Delaware Series LLC

What Is A Series Limited Liability Company?

Many corporations own and operate more than one business, and likewise, many individual real estate investors own multiple properties legally titled under a single name or business entity.  A problem with “single-pot” ownership of multiple businesses or property is that any legal liability relating to one business or property jeopardizes all other assets. Therefore, most owners of related businesses and real estate investors with several properties seek to separate ownership so that lawsuits against one business or one property will not jeopardize the owner’s other investments.  Traditionally, liability segregation meant setting up new and different business entities to own each business or each property.  As businesses grow, multiple entity ownership can become complicated and expensive.

The Delaware legislature created a new type of legal entity which aims to solve this planning problem by permitting a single limited liability company to own multiple subsidiary limited liability companies each of which owns a single-asset business.  This new entity is called “The Delaware Series LLC. Although a Series LLC must be created in Delaware, it can register to do business or own property in any other state.  This innovative concept allows one LLC to establish separate series, or units, under the same LLC umbrella.  Each unit of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members.  A Series LLC pays one filing fee and files one income tax return each year.

Under Delaware statutes, liability incurred by one unit does not cross over and jeopardize assets titled in other subsidiary units of the same Series LLC.  Although the same liability isolation can be achieved in any state with multiple entities, the Delaware Series LLC, in theory, offers superior and more economical asset protection under a single roof.

Benefits Of Delaware Series LLC

There are several practical applications for a Delaware Series LLC.  One such use is ownership of multiple parcels of real property in separate series within a Delaware Series LLC.  This is less expensive then creating, filing, and maintaining several different LLCs to segregate property ownership.  Second, an operating business could benefit from a Delaware Series LLC if the business owns real estate used in its operations.  If the business were formed or merged into a Delaware Series LLC, one series could own the real estate and a different series could operate the business.  Liability incurred by the business operations, in theory, would not jeopardize the real estate.  In addition, there should be no sales tax due on rent paid by the operating series to the real estate series.  Another possible benefit of a Delaware Series LLC is the ability to transfer assets among related businesses without income tax on built-in gain or liability for real estate transfer taxes.

Given the protection possibilities and planning flexibility provided by Delaware’s Series LLC statutes, one might expect to see Florida’s business landscape covered with innumerable Delaware Series LLCs registered to do business in Florida.  Yet, Delaware Series LLCs remain relatively uncommon in Florida and other states.  There are two principle reasons for this incongruity. The first reason is uncertainty about how a Delaware Series LLC will be taxed for federal income tax purposes.  A recent article by the prestigious and widely-followed BNA Tax Management Service, Tax Management Memorandum, Vol 45, No. 4, February 23, 2004, concluded that the lack of clear federal tax standards for a Series LLC with multiple members restricts adoption of this potentially useful business entity.  The second reason is that the asset protection and planning advantages of the Series LLC are only theoretical, and unproven, in actual asset protection combat.  No Florida state court and no Florida bankruptcy court has yet examined the asset protection effectiveness of a Delaware Series LLC.  Therefore, business people, investors, and advisers should proceed cautiously before relying on this new device to protect their wealth from creditors pending further court interpretation.

Formalities

Each Series or “cell” in a Delaware Series LLC is supposed to be treated as a separate entity. This means that each Series should have separate meetings, minutes and resolutions of action. Each Series should maintain distinct financial books of accounts. Failure to segregate the books and records of each Series may give a creditor grounds to pierce the veil of the Series or the entire LLC.

 

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.