and lots of them. How much fun it is to make subs? It’s like making friends and having lots of them.

What Is a Subsidiary?

A subsidiary company is a child company owned by a “parent” company. A subsidiary is tethered to the parent when all of the child’s ownership interests are in the name of the parent company. Subsidiaries are powerful tools. They allow for independence and for the protections needed for prudent risk-taking. Often, subsidiaries are separately filed limited liability companies. Between state annual franchise taxes and annual registered agent fees, the cost starts at about $400 per year per LLC.

How the Series LLC Relates to Subsidiaries

For certain low-risk passive asset owners, like real estate investors, the Series LLC is the ultimate structure in subsidiary creation. The Series LLC can register an unlimited number of internal subsidiaries, called “protected series”, without additional government filings and costs, allowing more flexibility and cost savings than other structures. It turns the $400 sub into a free lunch. With the rise of blockchain technology, this process could soon be safely automated, giving parent companies the ultimate freedom to make subs at will.

Conventional LLCs are simple. Their Operating Agreements, which lay out the ownership and management structures, are straightforward almost to the point of being boring. The agreements function predictably and can be amended at any time as the needs of the business and its owners change. This straightforward formatting contrasts with the Series LLC’s many moving parts. To keep track of dozens, hundreds or thousands of protected series would be complicated and subject to human error with conventional methods like spreadsheets. That makes the Series LLC a perfect candidate for automation on a blockchain.

How Does Blockchain Technology Factor In?

Blockchain technology, which utilizes an encrypted shared ledger to allow multiple data hubs to safely interact while maintaining privacy, allows information to be tracked and shared. It’s an immutable record, which means that the asset records created and stored on the blockchain cannot be changed once they’ve been added. When asset records need changes or updates, a new record is created and added to the ledger, allowing a permanent record of every change. Its immutability ensures that the Series LLC cannot play a shell game with creditors without leaving a traceable trail of breadcrumbs, preventing tampering.

Computer programs on the blockchain are run by smart-contracts: self-executing lines of code which exist and operate on any given blockchain. Like all other data on the blockchain, they are immutable, but otherwise function similarly to the code that makes up any other computer program. They can perform calculations, automatically execute programming, or even paper transactions which may have previously been bookkeeping entries. When an LLC operating agreement creates rules for asset segregation for the blockchain, it can be written in the form of these smart contracts. Contracts written in smart contract form will be unambiguous in execution, since computer language always interprets in a predictable way. Smart contracts increase accountability without the need for trust, since they will automatically manage an LLC’s operations, guided by guardrails programmed into the operating agreements.

The LLCs of the future may even be able to autonomously create and update business and subsidiary records through the common law maxim of “freedom of contract”, the maxim which allows private or public individuals to form contracts without statutory limitations. Developments in smart contract technology could allow blockchains to create new operating agreements, including additional protected series under a master Series LLC. They would be able to create those agreements as reactions to incoming company data and artificial intelligence on the blockchain, a process which would gain momentum in situations with related party transactions because of the higher degree of cooperation.

This ability to learn and react diminishes the need for regular human management. Contracts written onto a blockchain could allow artificial intelligences to auto-resolve disputes, easing the litigation burden on courts when computers start doing business with other computers. The ability to safely share information on a blockchain will also lighten the burden of business management, able to quickly access relevant data from business and industry partners as well as different hubs of the same company. In the future, the computers may even run businesses themselves with auto-learning algorithms.

The biggest challenge to LLCs looking to join the blockchain revolution of the future will be finding programmers talented enough to code smart contract management programs, and the careful drafting of the “contract” in computer code languages. It also provides a challenge to lawyers: If initial contracts are written by coders, and subsequent contracts are written by the technology itself, where do lawyers fit in?

There’s still a lot of opportunity. Lawyers will consult with programmers to “bug spot” during beta testing like they learn to “issue spot” in law school. They will need to think of possible errors that could be generated and think about how that could result in liability. They will need to know how the agreements and records can be rendered to be read by courts. The lawyer will try to ensure that the interests of their clients are represented in the coding of the smart contracts. Law has always been, in a sense, a “code” that operates in a similar “if, then” format as computer programming. This is second nature for lawyers even if the language is different.

The future looks brightly towards a time when LLCs will be fully independent entities powered by artificial intelligence with smart contract technology with the records kept in blockchain. Sooner or later the subs will be making subs and using robots to run companies to think faster, smarter and work harder. Wait until you see how these protected series are used to “tokenize” every asset in, and every aspect of all businesses. Someday, artificial intelligence and smart contracts will operate autonomous businesses and create tremendous value.

The next level will be when the computers themselves identify and solve problems on their own to use computer learning to generate improvements in technology and themselves program that new technology without the need for human programmers. When computers are doing the innovating and programming, we will see economic expansion and growth at a rate never before imagined. The flexibility of LLCs and the proliferation of subsidiaries will help make this prosperous automated future possible. For now, you should consider forming a Delaware LLC with LLC subsidiaries the old-fashioned way to reap the economic benefits that have been identified by Google and many other companies. Or you can form your Series LLC with a handful of protected series and add more as you go along. Do you feel like makin’ subs?

When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go