The Journal of The DuPage County Bar Association

Back Issues > Vol. 23 (2010-11)

Seriously Considering Series LLCs
By Matthew J. Jakobsze

Looking for a way to protect your business’ low risk assets from its high risk ones, and still maintain flexibility? Then the Series LLC may be the right type of formation for your business. “A series LLC is designed to allow the owner of an LLC that comprises separate businesses or separate lines of business (e.g., manufacturing and transportation) to put each in a separate series and protect the assets of one series from the creditors of another.”[1] The Series LLC has become a trend in the real estate industry, for venture capital and investment funds, operating companies, and other complex business arrangements with a diversity of risk

What is a Series LLC?  In 2005, the Illinois Legislature supplemented the Illinois Limited Liability Company Act by allowing LLCs to form series.[2] A series can be thought of as a “cell” or a compartment that allows an LLC to separate its assets, business functions, or liabilities, within the umbrella LLC organization. Under this statue, an LLC may, through its operating agreement, designate “series” of members, managers or limited liability company interests to have separate rights, powers, or duties regarding specific properties, obligations, profits and losses of the umbrella LLC.[3] In other words, no other series, nor the “parent” entity, is subject to the debts or obligations of any individual series. Furthermore, the owners of each series are not personally liable for the debts or obligations of the series which they own. Because Illinois’ statute accords separate legal status to a series,[4] each series may also have a business purpose or investment objective separate from each series and from the LLC itself.[5]

Under the Illinois Series LLC statute, so long as the corporate formalities are upheld, each series maintains limited liability and is to be treated as a separate entity.[6] As a result, each series may “contract, hold title to assets, grant security interests, sue and be sued, and otherwise conduct business and exercise the powers of a limited liability company....”[7] Because each series may have a purpose or objective distinct from the master LLC and the other series,[8] the Series LLC is not limited in its scope of business operations.

The corporate formalities associated with Series LLCs do not differ much from those required of regular LLCs.[9] These formalities include: maintaining separate accounting, banking, asset and entity records for the umbrella LLC and for each series; providing in the umbrella LLC’s articles of organization[10] how each series’ liability is to be limited; filing a certificate of designation[11] with the Secretary of State for each series created; and, giving notice to parties contracting with the series.[12] The notice requirement is further satisfied by ensuring each series contains the entire name of the LLC and by making each series’ name distinguishable from all other series created by the umbrella LLC.[13]

Administrative Costs.  You may be asking, if each series can separately make contracts, hold title to assets, and be party to a lawsuit, then why would a Series LLC be better than having multiple LLCs? One of the main benefits of using an LLC with multiple series, as compared to multiple LLCs, is the administrative costs saved. In Illinois, the filing fee to file articles of organization for a new LLC is $500;[14] whereas the filing fee for a new Series LLC is $750,[15] and an additional $50 to file each new series’ certificate of designation.[16] Thus, when using a Series LLC, the savings on filing fees are apparent after the creation of only two entities: two LLCs would cost $1,000; whereas an LLC with two series would only cost $850. The savings increase exponentially with the number of series created: if five LLC's were formed, it would cost $2,500; whereas an LLC with five series would cost only $1,000.

Flexibility. While the formation of a Series LLC starts with the incorporation of the umbrella LLC, and subsequently with the formation of individual series, these new associated entities do not automatically default to the traditional parent-subsidiary paradigm. Indeed, the flexibility available to determine how these entities should be related is the most interesting and potentially valuable asset. This new company can be owned and divided in an endless array of possibilities: some series may be member-managed, manager-managed; the LLC may own the series, or members and/or managers of the LLC may each own portions of each series. So long as the appropriate documentation is maintained, the entity form can take the shape of a holding company, or to horizontal subsidiaries. Furthermore, due to the ease and relatively low cost of adding[17] or dissolving a series,[18] the Series LLC provides even more flexibility.   

