What is a Delaware Series LLC?
The Delaware LLC Series provides for independent and separate liability of each asset within each series, without creating a separate limited liability company for each asset. The number of series can be increased without filing a registration; saving on both registration fees and annual entity taxes. Conventional LLCs can also be converted into a series LLC Delaware without the need to form a completely new entity.
A Series LLC is a Limited Liability Company that allows for multiple “sub-companies” under one “umbrella”. These “sub-companies” are sometimes called “mini-LLC’s” or “units”, but the technical term would be “Separate Series”. We’ll continue to use “sub-companies”; it’s a little less confusing.
Each sub-company or “Separate Series”, when properly formed, has all the features of a regular LLC, and each is independent of the other. The debts, liabilities and obligations of one sub-company are enforceable only against the assets of that sub-company, and not against the “umbrella LLC” or any other sub-company in the Series. Let’s review that in plain English, we’ll use an example while we’re at it:
- Tom Jones plans to purchase three apartment buildings. He registers a Series LLC we’ll call “TJ Properties LLC”. His Certificate of Formation contains the necessary clauses to invoke separate liability protection. Tom completes an Operating Agreement for TJ Properties LLC and a Separate Series Agreement for each of the three sub-companies. The sub-companies are “Cloverleaf Apartments, Series A of TJ Properties LLC” “Lamplighter Patio Homes, Series B of TJ Properties LLC” and “Main Street Efficiencies, Series C of TJ Properties LLC”. Each property is titled in the name of its corresponding sub-company.
- After a flood, the first-floor units of Main Street Efficiencies develop a dangerous mold problem and several sick tenants sue. The judge finds against Main Street Efficiencies and the ruling exceeds the assets of the Main Street sub-company. Fortunately for Tom, he properly set up a Separate Series Agreement for each sub-company, each company’s assets were separately held and he maintained separate and distinct records for each sub-company. The assets of Lamplighter Patio Homes and Cloverleaf Apartments are safe, as are the assets of TJ Properties LLC; they are protected from the liability of Main Street Efficiencies.
- If Tom Jones had held all of the rental properties together in one traditional LLC, his personal assets would be protected from the mold judgment, but the assets of the other two rental properties would be enforceable to satisfy the judgment. Tom could form three traditional LLC’s, one to hold each property; but then he would have the expense of registering and maintaining three LLC’s instead of one.
Which brings us to an important point, the sub-companies under your Series LLC umbrella will not be individually registered in Delaware. This offers tremendous savings because set-up and maintenance fees are paid only for the “Umbrella LLC” and not each sub-company. However, this also means you do not have exclusive right to the names of the sub-companies unless you register them as trademarks or register them as an alternate name in a jurisdiction which grants exclusive rights to use of a registered alternate name. Many jurisdictions do not grant exclusive rights to alternate names. This is not typically an issue of concern for a property holding Series LLC, but if your intention is to hold business enterprises in your Series, it is a subject for consideration.
Series LLCs are relatively new legal creatures. Some US states and foreign countries do not recognize the Delaware Series LLC, while other States, such as California, recognize each sub-company as a separate LLC and thus subject to separate registration and state taxation. Because they are a more recent type of entity, the Delaware Series LLC does not have the vast body of case law a Delaware Corporation or traditional LLC enjoys. This means that there are potentially areas of law which remain undefined; the court will rule on these situations as they occur. As a consequence, while they offer tremendous opportunity, they may not be the appropriate vehicle for all entrepreneurs and investors. For questions bearing on federal and state tax liability, bankruptcy, creditor’s rights and environmental liability you should consult a qualified tax professional and/or attorney, and be as specific as possible when describing the particulars of your business or investments.
How Are Series LLCs Managed?
Each sub-company can have its own Members and/or Managers, and may pursue its own business objectives. As with all Delaware LLCs, Delaware law allows tremendous freedom of contract between Members; each sub-company may opt from an almost unlimited number of management structures and may define its own rules respecting the voting rights of Members and how Distributions will be taken. As with the traditional Delaware LLC’s, corporate formalities such as minutes and annual meetings are not required.
The following information will be included on the Certificate of Formation of a Series LLC:
- The name of the Umbrella LLC
- The address of the Registered Office
- The name and address of the Registered Agent in Delaware
- The notice that the LLC is a Series LLC and the clause invoking separate liability
- The signature of the Authorized Person (Organizer)
What is a Delaware Series LLC Operating Agreement?
Like the traditional LLC, a Series LLC is defined by an Operating Agreement and each sub-company has its own “Separate Series Agreement”. See the Operating Agreement section of the traditional LLC for more information about LLC Operating Agreements.
A Separate Series Agreement is the Operating Agreement of the sub-company, and each sub-company must have its own. The Separate Series Agreement contains the following:
- The name of the Umbrella LLC and of the sub-company
- The names of the Members of the sub-company
- Statement that the new sub-company is created
- Separate liability clause
- The individual traits of the sub-company such as Business Purpose and Investment Guidelines, and any distinct Management guidelines or any other item found in a traditional LLC Operating Agreement which is unique to this sub-company.
- The signatures of all the members of this sub-company
If the following criteria are not met, the LLC will not be recognized as a Series LLC and the sub-companies will not be recognized as separate entities and will not have separate liability protection:
- The Certificate of Formation must identify the LLC as a Series LLC and must invoke a separate liability clause, or must be amended to do so.
- The Operating Agreement must identify the LLC as a Series LLC and must define the provisions of limited liability and separate organization to be enjoyed by each “Separate Series” (sub-company). The Operating Agreement of the Umbrella LLC must be signed by the members of the Umbrella LLC.
- Each sub-company must have its own Separate Series Agreement which must be signed by the members of that sub-company.
- Each sub-company must maintain its own separate and distinct records.
- The assets of each sub-company must be held separately in the name of the sub-company and in the sub-company’s own account.
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