Under Delaware law, a limited liability company (LLC) may be composed of individual series of membership interests. This type of entity is referred to as a series LLC. Each series is effectively treated as a separate entity, meaning the debts, liabilities, obligations and expenses of one series cannot be enforced against another series of the LLC, or against the overall LLC itself. Each series can hold its own assets, have its own members, conduct its own operations and pursue different business objectives, yet they remain insulated from claims of members, creditors or litigants pursuing the assets of, or asserting claims against, another series.
In that post we discussed the primary drawback of using the Series LLC: the lack of certainty surrounding whether courts in other states and jurisdictions would recognize a legal separation of assets and liabilities within what is technically a single entity. As we discussed, even though the legal segregation of the series is set forth expressly by statute in Delaware, no court has ever been called upon to rule on the validity of the legal segregation of assets within a Series LLC or articulated the circumstances under which a court would ignore the distinction among series.
Many of you have reached out to us and inquired whether the courts or legislature have provided any guidance or clarification on some of the issues surrounding the Series LLC. Unfortunately, there have been no significant developments that alleviate the concern we expressed in the May post.
California has arguably supported the notion that each series of a Series LLC is a separate entity; the California Franchise Tax Board ruled that each Series of the Delaware LLC is responsible for the $800 annual California franchise tax. Although this is not welcome news for our California clients that employ the Series LLC structure, it supports the concept that each series should be considered a distinct entity. Other states are expected to follow the same path as California and charge an annual fee on a per series basis.
Additionally, the U.S. federal tax treatment afforded to individual series is still not certain. For now, it appears the series of a Series LLC will generally each be taxed as a separate entity for federal income tax purposes.
For now, despite the theoretical savings in franchise taxes, Registered Agent fees and other costs, the Series LLC form is still a work in progress. Regulators, attorneys and accountants are all grappling with issues raised by the possibility of legal segregation of assets and liabilities within a single entity. Given this, while the Series LLC shows great promise and segregated cell companies are gaining in popularity and acceptance outside the U.S., typically most of our clients tend to use the safer alternative of creating separate entities for each venture.