What Is a Delaware Series LLC?
The Delaware Series LLC can establish multiple, even unlimited, liability shields within itself to hedge internal company risks. Each protected series within the LLC can own assets solely and separately from the other protected series. Each protected series can sue and be sued separately. Once a protected series is established and assets are associated with it, those assets are not available to creditors of the LLC generally or other protected series therein. This allows LLC members to segregate and protect assets separately all within the Series LLC fortress.
Do not put all eggs into one traditional LLC basket. A better alternative is the Delaware Series LLC, where members can designate assets into separate protected series baskets within the LLC to prevent a creditor with a claim against one protected series from reaching all of the assets associated with other protected series. This creates a legal barrier to block a determined creditor from collecting against all assets of the other protected series. When a creditor’s rights were limited to the assets of only one of the protected series, under the law, that creditor’s remedies should be limited to the assets of only the named judgment debtor, one of the protected series.
Some entrepreneurs do not want to keep track of many separate asset-holding LLCs when the nature of the assets are (1) passive and (2) not prone to attract liability. It is less expensive with regard to state filing fees and annual franchise tax payments to form one Series LLC with multiple protected series than two or more traditional LLCs. The Series LLC is the only way to have separate mini-shields all established by one entity.
Series LLC Information
The Series LLC is better suited when risks are remote and foreseeable risks can be insured. The number of protected series of the Series LLC is determined by the Series Operating Agreement.
To be eligible for the protection of Series shields, in addition to filing the Certificate of Formation and executing a Series LLC operating agreement setting forth the separate protected series, the members also need to (1) associate assets with protected series, (2) keep separate records and (3) operate each protected series like a separate entity at arm’s length. Because each separate series is a person under the law, care in management, operations and record keeping needs to be taken to prevent creditor claims of voidable transfers between protected series. The Series LLC should never be used to transfer assets between series to defraud creditors.
The Delaware Series LLC is a product of the Delaware legislature, a highly-regarded body for drafting business laws. To date, ten (10) states plus two territories have followed the Delaware model of the Series LLC. The Delaware version of the statute does not require listing or designating the number of protected series or the name of protected series with the Division of Corporations. In contrast, the Illinois version of the Series LLC law requires separate designations to be filed for each protected series. When deciding in what state to form the Series LLC, knowledgeable entrepreneurs and real estate investors choose the Delaware Series LLC because if established in Delaware, the Series LLC’s internal affairs will be governed under Delaware law.
The Series LLC members can establish an unlimited number of these protected series through a private operating agreement with sub-agreements for each series.
Those who are unsure whether to form a Series LLC, should form multiple traditional LLCs for more predictable protection. In the event multiple traditional LLCs is not an alternative for cost reasons, the Delaware Series LLC can be a compelling alternative, especially when risks faced by protected series can be hedged by insurance. When a single traditional LLC is compared to the single Series LLC, the Series LLC is superior because the Series LLC has the power to separate assets without additional state fees. When multiple traditional LLCs are compared to a single Series LLC, the multiple LLC approach offers more predictable protection to segregate assets. In addition to real estate separation and passive asset ownership separation, a number of entrepreneurs also use the Series LLC as an incubator to develop business ideas separately all under one master umbrella.
Benefits of a Delaware Series LLC
- Ability to create an unlimited number of horizontal internal “firewalls” between baskets of assets known as protected series
- Ability to add additional protected series from time to time without public filings
- One fixed annual fee, regardless of the number of protected series
- One registered agent fee, regardless of the number of protected series
- Flexible ownership and profit distribution options
- Each protected series can be arranged to be protected from the liabilities of other series therein
- Each protected series can sue and be sued in its own name
- Each protected series can obtain separate tax ID numbers
- Each protected series can contract separately in its own name, only obligating and exposing assets of one protected series and not the entire Series LLC or other protected series therein
- Each protected series can make separate tax elections. It is even possible to have one protected series be disregarded for tax purposes, another taxed as a partnership, another elect to be taxed as an S-corp, and another elect to be taxed as a C-corp under the IRS “check the box” rules
- A Series LLC may be allowed to “split up” and seek bankruptcy protection separately because each protected series is a separate “person” under the law. It is theoretically possible for a protected series to file for bankruptcy protection without the other protected series of the Series LLC
IncNow’s formation documents were prepared by a nationally recognized Series LLC attorney:
- Delaware Series LLC Certificate of Formation contains required elements to form the company (It is optional to add other provisions by request only, to disclose the number of protected series and names of protected series).
- Delaware Series LLC Operating Agreement template with the first two series included by default and as many additional series exhibits as you request. The template is in Microsoft Word format to allow you to easily add protected series from time to time.
- IncNow has a dozen years of experience setting up more than 1,000 Series LLCs.
- John L. Williams, Esq. is an ABA Advisor to the drafting committee for the Uniform Protected Series LLC Act.
- John L. Williams, Esq. is the Chair of the Partnerships and LLCs Committee of the Real Property Trust and Estate Section of the American Bar Association.
A Series LLC is a hybrid structure of 1) an LLC with internal divisions and 2) multiple LLC subsidiaries owned by a common parent LLC, and 3) multiple brother-sister entities owned separately.
- The Series LLC members enjoy the protection of “daughter” protected series without additional public filings.
- The Series LLC’s protected series are separate “persons” for tax and legal purposes, although the mothership Series LLC and all protected series therein constitute only one “entity”.
- Each protected series has members and assets associated with it. As shown below, each protected series is most often established to be owned directly by members associated with that protected series. The less common alternative would be to establish the protected series with the Series LLC as the protected series’ sole member, and therefore, a parent-child subsidiary relationship. Therefore, the most common arrangement is to structure each protected series like a separate partnership.
- The Series LLC has only one fixed annual Delaware franchise tax, regardless of how many series it establishes.
The Delaware Series LLC law is only one section of the Delaware LLC Act, Section 215. This is not a “self effectuating” statute. A self-effectuating statute would be one which would double as a default operating agreement in the absence of one agreed to by its members. No state currently has a self-effectuating Series LLC statute. A self-effectuating statute that implies an operating agreement for the Series LLC and sub-agreements for each protected series is the objective of the drafting committee charged with reconstituting what it means to be a Series LLC under a uniform Series LLC Act, which is being considered for adoption by the Uniform Law Commission. If adopted, the Series LLC Act would then be recommended to be enacted by the legislatures of non-Series LLC States and would be recommended to replace existing Series LLC acts in the 12 states, District of Columbia, and Puerto Rico.
Therefore, it is currently essential the Delaware Series LLC has an operating agreement to establish multiple protected series. Every Delaware Series LLC should have special series provisions in both the Certificate of Formation and the operating agreement. Do not attempt to modify a traditional LLC Agreement to add series. Instead, the form of Series LLC operating agreement should be one especially written for the complete relationship between the protected series, Series LLC, and members associated with each protected series.