This article has been written by Pratibha Chauhan pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho)
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Limited Liability Company or LLC is a familiar term for many people, but very few know about another version of traditional Limited Liability Company which is called a Series Limited Liability Company. The Series Limited Liability Company is a complex entity that may be difficult to understand for most people and that is why it is not as familiar as an LLC. Series LLC comes with several risks and unresolved queries due to which this version of Limited Liability Company is not much in use and is only in use to a very limited extent such as in some sophisticated enterprises like investment companies and special purpose commercial entities. However, despite all the difficulties, Series LLC laws are being adopted by the governments in several states. And, with the evolution of Series LLC laws, the business community is expected to become more comfortable with the concept of Series Limited Liability Companies. Soon the practice of Series Limited Liability Companies may become the more popular option for business owners and lawyers. It is generally assumed that the Series Limited Liability Company has the potential to protect the organizations and their assets from liability and in several cases can do so without demanding much expenditure and ensures more flexibility than other business structures which comes with the liability risk like the holding company or parent-subsidiary structures. The author in this article seeks to explore the concept of Series LLC along with discussing key pointers on how to draft a Series LLC agreement.
What is a Series LLC?
The concept of Series LLC has been derived from Delaware’s statutory trust law, which found popularity, particularly with Mutual Funds. Under the statutory trust law, one investment company can be founded in the form of a trust with a separate series and each of these series could carry its own portfolio with different investor profiles, strategies and other aspects.
A series LLC consists of the Parent/Umbrella Company with one or more than one series that is constituted under the parent LLC. Each series carries some characteristics that are absolutely different from other series. Also, the assets, members, objectives and investment strategies of each series differ from others and this way each series works as a separate entity with the Series LLC. A Series LLC is subject to all the LLC law provisions as a traditional LLC but those laws are exceptions that specifically apply to the Series LLC only.
What is required to constitute a Series LLC?
Like every commercial unit, the series limited liability company also requires some factors or necessary things to be formed. These include:
- There should be a separate bank account for each series or cell which should not be merged or shared with the other cells. The cell should also be given a separate asset name, tax ID number, etc.
- If a subsidiary LLC makes a purchase in real-estate, the related deed is required to be in the name of that individual series/cell.
- The previous rule applies to any contract, notes, and loans to avoid confusion.
- Any transaction between different cells of a series LLC should be considered as they are taking place with the outside companies or entities.
- Any transaction involving loans between units of series LLC requires interest-bearing and well-organized documentation.
- Assets and operations of each series or cell are to be separate from others in the series.
- Particular assets can be owned by only one series.
- Each series must have a sufficient capital base to support its individual business operations.
What is a Series LLC Operating Agreement?
The Series LLC Operating Agreement is known as an innovative concept that unites a series of cells within one LLC. There may be several benefits that the Series LLC Operating Agreement can serve. As the law states a series limited liability company may be created using an individual series of membership interests. When this type of company is established it is called Delaware Series LLC. The several benefits of Series limited Liability Company include:
- Retention of its own assets;
- Conducts its own operations;
- Has its own members; and
- Pursuit of business objectives different from the other ‘cells’ or units.
The Series LLC is already popular in some parts of the world in the form of “segregated portfolio companies”. While constituting a Series LLC, only one-time filing fee is required to be paid, doesn’t matter how many series/cells it contains. Series LLCs are considered to be single businesses and that is why there is a requirement for only one registered agent and one annual franchise tax fee instead of paying separate fees and taxes for every unit. Constituting a Series LLC protects personal assets from debts and obligations incurred by the business.
Here we want to share some crucial information about a Series Limited Liability Company Operating Agreement. Some important characteristics are usually there in such an agreement. The aforementioned characteristics are:
- An operating agreement gets prepared that outlines the norms and rules for regulation or for governing the operation of the series LLC.
- The job of drafting the agreement is recommended to be assigned to an attorney. Also, an account is suggested to be appointed to explain the tax laws associated with a series LLC.
- Publically filing the Series LLC Operating Agreement is not a requirement.
- For adding or removing a cell or a series, the operating agreement is required to be amended and this can be done whenever it is needed. Also, there is no fixed number of the series which can be made a part of it.
- In general terms, only one registered agent is needed for a series LLC and the series is required to file a single annual report.
- It is also suggested that each Sub-LLC/cell should apply for a “doing-business-as” (also referred to as DBA) title that is an assumed or fictitious name of the company.
- The owners of the series must be listed in the records for the DBA, in order to avoid confusion as to which series LLC is to be held responsible for any issue or debt.
What are the requirements of drafting a Series LLC Operating Agreement?
- Rights and Responsibilities of the Members: The distribution of both labour and authority should specifically be divided and mentioned in the Series LLC Operating Agreement. What rights are different members entitled to and what are the obligations of each member in the series should specifically be mentioned and discussed in the agreement. This is necessary for making every member understand their role within the company and to know about the skills they bring to the table.
- Joining and Leaving the Series LLC: The unexpected should be expected by every unit in the Series with regards to its members. The operating agreement should be consisting or touching the protocol for the detailed procedure to adhere to in case a member decides to join or leave the series. Outline details for process changes in the agreement on the decision for both joining and leaving by a member must be given in the agreement.
- Norms of Dissolution: A Series LLC Operating Agreement should be carrying detailed terms and processes with regards to dissolving a series LLC or cell. The following should be involved in the agreement:
- Rules for division of remaining assets among the members after paying off all the debts.
- Whether a former member is allowed to form or run a company like the one which has just been dissolved.
- Severability Provision: The Operating Agreement should not miss out on a Severability provision which is considered to be a standard legal boilerplate clause. It states that if any provision or arrangement of the operating agreement proves to be contradicting any state or federal law, that only provision would be removed or stated out of the effect and all the aspects which are not contrary to the state or federal laws would still be remaining the effect. It actually ensures that any small oversight must not invalidate the entire agreement.
- The procedure of Amendment: Do not forget to include the scope of editing in the operating agreement in the future whenever needed. It’s a good idea to include a provision covering the way to bring forth modifications into the document otherwise you may end up dealing with outdated rules or may have to depend upon the default rules for amendment set by the state.
The Series LLC operating agreement is an innovative concept that unites a series within one LLC. This is a powerful advantage because each series is treated separately for liability purposes, just as if it were its own LLC. The aforementioned factors are to be considered while drafting a Series LLC Operating Agreement. It is also recommended that the agreement should be reviewed by all the members one more time in order to be sure that there is no error or inaccurate information inculcated in the document. After this, the agreement document for the Series LLC can be finalized.
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