Forming a Series LLC in Florida Comes with Risks and Hidden Traps

What Is the Florida Series LLC?

The Florida Series LLC has the ability to segregate assets with separate asset protection shields that are like firewalls. For example, real estate investors can, within this one company, have the ability to hold 10 parcels of Florida real estate where the liability and damages from a slip and fall at one property titled in its own protected series is isolated from the other 9 properties in 9 other protected series. The idea is to avoid giving access to all the assets of the LLC when just one of the protected series is at fault. This can avoid all of the assets being held in one traditional LLC from being available to that one creditor of that one asset. The creditor of one protected series can be limited to only collecting against the assets of that one property where the slip and fall occurred. Often the series LLC is an attractive option that costs less to set up and maintain than 10 separate traditional LLCs, yet it still has protections by statute that are similar to 10 separate LLCs.

It is important to know that any existing Florida LLC has the power to designate Protect Series on file with the Secretary of State of Florida. Critically, the first series to be designated with Florida must have the unanimous consent of all LLC members before filing the designation of the protected series with Florida. This statutory requirement for unanimous consent overrides all majority or super-majority consent provisions found in most operating agreements. That unanimity requirement is the “trap” that could become a “sleeper issue” to invalidate all protected series should it later comes to light that not all members consented.

In the formation of a Series LLC, interestingly, no special language needs to be in the Articles of Organization of what is to become the LLC’s “mothership” entity. The LLC does not even need to check a box or pay a fee for the LLC to become an LLC capable of designating Series. Instead, the LLC just needs to file a “designation” with the Florida Secretary of State for each Florida Protected Series to be established and associated with the traditional Florida LLC, transitioning it into a Florida Series LLC.

Potential Risks of Forming a Florida Series LLC

Wanting to learn more about the new Florida Series LLC, IncNow team members attended a webinar on the subject by a Florida expert in Land Trusts. What was surprising about the Florida Series LLC law was, first, the ability to designate series on any existing traditional LLC and, second, the two hidden traps of them.

Risk 1: Protected Series Must Be Approved by All LLC Members

It is critical to know that the first designation of a Protected Series to be filed by a Florida LLC must be unanimously approved by all LLC Members. In the absence of this, it is possible that the Protected Series was not duly formed and the LLC will not house the protection of the internal vertical asset protection shields. Instead, without the unanimous consent, all Protected Series associated with the Florida LLC will just be part of the assets of the LLC, not segregated into a Protected Series of the LLC.

Risk 2: Inadequate Bookkeeping May Cause Liabilities

The second mistake is failing to trace asset records to know when assets were acquired by which Protected Series, how much was paid for the asset and when the asset was disposed of for how much consideration. Inadequate bookkeeping of asset tracing can result in an asset associated with a Protected Series becoming available to creditors of the whole LLC and all of the creditors of its other Protected Series.

The standard for judging whether these records are sufficient would be an objective standard, meaning some independent fact finder, like a judge should be able to review the records and be able to discern when an asset was acquired and became associated with a Protected Series, what was paid for that asset and when it was sold and how much was received for it when that asset leaves a Protect Series.

The Best Way to Form a Florida Series LLC

Ideally, when a Florida LLC wants to become a Florida Series LLC, it will:

1. Seek and obtain unanimous written consent of all LLC Members to the designation of Protected Series,
2. Enter into an Amended and Restated LLC Agreement with separate Series Agreements for each Protected Series,
3. File designations for each Protected Series,
4. Keep careful internal private records of what assets are owned by the “mothership” LLC and each Protected Series associated with the LLC.

Florida Series LLC vs. Delaware Series LLC

It should be known that the Florida Series LLC statute arises from the Uniform Protected Series Act. This is a departure from the Delaware model in a number of significant ways. For example, Delaware requires language in the Certificate of Formation to make reference to 6 Del. C. § 18-215 to enable the LLC to establish Series LLC.

Delaware also provides for two different types of Series that can be established by a Delaware Series LLC. The first is the Registered Series, which are established by filing a statement of Registered Series with the Delaware Secretary of State. These Registered Series were designed for secured financing under the Uniform Commercial Code to meet their definition of Registered Organizations.

An important distinction to make is that the Delaware Registered Series is more akin to the Florida Protected Series both with:

• public filing requirements,
• maintenance fees,
• and restrictions on its ability to conduct certain entity level transactions, prohibiting a merger into another entity at the Registered Series level.

Florida Protected Series also cannot be Members of other Florida Protected Series, to avoid a multi-layered structure with Protected Series owning other Protected Series.

In contrast, Delaware is not so “prescriptive” like a nanny state telling you what you can and cannot do like Florida and the other Uniform Protected Series Act states. Delaware is more of an “enablement” state that treats you like an adult and enforcing the Operating Agreement to let you structure your deal and organization under Delaware’s guiding principle of freedom of contract.

For example, Delaware has no “unanimous consent” hard and fast rule like Florida on the establishment of the first Protected Series associated with the LLC. Delaware also allows two types of Series:

1. The Delaware Protected Series
2. The Delaware Registered Series

Frustratingly, Delaware’s “Registered” Series is very similar to the Florida “Protected” Series in the requirement for a public filing and annual maintenance until dissolution. What is frustrating is that between states “Protected Series” in Delaware means something totally different from Protected Series in Florida. In Delaware the Protected Series is established solely by Operating Agreement, known as “private ordering,” without state fees or state filing requirements.

The Delaware “Protected” Series are only established by Operating Agreement without any additional public filings, annual reports, or other disclosures. Therefore, the Delaware Protected Series LLC is unlimited in the number that can be established with no required state fees. Thus, a Delaware Series LLC can establish dozens, hundreds, thousands, or even millions of Protected Series with only one generic Series LLC filing saying that the Delaware LLC has the power to establish Series associated with the company under 6 Del C Section 18-215.

Therefore, in every instance where a business owner is considering the jurisdiction where to establish the Series LLC, IncNow recommends considering the Delaware Series LLC over any other state, to avoid weaker laws, and restrictions on an organization chart design, flexible management, and ownership structures.