What this is: Delaware was an early adopter of laws allowing LLCs to establish independent series, and today 21 US states have laws that also allow their creation.
What this means: While the laws in each state vary from Delaware and each other, there are many similarities. Basic knowledge of how series LLCs work in Delaware provides a framework for understanding them in the other states.
What is a Series LLC?
A series LLC allows a company to create distinct vehicles for managing different assets, while eliminating the administrative obligations that come with maintaining separate LLC companies.
Under Delaware law, an LLC can create separate series that can have separate members and managers, maintain separate assets and pursue separate business purposes and objectives from the LLC that created them (the master LLC) and other series of the LLC.
Most importantly, the series is not liable for the debts and obligations of the master LLC or the other series (likewise, the master LLC is not liable for the debts and obligations of the series) so long as the LLC meets 3 key criteria:
- The assets and financial records of the series are maintained separately.
- The LLC’s Certificate of Formation states that the liability of the series is limited. (Note: the series do not have to be created at the time of the LLC’s formation.)
- The LLC agreement similarly states that the liability of the series is limited.
Protected Series and Registered Series
Effective August 2019, Delaware LLCs have the option of creating a protected series, which is a limited liability series that is not registered with the Secretary of State or filing a Certificate of Registration with the Delaware Secretary of State (SOS) to create a registered series.
A registered series has the following attributes:
- Limited liability, as long as the 3 criteria establishing it (listed above) are met.
- The name of the series must begin with the name of the master LLC. For example, “ABC Holdings, LLC Series XYZ.”
- The registered agent for the series is inherited from the master LLC.
- The ability to be cancelled independently but can also be cancelled automatically if the master LLC is cancelled.
- Its own record with the Delaware Division of Corporations.
- It can be converted into a protected series and can merge with another registered series.
- Good Standing Certificates can be obtained on a Delaware registered series.
- Each registered series pays an annual franchise tax, but it is lower than the $300 required for LLCs. Each registered series pays $75 per year, due on June 1.
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Risks and Benefits of the Series Structure
While series LLCs have been around for a long time, there has been some hesitancy about using them as a vehicle for holding multiple related assets for a number of reasons.
In the past, the inability to show existence of the series on the public record created complications. Now that there is an option to file a registration certificate with the Delaware SOS, registered series can appear on the public record and Good Standing Certificates can be provided for financial transactions when needed.
Another barrier to adoption of the series LLC stems from a flaw in the original statute, related to Uniform Commercial Code (UCC) law. The original series law did not define a series LLC in a way that allowed it to be considered a “person” under Article One of the UCC. The Delaware amendments that went into effect in August 2019 addressed this concern, defining series (both registered and protected) as “associations,” which are included in the definition of “person” listed in Article One. Thus, for the purposes of the UCC, series LLCs have the required characteristics of “registered organisations" that can be debtors. This change should make lenders feel more secure when providing financing to series LLCs.
There’s one more major reason for limited use of the series LLC, however, and it’s not one Delaware can fix on its own.
If the series is engaging in business in another state (or holding real property in a state that considers that activity to be “doing business”), registration requirements may be complicated by the fact that not all US states recognise series LLCs. Whether the courts in a state without series LLC laws will recognise the limited liability structure of a series LLC is a big concern. Currently, only 21 states and Puerto Rico have series LLC legislation.
That said, the administrative simplicity and unique structures of series LLCs is clearly a draw for many, and in Delaware and elsewhere this entity type is becoming more common.
FAQs
Have there been any recent amendments to the Delaware LLC law?
Delaware updates its business entity laws annually. Recent changes to the Delaware LLC Acts include the provisions which allow an LLC to make amendments when filing a certificate of division, provisions for revocation of dissolution for domestic LLCs which also permits the revocation of its registered and protected series. These and other changes are covered in more detail in our article Delaware Business Law Changes Part 2: Amendments to the LLC (Limited Liability Company) and Partnership Acts.
Will a series LLC have to make a filing under the new Corporate Transparency Act?
Whether a series LLC and its registered series cells will need to file a Beneficial Owner Information report under the new Corporate Transparency Act is a complex question that requires legal counsel to review the requirements of the Act and the structure and business of the series LLC company and its related series cells. For more information on the Corporate Transparency Act, please consult our article: 10 Frequently Asked Questions about the Corporate Transparency Act.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