Liability in Illinois.  For entities solely doing business in Illinois, the laws on liability will be fairly straightforward. Because each series within the limited liability company is treated as a separate entity (to the extent set forth in the articles of organization), the debts, liabilities and obligations incurred for by each respective series will be enforceable against that series alone and not against the LLC generally, so long as the aforementioned corporate formalities are upheld.[19] As a result, the LLC and any of its series can choose to work together, to contract jointly, or to be treated as a single business for purposes of qualification to do business in this or any other state,[20] and these choices will not affect the limited liability of each series, unless a series specifically accept joint liability by contract.[21]

Drawbacks.  Due to the novelty of the Series LLC, and because the drafters of the 2006 Revised Uniform Limited Liability Company Act did not include a section on Series LLCs,[22] problems may arise as to whether series are recognized as distinct legal entities. Since there is no uniform or fallback source to guide courts in their assessment of proper business relations, an entity considering the Series LLC format must evaluate how it may be viewed in foreign jurisdictions and for torts, how to ensure a series liability is limited in contract, how a series may be taxed, and how a series may be viewed by a bankruptcy court.

Respect from Foreign Jurisdictions.  The ability to separate high-and low-risk endeavors is a significant advantage of the Series LLC but because many other jurisdictions have not adopted a Series LLC statute,[23] doing business in other states poses the risk that a foreign state will not uphold the internal insulation established by a Series LLC, and will instead use its own LLC laws. As a result, when deciding on what type of business entity to form, considerations should also be made as to where this entity will do business, and the potentially conflicting laws of those foreign jurisdictions. In doing such an assessment, one must review choice of law principles for business corporations.

Whether an organization is to be treated as a corporation under a foreign state is governed by § 298 of the Second Restatement of Conflicts, which states “[a]n organization formed in one state will be considered a corporation within the meaning of a statute or rule of another state if the attributes the organization possesses under the local law of the state of its formation are sufficient to make it a corporation for the purposes of the statute or rule.”[24] The qualities of a series should be compared against those of the LLC statute of any foreign state. “If the [foreign] forum state's law [will] negate the shield entirely or [will] limit the shield in a manner different from that of the law of the state of organization”[25] (as may result when a another state does not have a Series LLC statute), there is more reason for a court to apply a heightened scrutiny to the actions of that series. But because many of those qualities will mirror those held generally by LLCs, there appears to be strong support for according a series the same respect as a forum state’s regular LLC.

“[A] court may, [however,] disregard a foreign liability shield if the shield is repugnant to the policy of the forum state.”[26] A foreign state’s strong interest in compensating its citizens may lead a court of that forum to disregard the Illinois series system and hold the umbrella LLC liable for the actions of its series, especially if there is fraud, undercapitalization, a failure to maintain the corporate formalities, or if the series functions as the alter ego of the general LLC, or another series. Thus, it is even more important to adhere to the corporate, record, and notice requirements.

States generally will not prohibit a foreign company from doing business in that foreign state, but may impose restrictions or qualification requirements.[27] But courts may prohibit a foreign company from doing business if the financial structure of the company involved does not meet its requirements.[28] In anticipation of such requirements, the Illinois Series LLC statute allows a series and the LLC to “elect to be treated as a single business for purposes of qualification to do business in this or any other state.”[29] If the general LLC can bolster a series qualification to do business in another state, courts in that foreign state may view the series and the LLC as one entity, disregard the limited liability of each series, and impose a judgment against the entire LLC. If both the series and the LLC register jointly to do business in a foreign state, it may affect the way the general LLC and other series are held liable. It is important, therefore, for a Series LLC to consider the qualification requirements of any state it considers doing business in, and make sure to provide adequate notice of the capacity of the series doing business.[30]

Tort Liability.  Does an LLC expose itself to tort liability for “working together” with its series? Under Illinois’ Series LLC statute, this choice does not affect the limited liability of such a series.[31] It would seem then, that because the Illinois statute recognizes an LLC and its series as legally distinct entities, the only way a general LLC will be held liable for the actions of its series is by piercing the corporate veil. But if a third party sues in a foreign jurisdiction for a tort that a Series committed in that jurisdiction, the forum jurisdiction could potentially disregard Illinois’ Series LLC statute, impose the LLC law of the forum state, and hold the general LLC liable for the actions of its legally distinct series. Therefore, the lack of predictability in the conflicts analysis in Part III.A poses another drawback that may not be resolved until more states adopt a Series LLC statute.

