If you have several related business ideas, filing a Series LLC can be an attractive option. But simply forming a Series LLC doesn’t entitle you to the internal asset-by-asset protection of a Series LLC. Instead, there are certain steps you need to take to make sure that you (1) have established protected series by the operating agreement and (2) kept separate protected series asset records as part of an operating a Series LLC.
While the Series LLC as a whole is a “juridical entity”, the protected series associated with it are not full blown “entities” with the panoply of rights and protections associated with a separate entity. Protected series are “entity-like” because they have many characteristics of separate entities, but not all the characteristics. Therefore, the protected series associated with a Series LLC are each “quasi-entities” somewhere close to separate entities. The Delaware LLC Act defines protected series as separate Persons, meaning they have the right to enter into contracts, own assets, sue and be sued.
One reason the Delaware LLC Act stops short of calling a protected series an entity is because, often for regulatory avoidance, people who use the Series LLC want the entire organization and all associated protected series to be considered one entity. For example, some regulations address entities and people who use the series do so because they want the whole “family” of that Series LLC to be one entity. For example mutual funds like that the SEC only requires one filing for all the portfolio funds within the family of funds under the Series LLC umbrella.
What Is a Quasi Entity?
In order to understand what a quasi entity is, it’s important to first grasp what a Series LLC is. A Series LLC is a unique type of LLC where the Certificate of Formation allows it to “slice and dice” the LLC into an unlimited number of protected business units, each of which can have its own associated members interests, assets, and operations into what is known as protected series. Under a Series LLC, one protected series within the LLC may be insulated from the debts and liabilities of another series. A series LLC in Delaware is filed as one entity and requires just one franchise tax payment each year, making it an attractive, potentially cost-saving option for people with multiple companies.
There is now a new form of “registered series” (filing requirement for each new series) as an alternative to “protected series” (no filing requirement for each new series). Most Series LLC users prefer the protected series because registered series have costs associated with filing and maintenance fees. The registered series are mostly for the purpose of uniform commercial code secured financing transactions where the series need to be considered “registered organizations” to secure the financing.
So, if someone has a number of outdoor service companies, including a pool maintenance business, lawn care crew, paver company, blacktop service, and landscape design company, they may wish to create a Series LLC instead of paying to form and maintain individual LLCs for each company.
Here’s where the quasi entity comes in. A quasi entity is a company that is a discrete extension of a Series LLC, an outgrowth of the company with its own assets. With a quasi entity is like an unemancipated child. The child is a person, but not an autonomous adult.
With a quasi entity, the protected series is tied with an umbilical cord to the “juridical” Series LLC that is on file with the Secretary of State. The quasi entity is like a satellite that is in orbit around the mothership. Problems arise when the operating agreement has not been drafted properly, records have not been kept properly and transactions have not been at arm’s length. Without these internal controls, the satellite protected series get pulled back into the mothership and recombined for liability separation purposes without the desired separate asset protection. The goal of a Series LLC is to keep the creditors of one series from being able to collect against the assets of other protected series within the same Series LLC.
How To Avoid Having a Quasi Entity
There are several important steps Series LLC owners need to take in order to create and maintain a quasi entity or quasi entities.
- Create an operating agreement. An operating agreement is a written, private document among the Series LLC members that sets forth the ownership, management structure, and operating procedures for the LLC. Technically, Delaware law states that an operating agreement can also be oral or implied, but documenting your operating agreement in a formal, written contract is the only way to make it enforceable. Keep in mind, too, that you’ll want to update this to add new “protected series” agreement exhibits as your company grows.
- Keep separate records. This is an essential part of establishing a quasi entity. If you claim you have separate series, but you keep all of your records in the same place–say, all or several of the businesses share a checking account—it’s difficult to maintain in litigation that your businesses are, in fact, separate series.
Thinking of forming a Series LLC or have a Series LLC and just realized you may have not completed the necessary steps to establish and maintain quasi entities? We can help you by providing you with a Series LLC operating agreement with an exhibit for each protected series to help ensure your protected series are duly established as quasi entities. After that, it’s up to you to keep the records separate.