The first three parts of this Article introduced Serial LLCs – a relatively new form of business entity structured to operate multiple businesses in subordinate “protected series” (sometimes “protected series” or “series”) with the ability to partition ownership of assets and exposure to liabilities among the Series LLC and its single or various protected series to achieve the primary purposes of (1) creating separate series as entities between or among which liability shields can exist to protect the parent Series LLC and each protected series and their respective assets, members and managers from exposure to liability from the others, and (2) to minimize legal, accounting, and recording fees that might otherwise accrue when creating separate single or multi-member LLCs underneath a parent LLC. Parts I, II, and III were attempts to briefly describe how Series LLCs work, how they are the same and differ in essential respects from state to state, and to address the challenges still facing Series LLCs before they gain universal utility. This Part IV introduces the new Virginia Uniform Protected Series Act (the “Virginia Act”) which is effective July 1, 2020.
As mentioned in the earlier parts of this Article, the new Virginia statute embraces the approach to organizing and operating Series LLCs set forth in the Uniform Protected Series Act (the “Uniform Act”) promulgated by NCUSSL in 2017. It is one of four Series LLC Uniform Act statutes among those Series LLC statutes adopted by eighteen states, the District of Columbia and Puerto Rico.
Prior to the promulgation of the Uniform Act, the statutes that had been adopted varied in many respects generally discussed in Part II, including sharing some fundamental requirements, and containing many differences which may be significant, requiring that the applicable state statute be thoroughly studied, and distinctions understood and regarded lest the Series LLC and its protected series not enjoy the intended benefits afforded by the enabling statute if the Series LLC deviates from the requirements of the statute.
Parts II and III generally discussed common difficulties in employing Series LLCs due to statutory language not dovetailing with existing LLC statutes regarding some organizational and operational issues, or lacking clarity regarding the application of certain provisions of the state’s Series LLC statute, particularly in the context of Series LLCs and their protected series doing business in the majority of states which have not adopted Series LLC statutes or have adopted statutes with different organizational and operational provisions.
The Virginia Act, by incorporating aspects of the Unified Act intended to settle concerns with whether a protected series is a “person” for purposes of the UCC Article 9 and the Bankruptcy Code and to establish clear internal liability shields among assets and members, is much less restricted by the uncertainty generated by Series LLC enabling statutes of the early adopters of Series LLCs.
The Virginia Act was adopted as new Article 16 of Chapter 12 of Title 13.1 of the Virginia Code. It is, therefore, part of the existing Virginia Limited Liability Company Act, which was the intention of drafters of the Unified Act. The Virginia Act is a comprehensive and detailed effort to blend the new Series LLC Article 16 with the provisions of the existing Virginia LLC Act. This is evident throughout the Virginia Act, particularly in cross-referencing many provisions of the existing Virginia LLC Act.
There are rules set forth in the Virginia Act which govern how the provisions of the existing Virginia LLC Act should be applied to address matters that are not addressed in the operating agreement of a Series LLC if the matter is expressly permitted but not otherwise addressed by the Virginia Act. The Virginia Act also relies generally on defined terms in the existing Virginia LLC Act to cover terms used in the Virginia Act.
The organization of protected series of a Series LLC is accomplished by filing a statement of protected series designation with the Virginia State Corporation Commission. The statement and any amendment to the statement of protected series must be approved by all members of the Series LLC. The Registered Agent and Registered Office of the Series LLC also serve all protected series under the Series LLC. In the event one or more protected series are to be manager-managed, they may appoint the manager, or the Series LLC may appoint its manager, to serve as manager of the protected series. In the event a protected series has no associated members, the Series LLC will be the manager of the protected series.
Governance of a Series LLC is largely dependent on a comprehensive operating agreement, which is a must if a Series LLC is to be employed. The protected series of a Series LLC may but need not have separate operating agreements that address unique elements of ownership and management. Although it may make for a long and complicated document for the Series LLC’s operating agreement to address disparate arrangements within each protected series, it may be a more efficient management tool.
As discussed in Part II, the income tax status of the Series LLC and each protected series as partnerships, corporations and/or disregarded single-member LLCs would be determined under the “check-the-box” regulations, which permits a parent Series LLC and each of its protected series to elect independent status for federal income tax purposes.
The Series LLC may be the sole member of its protected series or may have multiple members which may be associated members of the protected series in different percentages of ownership if desired. The Virginia Act states clearly that a protected series is a person distinct from the parent Series LLC, any other protected series LLC, any member of the Series LLC, any protected assignee of a series, or any assignee of a membership interest in the Series LLC. The protected series of a Series LLC:
- has the capacity to sue and be sued each in its own name;
- has the same power and purpose as its Series LLC except that
- the protected series ceases to exist when the Series LLC ceases to exist;
- the protected series may not be a member of the Series LLC and may not establish its own protected series; and
- the protected series generally may not have any purpose or power that the law of Virginia prohibits a limited liability company from doing or having.
The assets of the Series LLC and its protected series can be separated and identified as separate assets by the Series LLC and use of protected series names with the addition of either “protected series”, “PS” or “P.S”. The assets can be owned by the members associated with the assets of a protected series in the name of the Series LLC, the associated members, the protected series, nominees, or others. In order to leave no doubt regarding the ownership of associated assets of protected series, the Virginia Act establishes stringent recordkeeping rules for assets and the associated members. The recordkeeping is required to be detailed and comprehensive and to be continuously and meticulously maintained in order to preserve the internal liability shields among the Series LLC and protected series. If the recordkeeping is properly maintained a creditor of a protected series or a particularly associated asset will be unable to pursue a claim against the Series LLC or other protected series or their associated assets.
The Virginia Act provides that Virginia law governs the internal affairs of a Series LLC and each protected series, including procedures and conditions for becoming an associated member or protected series assignee. It also governs the relationships between and among the Series LLC, members of the Series LLC, any protected series, any protected associated members, any protected series manager, and any protected series assignee. It also governs the rights and duties of a protected series manager and the activities and affairs of a protected series.
The Virginia Act specifically provides that it governs the liability of a person for a debt, obligation, or other liability of a protected series of a Series LLC if the debt, obligation, or liability is asserted solely by reason of the person being or acting in a capacity related to the Series LLC or protected series Finally, it specifically provides that it governs the liability of a protected series for a debt to a Series LLC for a debt obligation or other liability of the Series LLC or of another protected series of the Series LLC if the debt, obligation, or liability is asserted solely by reason of being a protected series of the Series LLC or having as a protected series manager the Series LLC or another protected series or Series LLC owning a protected series membership interest of the protected series.
Under the Virginia Act, a Series LLC may be a party to a merger only with another LLC and if the surviving entity is not created by the merger. Series LLCs are not permitted by the Virginia Act to convert to a different type of entity under state law, to domesticate as a foreign LLC, or to be a party to or the surviving entity in a merger where the surviving entity is created by the merger. Protected series of a Series LLC may not merge or convert to a different type of entity under state law but may convert solely for federal income tax purposes as described above.
The Series LLC will certainly evolve as a more popular alternative form of a business entity over the years as more states adopt enabling legislation and the early-adopting states amend their statutes to emulate the Uniform Act. As stated in Part I, it will very likely be the choice for many businesses, such as real estate development, home building, professional businesses, manufacturing, distribution; investment companies, or franchise businesses, with multiple operations and related assets where multiple owners have different interests in the business or in different operations of the business and wish to simplify the legal structure and protect each business and its assets from liabilities of the others.
ABOUT TOM HICKS
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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