Liability in Contract. Unlike tort law, there is a much easier way to ensure Illinois’ Series LLC law will be used instead of a foreign state’s LLC law - when a series enters into contracts with companies that are not from Illinois, include a choice of law provision. Since a series incorporated (and presumably operating) in Illinois has a substantial relationship to the parties and to the transaction,[32] and the business formation of a party who has been named a defendant in a claim arguably does not contradict the fundamental policy of a foreign state with a materially greater interest,[33] such a choice of law provision should be upheld. Notice in the contract that the business contracting is a series, and not the full LLC or an agglomeration of the series, will bolster the limited liability shield. If no choice of law provision is included in the contract, courts will weigh each parties interests under section 188 of the Second Restatement of Conflicts,[34] and consider “the place of contracting,”[35] “the place of negotiation of the contract,”[36] “the place of performance,”[37] “the location of the subject matter of the contract,”[38] and “the domicile, residence, nationality, place of incorporation and place of business of the parties.”[39] Due to uncertainty as to which side a court will come down on in this analysis, prudent practice dictates including a choice of law provision.

Taxation. Business owners should strongly consider the type of state and federal taxes a business will incur when deciding whether to form a Series LLC. Because each Illinois series has its own powers, rights and responsibilities, “[t]he default treatment of the series and parent LLC under Illinois statute is that they are separate entities and will remain so until the series and parent LLCs choose to be treated as one taxpaying entity.”[40] While each series may be intended to be a separate entity,[41] the variables involved with establishing ownership interests and profit expectations lead to a variety of ways to minimize taxes.[42]

While Series LLCs also likely qualify to choose whether to be taxed as a partnership or as a corporation,[43] the IRS’s refusal to publicly issue guidance on Series LLCs leaves another layer of uncertainty.[44] Even though “the Illinois Series LLC statute appears to be tailored more toward the treatment of the series as a separate entity, whether a series will be treated as such by the IRS in all circumstances still is not clear.”[45]

Bankruptcy.  Some have dreamt of how Series LLCs can make an entity “judgment-proof” by using series to insulate assets from the bankrupt estate.[46] Just as there is uncertainty for tax purposes, there is uncertainty as to how bankruptcy courts will evaluate this type of asset isolation. Matters are complicated by the potential choice of law issues between federal bankruptcy laws and state corporation law, and the equitable remedies afforded to bankruptcy courts that seek “to achieve fair treatment for creditors and other claimants.”[47] In evaluating whether to consolidate a business, bankruptcy courts consider “whether the group engages in essentially one business, the integration of the group's external operations, and the integration of the group's internal operations.”[48] If special care is taken to ensure those factors are avoided and otherwise maintain separate records, there is a much stronger likelihood that series’ limited liability will independently be upheld. Furthermore, because Illinois series are recognized as separate legal entities, there is a strong argument that each series should be able to separately file for bankruptcy and have its liability shield upheld.[49] This argument is furthered if the series has provided adequate notice of its status as a series to its creditors, which would limit creditors’ expectations.[50]

Administration Costs.  Administrative costs have benefits but they can also have some associated drawbacks. Because only a few other jurisdictions have enacted a Series LLC statute, a strict adherence to the corporate formalities will be necessary in order to ensure that courts uphold the internal liability shields and asset protection envisioned in the Illinois statute. Thus, it may take greater administrative oversight and management to keep each series’ records separate and distinct. Additionally, while Illinois requires only one operating agreement and one registered agent acting for the entire LLC, each series must file an annual return, the LLC and each series must file an annual report and pay associated fees.[51] Finally, the cost of hiring an attorney to draft documents, litigate, and advise to avoid litigation can be costly due to the novelty of the subject-matter and the uncertainty as to whether foreign states will uphold the Illinois Series LLC statute. These administrative drawbacks may pale in comparison to the costs under one of the aforementioned areas of law a company may be held liable.

Conclusion.  There are many of issues yet to be resolved in the area of Series LLCs. When assessing what type of business to set up, the aforementioned issues are all important considerations, but are not exhaustive. In many instances, the risks associated with a Series may outweigh the benefits, and separate LLCs may be a safer course of conduct. Yet, as more states adopt Series LLCs statutes comparable to Illinois’, a Series LLC may be a more advantageous corporate formation than using multiple LLCs.   

