Series LLCs

Businesses organized as LLCs, just like with corporations, often find it advisable to form multiple LLCs to cover different lines of business to keep liabilities associated with one business isolated from the others.  However, the formation of multiple entities increases the business’s administrative costs.  For each new entity, there are filing fees and then ongoing franchise taxes with the state of organization and other states in which the company does business, separate tax returns, etc., so the business has to weigh these costs against the benefits of asset protection before making the decision to form new entities.

In 1996, Delaware attempted to obviate the administrative cost issue by permitting the formation of series LLCs.  Since then, a handful of states, though not New York, have followed suit.  The series structure is analogous to a parent company with several subsidiaries, except in this case each subsidiary (called a series) is formed by contract among the company members and does not require separate filings with the state.  In Delaware, the series LLC is formed by the filing of a Certificate of Formation, which in this case requires an additional paragraph relating to the entity’s series status, but no details about any specific series.  That’s it from the state/public filing perspective – just one filing, and you can form an unlimited number of series under the umbrella of that entity without additional filings.  The series LLC has a master operating agreement that governs all the series, and then each new series has its own series supplement that contains all the substantive terms of the series.  Each series can have different members, distribution provisions and management provisions, and should have its own bank accounts, just as would be the case with forming separate LLCs.

Despite the clear cost advantage of series LLCs over a traditional multiple-LLC structure, there has been some resistance to adoption, in part because the structure is new and untested.  It’s not completely clear that, for example, a New York court would respect the asset segregation of a Delaware series LLC, even though that’s the clear intent of the Delaware legislature.  However, the LLC form itself took a long time to become the norm for similar reasons, and I expect the series LLC to gradually gain acceptance in the same manner.