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Series LLC's

By John Dietz - Email Editor

Date: Aug 29, 2006

The basis of Asset Protection has always been to separate liability generating assets. The idea, of course, is that a lawsuit filed against one entity should not affect any other unrelated asset. Today, most entrepreneurs have at least a business and some property outside their personal residence. The difficulty with titling these assets has always been the expense, administration and complexity. For example, if you own ten properties, you would typically have ten separate LLCs.

A possible solution is the Series LLC. Delaware is the first to adopt such legislation with some other states following their lead. The Delaware act allows for the creation of multiple cells within one LLC umbrella. Each cell or unit can have its own business purpose, its own separate assets, and can have multiple managers and members.

Under the Delaware statute, liability incurred by one cell will not affect the assets in another cell within the LLC umbrella. The Delaware statue is very clear; unfortunately, there is no history or case law to back up the statute. In essence, no one can say with any degree of certainty what will happen at the trial level. Time will tell how these entities will hold up under scrutiny.

The practical application for using the Series LLC is holding multiple properties in liability properties within these liability segregated cells. It gets more appealing if you happen to be in a state with expensive franchise tax. Rather than have separate filing and applicable franchise tax fees, there should only be one filing with the respective state's secretary of state.

Where the Series provisions may breakdown is qualifying to do business in a state that does not offer the Series LLC. Choosing a Delaware series LLC while functioning in another non-series state can be perplexing. For example, there is no reason to believe that a non-series state would uphold legislation that they never agreed to in the first place. While you could make a case that disputes between members inside the Series LLC would be upheld in most states, the series provisions are highly unlikely to work with regards to outside creditors. The only light at the end of the tunnel is that most states are considering adding the series LLC to their statute.

Before we go on record dismissing this Series LLC as too much of an adolescent to be taken seriously, let's consider one possibility. Take the case of multiple properties. We know that each property should be in its own bucket; we know that multiple LLCs can be costly; and we know that it is impossible to predict with any certainty the outcome of a lawsuit. Having said all of that, the Series LLC will make inroads where it makes most sense, and multiple real properties are where it makes most sense.

If your situation warranted the possible use of the Series LLC today, the only way I would consider it is if the real properties were property equity striped and any resulting cash put in a well crafted complete Asset Protection Plan.

So, in the end for us, it's a wait and see attitude. We will keep you posted about this possibly very viable product.

Until next time,

John

 

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