Among a number of recent states to enact Series LLC legislation, South Dakota’s new Series LLC law becomes effective soon. The approach of South Dakota counters the larger Series LLC trend. Most states follow either the business-friendly Delaware model or the prescriptive Uniform Protected Series Act (“UPSA”). Here’s what you need to know.
When Will South Dakota Form Series LLCs?
The state legislature introduced South Dakota’s House Bill 1179 on January 30, 2020, containing authorization for Series LLCs. South Dakota’s Governor signed it into law on March 23rd. This amended §47-34A-101 et seq., of the South Dakota Uniform Limited Liability Company Act. Under the act, South Dakota will begin forming Series LLCs on November 15, 2020. We shall refer to the protected business units of a Series LLC as a “Protected Series” in this article.
What Is a South Dakota Series LLC?
The South Dakota legislature modeled their Series LLC law after the Illinois Series LLC. This legislation requires a Certificate of Designation to establish each Protected Series. South Dakota, almost identical to Illinois, only allows Protected Series formation through additional filings with the Secretary of State’s office. Interestingly, South Dakota, like Illinois, allows each Protected Series to be a separate entity if the LLC’s Articles of Organization provide for that. This type of provision is rarely included in practice.
The language of the South Dakota statute allows the Series Limited Liability Company to own assets in its own name or through one of the Protected Series. It also spells out the naming conventions for the various Protected Series. South Dakota is explicit about requiring the entire name of the LLC to be part of the name of the Protected Series. Each Protected Series must have a unique name to distinguish it from the others.
South Dakota vs. Delaware Series LLC
A majority of other states that have the Series LLC follow the Delaware model. Core to this is allowing the LLC to establish an unlimited number of Protected Series by Operating Agreement without further Secretary of State filings. South Dakota also did not follow the Uniform Protected Series Act, which could be viewed as an enhanced and updated version of the Illinois approach. UPSA has more rules and requirements to avoid abuses by proprietors using the Series LLC to harm innocent creditors. UPSA is law or soon to be the law in Tennessee, Colorado, Arkansas, Virginia, Iowa, and Nebraska. It is fair to say Illinois is a middle-ground between Delaware and UPSA. South Dakota following Illinois suggests a compromise by South Dakota in adopting Series LLC provisions.
Regarding the treatment of Foreign Series LLCs (non-South Dakota Series LLCs), the law also explicitly authorizes Series LLCs from other states to file for a “Certificate of Authority,” sometimes known as a Foreign Qualification. This would be on behalf of the Series LLC, thereby excluding its Protected Series from doing business in South Dakota. Additionally, one or more Protected Series of any Series LLC may Foreign Qualify as a Foreign Protected Series. For example, a Delaware Series LLC can do business in the state of South Dakota, only if it files a Certificate of Authority. This document would list the Company and Protected Series which are doing business in South Dakota.
Delaware has splintered its approach into two. The original Delaware model only provided for Protected Series establishment by Operating Agreement. Delaware now allows for an alternative of a filed Registered Series associated with the Series LLC. The Delaware Registered Series filing functions largely like a Certificate of Designation in Illinois. It specifically ensures a Registered Series is on the public filing records. It also classifies it as a “registered organization” for UCC secured financing purposes.
Whether you use a Series LLC formed in South Dakota or a foreign Series LLC, it is important to know what you have by statute since not all Series LLCs are created equal.