How To Structure a Protected Series LLC
A protected Series LLC is a particular type of LLC that the Delaware legislature invented in 1996 that lets you take one LLC and break it down into its component parts. Instead of having just one overarching shield to protect owners from the liabilities of the company they own, one protected Series LLC allows you to establish an unlimited number of protected shields associated with assets of the company. As a result, one protected series within the protected Series LLC may be insulated from the debts and liabilities of all other protected series of the LLC.
How to Create a Protected Series LLC
One initial decision in building the structure of the protected Series LLC is deciding who are to be the members associated with each protected series. Usually each protected series has the same individual members associated with it. This uniformity of ownership of each protected series causes the profits and losses of each protected series to flow to members directly and not through the mothership LLC.
To use a simple example, ABC Capital LLC can be a single-member Delaware Protected Series LLC with Abel Adams as a member. It usually has Abel Adams as the single member of ABC Capital LLC, protected series 1; with Abel Adams also as the member associated with protected series 2; and Abel Adams associated with protected series 3.
In the partnership setting, XYZ Capital LLC would be a multi-member Delaware Protected Series LLC with Abel Adams and Bob Best as members. It would then have Abel Adams and Bob Best as the two members of XYZ Capital LLC, Protected Series 1; with Abel Adams and Bob Best also as the members associated with XYZ Capital LLC, Protected Series 2; and Abel Adams and Bob Best associated with XYZ Capital LLC, Protected Series 3.
These examples are not “parent-child” relationships because the relationship between protected series is horizontal (brother-sister), and not a vertical parent-subsidiary relationship.
Protected Series LLC Structure Advantages
Uniformity of ownership has its advantages with avoiding internal jealousy and conflict between members. We do not suggest having different members associated with each protected series because it is unwieldy and runs a high potential for conflict when ownership is not aligned between protected series. Therefore, do not associate Carrie Crawford with an individual protected series unless she is also associated with all protected series therein. Ideally, the ownership is mirrored in each protected series, so each member or members associated with any protected series is associated with every protected series in the same ownership percentage. This minimizes the risks of in-fighting between members. Chances are any future attacks on your company are much more likely to come from the insider members than from outsiders who are not members.
While some suggest having different ownership and control to avoid “associate liability” or “enterprise liability”, difference in control will create a conflict-ridden complex structure, which often leads to in-fighting.
Example Structures of a Protected Series LLC
The most common and recommended structure of a protected Series LLC is one which has a “master” protected Series LLC which names certain members in its master LLC Agreement. This is the LLC name that is on record with the State of Formation and the name listed on the Certificate of Formation. That master protected Series LLC establishes individual protected series which hold separate assets, keep separate books and have their own members, although the individual protected series will often have the same members as the master protected Series LLC. Typically, Protected Series 1 will be the management protected series, responsible for managing the operations of the business. Protected Series 2 and on will hold separate pieces of property or operate different segments of the business.
A less-common protected Series LLC structure is diagrammed above. This configuration establishes separate protected series and assigns certain assets to each, as in the first example, but here, the master protected Series LLC is the member of each protected series rather than each member individually.
Regardless of whether a protected Series LLC is structured like the first or second configuration, it is important to keep accurate and detailed books and records. Leaving assets unassociated with an individual protected series or the Company makes the asset potential fair game for judgement creditors of the Company or other protected series. Also, it may raise the issue of inaccurate books and records and give creditors a theory to attack other individual protected series.
Additional resources on the Delaware Protected Series LLC
- What is a Delaware Protected Series LLC?
- The Delaware Protected Series LLC vs. Other States
- Delaware Protected Series LLC Operating Agreement