Series LLCs - Wise Or Risky Strategy? | Wolters Kluwer

What is a Series LLC?

The Series LLC was first introduced by Delaware in 1996. The concept was borrowed from Delaware’s statutory trust law, which was particularly popular with mutual funds. Under the statutory trust law, one investment company could be formed as a trust with separate series. Each series could have its own portfolio with different investors, investment strategies, and so on. When the Series LLC became an option it allowed mutual funds to use the LLC—a more flexible vehicle than the statutory trust. Although that’s how it began, a Series LLC can be used for many purposes beyond setting up mutual funds.

A Series LLC consists of the “parent” or “umbrella” LLC with one or more series that are established under the parent. Each series can have characteristics that are separate from the Series LLC itself and every other series. Each series can have its own assets, members, managers, purpose, and investment objectives. And if certain statutory requirements are met, the debts, liabilities and obligations of one series are enforceable only against the assets of that series and not against the assets of any other series or the Series LLC. As such, each series basically functions like a separate entity within the Series LLC.

Here’s an example of the theory behind the Series LLC concept. Dick and Jane each own a restaurant (Dick’s Diner and Jane’s Diner). They decide to form a traditional LLC to own the two restaurants. Dick’s Diner is not successful and can’t pay its rent. Jane’s Diner is quite profitable. Dick’s Diner’s landlord sues the LLC for back rent. The profits the LLC gets from Jane’s Diner can be reached by Dick’s landlord. Now say Dick and Jane form a Series LLC. Each diner is associated with a separate series. They properly form and maintain each series. Now Dick’s landlord can only reach the assets associated with Dick’s Diner series. The profits earned by the series associated with Jane’s Diner cannot be reached—nor can any assets the Series LLC itself might own.

Of course, Dick and Jane also could have formed two separate LLCs. But, depending on the state and circumstances, that might have been a more expensive option and more of an administrative headache.

States permitting Series LLCs

The Series LLC is a creation of state law and can only be formed in a state that authorizes the formation of a Series LLC. Not all states do. The jurisdictions that do authorize Series LLC formation include the following:

• Alabama
• Arkansas
• Delaware
• District of Columbia
• Illinois
• Indiana
• Iowa
• Kansas
• Missouri
• Montana
• Nebraska
• Nevada
• North Dakota
• Oklahoma
• Puerto Rico
• South Dakota
• Tennessee
• Texas
• Utah
• Virginia
• Wyoming

Additionally, there may be some states that do not allow Series LLC formation but do recognize Series LLCs formed in another state. California is one such state. In California, foreign LLCs can register to do business even though a domestic Series LLC cannot be formed..

It is also important to be aware of some states that have “false series” laws. Although the LLC law refers to “series”, the series they are referring to is more analogous to the series of stock that corporations can issue. These series allow for membership interests in which the members of the series can have different voting or financial interests than other members. But there is no liability shield, and these states do not actually authorize the formation of Series LLCs.