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Series LLCs: Are They for Your Business? – Part III

Part I and part II of this article introduced us to protected Series LLCs, a relatively new and possibly appealing brand of business entity currently available under enabling statutes adopted in eighteen States, the District of Columbia, and Puerto Rico. The enabling statutes in fourteen states, including Delaware, which was the first state to recognize protected Series LLCs, were adopted prior to the release of the Uniform Protected Series LLC Act (the “Uniform Act”) promulgated by NCCUSL and contain diverse statutory requirements.  Only four of the states, including the Commonwealth of Virginia, have adopted the Uniform Act which provides a broad level of uniformity among Series LLC enabling statutes.

Many states’ Series LLC enabling statutes were adopted independently from the state’s existing traditional LLC enabling statute, as an “add-on,” sometimes without regard to many of the nuances in the framework of the existing LLC statute.  The existing LLC statutes did not contemplate Series LLCs and are not completely receptive to those nuances.  However, in the absence of a limitation in the existing LLC statute, the general rules of that statute may be expected to apply to a Series LLC as well as traditional LLCs.  But, although many of the general rules of the existing LLC statute will accommodate Series LLCs, it is often not clear how or whether such provisions dovetail with the idiosyncrasies of the Series LLC.

For example, after the amendment of an existing LLC statute to recognize Series LLCs, even if a Series LLC can merge, convert or engage in an interest exchange under its enabling statute, it may not be clear what becomes of the series (this term refers to one or more protected series under the parent Series LLC) and the rights of the associated members of the series. It may not be clear whether a merger into a traditional LLC, which terminates the Series LLC, would terminate all the series or the protected rights of the associated members of the series. If the Series LLC is liquidated, its series will also liquidate since the Series LLC no longer exists and the associated members of each series under the Series LLC will receive the assets of that series.  But otherwise, the general rules of the existing LLC enabling statute may leave open questions about protections of associated members of the series when there is more than one as well as when there are multiple members of the series.

The uncertainty surrounding issues arising with an existing traditional LLC statute being amended to recognize protected serial LLCs would not be as prevalent with Series LLCs created in states adopting the Uniform Act as a complete self-sufficient enabling statute.  In any event, drafting the organization documents of any Series LLC is more complex than is required with a traditional LLC. The LLC agreement  (the operating agreement of the Series LLC) should address those situations where there may be conflicts with the state’s existing traditional LLC statute and diverse statutes of states where the Series LLC may qualify to do business as well as states without a Series LLC statute.  In addition, there are other legal areas to consider in organizing and operating Series LLCs, including:

1. Tax Treatment:

Part II of this Article briefly addressed the Proposed Series LLC Regulations published September 2010 (Reg-119921-09) that settled uncertainty in the treatment of Series LLCs and their series for federal income tax purposes.  Under the Proposed Regulations (which remain in effect), Series LLCs are considered tax reporting entities with respect to assets, liabilities, and all business activity other than the activity of its series with an associated member other than the Series LLC. Each series of the Series LLC with multiple associated members is considered a separate income tax reporting entity with respect to its assets, obligations, and activities, and each associated member of a series is considered an owner of the series.

Federal tax classification under the Proposed Regulations follows normal tax classification rules. The “check the box” rules apply.  Multi-member Series LLCs and each series with multiple associated members is treated as a partnership unless it elects to be treated as an association taxable as a corporation.  A single-member Series LLC and each series with only one associated member is treated as a disregarded entity for federal income tax purposes unless it elects to be treated as an association taxable as a corporation. The general income tax rule of states other than Texas is to follow the Proposed Regulations. Texas treats the Series LLC and its series as a single tax entity.

However, the employment tax treatment of Series LLCs and their series is unsettled and there are other state tax differences that will apply and challenge tax planners when representing Series LLCs.

2. Lenders’ Concerns:

Lenders have expressed concerns that series organized under Series LLCs in many states do not meet the definition of “debtor” under UCC Article 9 as adopted in many states. There is also concern that, even if a Series LLC and its series are “entities” under federal income tax law, some states permit assets held by the Series LLC or series to be held in various ways.  Delaware, for instance, permits assets to be held either in the name of the Series LLC, in its series, by a nominee or otherwise.  Even if series have the power to sue and be sued and may be viewed as legal entities under the enabling legislation of their state of organization, such series may not be viewed as legal entities in states that have not adopted Series LLC legislation expressly permitting the same powers.

