By Lara L. Hjortsberg Of Counsel at Carney, Kelehan, Bresler, Bennett & Scherr, LLP.
Adjunct Professor, U. Md. School of Law
The series LLC is a creature of statutory law whereby a limited liability company (LLC) is carved into separate asset pools called series, each with the ability to have its own members and liabilities. These entities are separate and distinct from LLCs that issue different classes of membership interests. In that case, the classes may share differently in profits, losses and distributions, but they all share from the same pool.
The series LLC has been touted as a way to simplify structure and reduce costs. By using one entity, owners can be rid of one layer in a holding company structure. They do not have to separately organize new entities as projects arise. In addition, these owners can avoid some of the fees associated with organizing and maintaining many separate entities. Where a holding company structure is employed instead, the states can levy filing and franchise fees on each entity within a holding company structure. For holding companies with a large number of LLC subsidiaries, the holding company structure can become costly both at the time of formation and with the franchise fees due annually.
Delaware was the first state to permit the use of series LLCs, adding a provision regarding series LLCs to the Delaware Limited Liability Company Act in 1996. (Del. Code Ann. tit. 6 § 18-201 et seq.) Since then seven other states – Illinois (805 Ill. Comp. Stat. Ann. § 180/37-40), Iowa (Iowa Code § 490A.305), Nevada (Nev. Rev. Stat. Ann. § 86.296), Oklahoma (Okla. Stat. tit. 18 § 2054.4), Tennessee (Tenn. Code Ann. § 48-249-309), Utah (Utah Code Ann. § 48-2c-606) and most recently, Texas (Tex. Bus. Orgs. Code 101.601) – have followed suit. With the exception of Illinois (which has more extensive procedural requirements and, more importantly, explicitly imparts separate legal status to each series of the entity), the other states’ statutes closely resemble that of Delaware.
Section 18-215 of the Delaware Limited Liability Company Act permits an LLC to establish one or more series of members, managers, LLC interests or assets and provides that any such series may have separate rights, powers or duties with respect to specified property or obligations of the LLC or profits and losses associated with the specified property or obligations. Each series can even have a separate business purpose or investment object. The statutory provision further provides that the debts, liabilities and expenses existing with respect to a particular series are enforceable only against the assets of such series and not against the assets of the LLC generally or any other series of the LLC. The same holds true with respect to the debts, liabilities and expenses existing with respect to the LLC generally as it relates to the company’s individual series.
Maryland law does not provide for series LLCs. Maryland is not alone in this regard. As mentioned, there are seven states that have adopted series LLC provisions, but that leaves 43 states that have not. Further, the drafters of the Revised Uniform Limited Liability Company Act (RULLCA) have declined to include a series LLC provision in RULLCA.
As with corporations, Maryland businesses are free to organize under Delaware law and take advantage of this relatively new entity form. However, a practitioner should be wary; there are risks and uncertainties associated with this strategy.
One of the primary risks rests in the very fact the Maryland Limited Liability Company Act (See Md. Code Ann., Corps. & Ass’ns § 4A-101 et seq.) does not include a series LLC provision. As with the early days of the LLC when not all states had adopted LLC Acts, there was some question as to whether a state without an LLC Act would recognize the entity type and thus enforce the limited liability shield of an LLC. With the series LLC, the question becomes: will Maryland courts recognize the internal limited liability shield both between the separate series and between the series and the LLC as a whole? The answer is important as it relates to the ability of creditors to proceed against the assets of another series or of the LLC as a whole. It also has bankruptcy law implications – can one series go through bankruptcy without affecting the company itself or the other series?
One could quickly point to the internal affairs doctrine – the legal concept that courts will apply the law of the state of formation as to the internal affairs of the entity Restatement (Second) of Conflict of Laws § 302(1) (1971). But what of those actors who are not part of the internal structure of the entity? With respect to series LLCs, some have argued that the internal affairs doctrine applies just as its name implies – internally. In other words, courts will apply the law of the state of formation when it comes to issues arising with respect to the relationship among the entity itself and its officers, directors and stockholders/members but not necessarily to an entity’s relationship with parties outside the organization, such as creditors. However, some state statutes require a statement in the articles of organization that liabilities of a series are limited to the assets of that series, putting creditors on notice as to the limited liability of a series. Thus, the questions remain, and it is those questions, as well as uncertainty as to the federal and tax treatment of the series LLC, that cause some practitioners to eschew the series LLC and continue to opt for a LLC holding company structure.
As in other cases where uncertainties in law exist, one looks to analogous forms that may shed some light. Although Maryland has not adopted a provision providing for the series structure for LLCs, there is some precedent for this configuration. Open-end investment companies, or mutual funds, organized under the Maryland General Corporation Law have long employed a similar organization. In the case of mutual funds, a master fund is incorporated under Maryland law. The authorized capital stock of the corporation is then classified into one or more series, generally designated as portfolios or funds, which can be further divided into different classes of stock. At the series level, assets (and the income, earnings and profits thereon) and liabilities attributable to such assets are held separately by the separate series. Dividends and distributions on the assets belonging to a class are distributed only to the holders of shares of that particular series. Similarly, upon liquidation of a portfolio, the proceeds are again distributed only to the holders of the series. To the extent that assets or liabilities are not readily identifiable as an asset or liability belonging to a series, the charters of these master funds authorize the Board of Directors to allocate such assets and liabilities among any one or more of any series in such manner as the Board of Directors deems appropriate. This would seem to be a good starting point from which to work through Maryland’s treatment of a foreign series LLC.
Unfortunately, the efficacy of this series structure as it relates to mutual funds has also never been tested in the Maryland courts or elsewhere, so the uncertainties still remain. Series LLCs are an interesting development and can be a useful and economical tool to segregate different projects or assets within one entity. However, before venturing into this area, one must be cognizant of the risks inherent in relying on this relatively new development in business law. Further, if not currently interested in using a series LLC, one should continue to follow the progress of the law regarding series LLC. If the uncertainties that surround the entity are eventually resolved, the series LLC may be the next “it” entity.