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Comparison of LLC Statutes

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Series Availability: The Latest Option

Another interesting difference among LLC statutes is the availability of series LLC.  This relatively new concept is said to have its origin in offshore financial institutions as a way of allocating assets and risks among a series of companies.  Series LLC offers numerous advantages, which include flexible structure, greater protection against liability, and lower filing fee and administrative burdens, but is also fraught with uncertainty, particularly with respect to its treatment under federal bankruptcy law and the laws of states that do not recognize series LLCs.  In 1996, Delaware became the first state that passed a series LLC law under the Delaware Limited Liability Company Act, followed by a dozen other states.

In Delaware, a series LLC is formed by establishing one or more designated series of members, managers, LLC interests, or assets, and allocating separate rights, powers, or duties with respect to specific property or obligations of the LLC among the series, as well as a separate business purpose or investment objective.[1]  Each series has the capacity to contract, hold title to assets, and sue and be sued, in its own name, unless otherwise provided in the LLC agreement, which allows each series to operate independently.[2]  Importantly, the main advantage of series LLC is the limitation of liability, i.e., the debts and liabilities of one particular series are enforceable only against the assets of that series, and not against the assets of any other series or the LLC itself, as long as certain conditions are met (e.g., notice of limitation of liability, separate records, a method to account for the assets of each series, etc.).[3]  This liability shield may be particularly useful to entities that own multiple properties (e.g., real estate investors) and want to segregate their liabilities without having to form multiple LLC with the attendant costs and inconvenience.

Likewise, in Texas, a series LLC can be formed in the same manner,[4] with substantially the same characteristics, power, capacity, and liability shield.[5]  Unlike Delaware law, however, Texas law expressly provides that a series is not a separate entity.[6]  (Note: This is not to say that Delaware law treats each series as a separate legal entity; rather, the law is silent on this point, which, to date, is an open issue.)  Texas has provided further guidance, in the context of state tax filing, that a series of an LLC is not separately identified as a taxable entity under the state’s tax code and, thus, an LLC that has series as part of a structure must file as a whole LLC with a single tax report.[7]

Notably, New York has not adopted a series LLC statute.  This is not surprising given the relative novelty and a great deal of uncertainty surrounding the treatment of series LLCs under federal and state laws.  As series LLCs gain popularity and prompt more guidance from regulatory authorities and courts, New York may soon jump on the bandwagon to become another state that recognizes series LLCs, but until then, you may have to look elsewhere if you are considering a series LLC for your next business entity.

An interesting, and largely untested question, is how an LLC with series can or would transact business in a state that doesn’t recognize series.  For instance how would a series of a Delaware LLC do business in New York when New York law does not expressly recognize series?  It is an open question leaving an uncertainty for businesses.

This post was a part of a multi-post blog series on comparison of LLC statutes.  You can find the other posts by searching our blogs.  In our next post, we will discuss the court systems in these states.

 

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C. which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258.

[1] Del. Code Ann. tit. 6, § 18-215(a).

[2] Id. § 18-215(c).

[3] Id. § 18-215(b).

[4] Tex. Bus. Org. Code § 101.601.

[5] Id. §§ 101.605—06.

[6] Id. § 101.622 (emphasis added).

[7] Tex. Comptroller of Pub. Accounts, Letter Ruling 201005184L (May 5, 2010).

Facebooktwittergoogle_pluslinkedinmailAbout the Author Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email or call (214) 418-0258.

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