It is uncertain whether series would be treated as legal entities with the power to sue and be sued in most jurisdictions that have not adopted Series LLC enabling statutes or other legislation expressly permitting series to sue or be sued. Lenders and other plaintiffs may have to sue the parent Series LLC.  Even among the states with Series LLC enabling statutes, some provide that the election may be made under the articles of organization of the Series LLC that the series must be treated as a separate entity “to the extent stated”, but do not clarify whether they would be treated as a separate entity for all legal purposes or only as expressly stated.  Other states’ Series LLC enabling statutes do not provide the election in the articles of organization to treat series as entities.  Many of the statutes that give the series power to contract and to sue and be sued in their own name imply that the series are legal entities, but there is much room for argument which leads lenders to be concerned about the effect of their UCC Article 9 filings securing their loans.

3. Bankruptcy

There has been uncertainty whether a series under a Series LLC constitutes a “person” under the Bankruptcy Code eligible to file a bankruptcy petition. A “person” under the Bankruptcy Code includes an individual, partnership, or corporation. LLCs have been determined to be similar to both corporations and partnerships and, thus, are  “persons” eligible to file bankruptcy petitions since the Bankruptcy Code definition is not considered to be exclusive.  However, it is still uncertain in states with Series LLC statutes, particularly those limiting only capital of associated members as exposed to debts of the series, whether a series would be recognized by a bankruptcy court as eligible to file a bankruptcy petition or if only the Series LLC may do so.

Another issue is whether the bankruptcy court may consolidate assets of series with those of a Series LLC in the estate of a Series LLC or a series applying the doctrine of substantive consolidation.  That determination may depend on whether the Series LLC itself is not the sole or controlling member associated with the series.  It is more likely that assets will not be consolidated if there is an association of the members of the Series LLC with the series. The determination may also depend on if the Series LLC statute does not require public notice afforded by filing articles of organization for series, such as is the case with Delaware.  Another determining factor may be whether the Series LLC and series do not maintain separate company records or if assets are shared.

The Series LLC statute of each state must be analyzed to determine if bankruptcy courts are likely to entertain a petition filed by a series independent of the Series LLC or if the series’ assets may be swept up in the bankruptcy of its Series LLC.

4. Internal Liability Shields:

The internal liability shields of Series LLCs established under statutes adopting their enabling statutes in the form of the  Uniform Act are less likely to disregarded.  Some states’ statutes are not entirely clear in establishing that only unassociated assets are subject to claims against the Series LLC or its series.  This becomes more of an issue where a series does business outside the state of organization, especially if such other state does not have an  LLC statute.

As stated above, only sixteen states, the District of Columbia and Puerto Rico have adopted Series LLC statutes, largely in different forms. Series LLCs and their series engaged in multistate businesses must be diligent in determining whether enforcement of their internal liability shields are at risk of being ignored.  Although the law clearly provides multistate liability shields for corporations, the applicable law has not yet been extended to Series LLCs.  It cannot be assumed that a state’s LLC enabling statute will provide the same internal shield protection for another state’s Series LLC that is enjoyed under that state’s enabling statute.  This is particularly true if the Series LLC’s enabling statute, such as Delaware’s statute, does not have specific public filing requirements with respect to series.  The risk for a Series LLC or its series losing its internal liability shield doing business in another state decreases if it’s enabling statute emulates the Series LLC statue of a state in which it qualifies to do business, or if such other state has a statute that expressly recognizes the internal liability shields of Series LLCs and series of other states.

The foregoing discussion is a simplistic effort to explain issues that cannot be detailed in this Article.  Suffice it to say until more states adopt Series LLC statutes and the law governing Series LLCs and their series evolves, it is necessary to be vigilant in having such entities engage in cross border business.  When drafting organizational documents for a Series LCC and series it is prudent to include in the Articles of Organization or Operating Agreement, depending on the applicable statute and desire that the provisions not be amended or deleted, the prohibition against doing business in other states or the requirement for a supermajority vote of owners to approve the decision.  At the same time, if ownership of the Series LLC and its series is in the same hands and the same proportion, the application of the law of other states may not generate a different outcome.

Part IV of this Article will examine the new Virginia Series LLC enabling statute which goes into effect this month.

If you have any questions about Series LLCs, please reach out to Tom Hicks at or 703.745.1846.


C. Thomas (“Tom”) Hicks III has more than 35 years business law practice experience in Northern Virginia. Mr. Hicks represents business clients in all their legal needs, working with the management team as outside general counsel, and otherwise coordinating the company’s general legal needs. Mr. Hicks assists the organizers with choice of business entity and organization, initial and private equity financing and debt financing. He advises the management team regarding corporate governance, executive employment and compensation matters, contract matters, business acquisitions, equity and asset sales and merger, and business breakups and dissolutions of business entities, among other legal areas.  He also advises business executives and companies regarding stock and other equity benefit plans, and wealth planning and asset protection. Mr. Hicks has advised commercial real estate developers in all legal aspects of their business.






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