Delaware is the only state that provides for the Series LLC

The Limited Liability Company (LLC) has fast become the business entity of choice in the U.S. The LLC allows business owners to achieve limited liability for debts of the business while being taxed on a relatively unrestricted pass through basis.

The Delaware Series LLC Act provides for the creation of separate “series” within an LLC whose debts and other liabilities are enforceable against that Series alone. The Act also provides that classes or groups of members can be established, having whatever rights the LLC agreement says they have. The combination of the two provisions allows a Series to be treated in many ways as a separate LLC. Thus, the Series provisions in the Delaware LLC Act allow for the creation of separate protected “cells” within one limited liability “container” without the need to create separate entities, thus avoiding the inefficiencies associated with multiple related entities. The concept is similar in function to the segregated portfolio companies and protected cell companies designed for the mutual fund and captive insurance industries in Bermuda, Guernsey, the Cayman Islands, Mauritius and Belize.

The Act allows an LLC agreement to designate Series of members, managers or LLC interests that have separate rights and duties with respect to specific LLC property or obligations. So, each Series can be tied to specific assets and can also have different members and managers. If the various Series within an LLC have different members or different membership rights, each Series may be treated as a separate LLC for income tax purposes, eliminating some of the administrative advantage of the Series LLC.

Each Series can have its own separate business purposes. A Series can be terminated without affecting the other Series of the LLC. A Series can make distributions to its own members without regard to the financial condition of the other series.

Most importantly, the Act provides that debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular Series are enforceable against that Series only, and not against the assets of the LLC generally or any other Series of the LLC. However, to obtain this protection, each Series must be treated separately. Books and records must be kept for each Series and the assets of each Series must be held and accounted for separately. Finally, in order that the public knows that it is dealing with a Series LLC, it must be put on notice by the inclusion of the Series imitations in the LLC’s Certificate of Formation filed with the Delaware Secretary of State.

Benefits of Filing a Limited Liability Company

The LLC provides protection to its owners for debts unrelated to the business in that LLC property and LLC interests themselves generally cannot be directly seized or attached by creditors of debtor members. Instead, such creditors are limited to a “charging order” issued by a court requiring the LLC to divert payments to the debtor member to the creditor.

However, the charging order does not provide the creditor with voting rights, such as the right to vote for a distribution. If no distributions are made to the debtor member, neither are distributions made to the creditor. Furthermore, in some cases, the creditor may be taxable on the debtor member’s share of LLC income, whether he receives a distribution or not. Thus the charging order is not a particularly attractive remedy for a creditor.

Segregating “dangerous” assets and businesses into separate entities away from other assets, especially “safe” assets, is always a good idea from an asset protection point of view. For example, an individual who owns a gas station and a rental home shouldn’t own both within the same entity. Neither should an individual with a large amount of liquid assets (cash, securities, etc.) to protect hold the cash in the same entity as a business.

Best practices would dictate that every distinct business or major business asset be segregated into a different limited liability entity. In an ideal situation, someone with 25 rental properties would have 25 separate LLCs, one for each property. However, this isn’t always practical because of administrative costs and government fees that must be paid for each LLC. What can such a business owner do to protect his assets from liabilities unrelated to those assets in a cost-effective way?

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