A Series LLC allows you to take one LLC and break it down into its component parts. One parent LLC has the ability to form an unlimited number of separate, protected series. Each of these protected series is a legal person able to hold assets. The statute shields the assets of each protected series from the liabilities of other protected series or the LLC itself.
This is provided a Series LLC has both (1) properly established its protected series and (2) kept separate records of its protected series.
Forming a Series LLC can be a cost effective way to achieve limited liability protection for multiple businesses using one legal entity. However, there is a catch. Series LLC statutes have stern record-keeping requirements. Managers must meet these requirements in order to maintain the internal shields between protected series and the parent LLC. A member or manager can incidentally impose cross-liability on sister protected series if they are not diligent about maintaining records.
Here is what you need to know about the record-keeping requirements, including tips for maintaining the firewalls between your Series LLC assets.
Series LLC statutes clearly outline the conditions for records of associated assets. The most important condition is that internal records keep the assets of each protected series separate from one another. Records must objectively describe an asset to distinguish it from those associated with other protected series, or the parent LLC.
Records should determine when and from whom the asset was acquired. Managers should organize assets by specific listing, category, type, quantity or allocational formula including percentage shares of an asset associated with a protected series.
Series LLC statutes require records of assets be well detailed. However, it is important records remain understandable to an outsider looking in. Many statutes include that records must describe an asset with an amount of specificity such that they could be distinguished by a “disinterested, reasonable individual”.
This may sound vague, however, here is some clarification. The law describes a reasonable individual as having a base understanding of business records. It does not require however that they have familiarity with generally accepted accounting principles. Ideally, it should not take a trained, forensic accountant to distinguish what assets are associated with your protected series.
Consequences of Commingling
Careless managers can incidentally commingle assets across multiple protected series in a Series LLC. This could result in the the entity’s internal liability shields, making each protected series vulnerable to attacks by hostile creditors.
Series LLC statutes often consider asset exposure on an “asset by asset” basis. Business assets can fall into a category of being “non-associated” if record-keeping formalities are not met. This means that an asset not clearly associated with a protected series is potentially up for grabs to creditors of any of the other protected series or the parent LLC. Assets can only receive protection from internal liabilities if they are properly associated through adherence to record-keeping conditions.
Separate Bank Accounts
One strategy is to establish a separate bank account for each protected series. The finances of each protected series should never be commingled in joint accounts, unless assets within that account are accounted for within separate ledgers. An example of this would be an attorney trust account. This is crucial if the assets held by each protected series are fungible.
One way to handle this is through a cash management agreement between protected series. The agreement allows protected series to pool assets with internal records or internal tranches. Sometimes, this can be achieved simply through having separate asset ledgers within QuickBooks.
2. Maintain Meeting Minutes
States do not require members or managers to hold meetings, however, this is a way to go “above and beyond” to show adherence to formalities. Maintaining meeting minutes and resolutions would be beneficial to thorough record-keeping. This could be done for each protected series, as well as the parent LLC. Maintaining records of organizational decisions, especially if they concern associated assets of the LLC or any protected series, will make it more difficult for a creditor to challenge your records in court.
3. Delegate Responsibilities
Series LLC statutes stipulate that the owner of an asset, whether it be the general LLC or a protected series, is responsible for meeting the record-keeping requirements. This is true unless the responsibility for record-keeping is delegated to a manager or a records governor in the Series LLC operating agreement.
A decentralized method of record-keeping might be the default system in absence of an agreement, but it could be a potential trap. Based on the number of protected series, it could take a significant amount of collaboration between members associated with a series to ensure against any incidental commingling. Miscommunication or inconsistency regarding a particular asset could result in loss of liability protection for that asset.
To avoid incidental commingling, members often delegate record-keeping responsibilities of the LLC and all series to one manager. This manager should be thoughtful and knowledgeable about the ongoing need to maintain record-keeping discipline.
Oftentimes, managers who are new to the Series LLC will quickly figure out a system to ensure they have a record of which assets are associated with each protected series. This reduces the chances that the internal firewalls of the Series LLC are pierced by a hostile creditor in court. The system the manager establishes should allow an outsider to objectively determine which assets are associated with its protected series.