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December 22, 2011

What is a Series Limited Liability Company?
By: Julie C. Panaro, Esquire

We are sometimes asked about “series limited liability companies” and their use and application in Delaware real estate transactions. Individuals asking about this structure typically own one or more businesses that own real estate or own investment properties. Sometimes, these individuals are seeking to simplify their bookkeeping or solve the problem of multiple entities and the corresponding franchise taxes and filing fees that apply to those separate entities.

The concept of a series within an entity structure originated in the Delaware Business (now Statutory) Trust Act. The idea was grafted into Delaware LLCs in 1996. The series components of the LLC Act permit a “series”, or separation, of members, managers, LLC interests and assets. Specifically, the Act provides: “Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligation, and any such series may have a separate business purpose or investment objective.”

The Act permits a series to carry on business for any lawful purpose, whether or not for profit, except for banking. The Act permits a series to have the power and capacity to contract, hold title to assets (including real, personal and intangible property), grant liens and security interests and sue and be sued. Further, the series LLC structure may provide for classes or groups of members or managers associated with a series to have varying provisions for rights, powers and duties. The LLC may even reserve the right to create future series within the LLC. A series may be wound up and terminated without causing a dissolution of the LLC.

In essence, the Act enables the LLC to operate as if it had separate subsidiaries or units within itself. Theoretically, if properly established, the LLC could create innumerable numbers of series within the single company, and have various assets owned by various individuals or entities within each series, creating separate asset pools and liability structures.

In order to create a series LLC, the following requirements must be met: (1) the LLC agreement must provide for the creation of the series or right to create series in the future, (2) there must be a separation of records maintained for the assets of the series, (3) the certificate of formation must include notice of the series or right to create series. If these elements, as well as other criteria set forth in the Act, are met, then “none of the debts, liabilities, obligations and expenses incurred, contracted for, or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series.”

While the concept of Delaware series LLCs is appealing, especially for the individual who owns multiple investment properties, the reality is that conservative Delaware real estate lawyers have not used series LLCs for real property investments. Why? Because what is unknown is how Delaware courts respect the creation and separation of series LLCs, particularly with real estate. Typically, series LLCs have been used in highly structured financings or for aircraft carrier ownership; it has not been used in real estate. Specifically, an area of concern is in the event of an environmental hazard on a property owned by a series within a LLC that owns other real property assets, where the assets of the series that owns the contaminated property are inadequate to pay for the costs of clean-up. Whether a court will respect the series or look at the LLCs assets as a whole notwithstanding the attempt to create separateness is not a risk most large businesses are willing to assume. Therefore, at least currently, maintaining separate LLCs for different real estate investments will remain the trend until the Delaware courts have an opportunity to hear a case relating to series LLCs and lawyers can advise their clients with greater certainty as to the treatment of series LLCs in Delaware. Although series LLCs can be used and created to hold real estate assets, it is as yet an untested model in Delaware.

For more information about entity structures or for help with your next real estate transaction, please contact The Kirsh Law Firm at either Newark, DE (302) 454-1510 or North East, MD (410) 287-1510. We look forward to the opportunity to be of service to you.

Copyright © 2011 The Kirsh Law Firm.  All rights reserved.

 

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