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.