Sometimes you see the term “series LLC” floating around. Recently a lawyer asked me what a series LLC is, so the uncertainty pervades even among experts. The answer isn’t easy; it’s a nebulous concept.
The idea of a series is that you have separate groupings of assets and liabilities within a limited liability company, almost like mini-cells of a company within the LLC. A series can also be applied to trusts or other legal entities. But they’re challenging because it’s hard to conceptualize how you have a legal entity with separate groupings of assets and liabilities within it. Each state has its own way to treat a series LLC. There is no national norm for what a series is.
Most provisions of LLC law have become somewhat similar across the United States. Same with corporation law. Series are not being used, and they haven’t been widely adopted. Why, might you ask, are series not being used? They sound great — an easy way to set up different groups of assets and liabilities, and protect the business owner’s assets. The problem is people are uncertain how a court would handle a series. What would happen in the event of a bankruptcy of a series? How will a series be treated across state lines? These are open legal questions, and very few of the sophisticated parties doing entity formation and structuring want to be the test case that determines which side of the ledger things fall.
There’s a very open issue under federal bankruptcy law. It’s unclear whether a series would be treated as a filer under federal bankruptcy law. Therefore, you might have a separate grouping of assets and liabilities for state law. The federal bankruptcy court may not respect that separate grouping of assets and liability, which kind of defeats the whole purpose of having a series. They’re a great concept developed under state law, but they’ve been under-utilized because of these risks.
What’s your experience? Have you used a series LLC? Have you seen others use them? Join us in the comments below.
Each case is unique. Past results do not guarantee future outcomes. This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. FreeImages.com Photographer Ulrik De Wachter.
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