[1] Michael W. McLoughlin & Bruce P. Ely, The Series LLC – Raises Serious State Tax Questions but Few Answers Are Yet Available, 24 J. Multi-State Tax. & Incentives, at 8 (Jan. 2007).
[2] 805 Ill. Comp. Stat. § 180/37-40.
[3] 805 Ill. Comp. Stat. § 180/37-40(a).
[4] 805 Ill. Comp. Stat. § 180/37-40(b).
[5] 805 Ill. Comp. Stat. § 180/37-40(a).
[6] Subject to how each series is limited in the articles of organization. 805 Ill. Comp. Stat. § 180/37-40(b). This is distinct from the Delaware Series LLC statue, which does not authorize a similar level of autonomy.
[7] 805 Ill. Comp. Stat. § 180/37-40(b).
[8] 805 Ill. Comp. Stat. § 180/37-40(a).
[9] Compare 805 Ill. Comp. Stat. § 180/37-40(b), with 805 Ill. Comp. Stat. § 180/1-37.
[10] The Illinois Articles of Organization form can be found at the Illinois Secretary of State website, Cyber Drive Illinois, Limited Liability Company, (last visited Oct. 6, 2010).
[11] The Illinois Certificate of Designation form can be found at the Illinois Secretary of State website, Cyber Drive Illinois, Limited Liability Company, (last visited Oct. 6, 2010).
[12] This notice requirement imposes a heavier burden than most states’ Series LLC statute’s notice requirement. Under Illinois law, the certificate of designation for each series must list the names of the members, if the series is member-managed, or the names of the managers if the series is manager-managed. 805 Ill. Comp. Stat. § 180/37-40(d). That statement is deemed to be notice to the public of the limitation on liability. Presumably, the LLC does not need to make any other formal or practical disclosure to third parties that obligations cannot be enforced against the assets of the LLC as a whole, but due to the novelty of the Series LLC, it should.
[13] 805 Ill. Comp. Stat. § 180/37-40(c).
[14] 805 Ill. Comp. Stat. § 180/50-10(b)(1).
[15] Id.
[16] 805 Ill. Comp. Stat. § 180/50-10(b)(18).
[17] A series’ existence begins upon the filing of the certificate of designation with the Secretary of State. 805 Ill. Comp. Stat. § 180/37-40(d). It only costs $50 to create a new series. 805 Ill. Comp. Stat. § 180/50-10(d).
[18] 805 Ill. Comp. Stat. § 180/37-40(b). There is a $100 fee associated with filing articles of dissolution for a series. 805 Ill. Comp. Stat. § 180/50-10(d).
[19] 805 Ill. Comp. Stat.  § 180/37-40(b) (“[T]he debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof, and unless otherwise provided in the operating agreement, 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.”).
[20] 805 Ill. Comp. Stat. § 180/37-40(b).
[21] Id.
[22] Revised Unif. Ltd. Liab. Act, Prefatory Note (2006), 6A U.L.A. 214, 216 (West Supp. 2007).
[23] Illinois and only a few other states have enacted a form of Series LLC statute: Delaware (Del. Code Ann. Tit. 6, § 18-215); Iowa (Iowa Code Ann. § 490A.305 (West Supp. 2008)); Oklahoma (Okla. Stat. Ann. Tit. 18, § 2054.4 (West Supp. 2008)); Nevada (Nev. Rev. Stat. Ann. § 86.296 (West Supp. 2008)); Tennessee (Tenn. Code Ann. § 48-249-309 (West Supp. 2008)); and,  Utah (Utah Code Ann. § 48-2c-606 (West Supp. 2007)).
[24] Restatement (Second) of Conflicts of Law § 298 (1971).
[25] Carter G. Bishop & Daniel S. Kleinberger, Limited Liability Companies: Tax & Bus. L. ¶ 6.08(6) (2009).
[26] Id.
[27] See Restatement (Second) of Conflicts of Law § 311 cmt. b (1971).
[28] See Restatement (Second) of Conflicts of Law § 311 cmt. b (1971).
[29] 805 Ill. Comp. Stat. § 180/37-40(b).
[30] Arguably, since states can impose such qualification requirements on foreign businesses, the absence of such a requirement (that a LLC be jointly liable for the actions of an LLC’s series’ actions within that foreign state) may preclude a court from holding the general LLC liable.
[31] 805 Ill. Comp. Stat. § 180/37-40(b).
[32] See Restatement (Second) of Conflicts of Law § 187(2)(a) (1971).
[33] See id. § 187(2)(b) (1971).
[34] Restatement (Second) of Conflicts of Law § 188 (1971).
[35] Id. § 188(a).
[36] Id. § 188(b).
[37] Id. § 188(c).
[38] Id. § 188(d).
[39] Id. § 188(e).
[40] Charles T. Terry & Derek D. Samz, An Initial Inquiry into the Federal Tax Classification of Series Limited Liability Companies, 110 Tax Notes 1093, 1097 (2006).  See also 805 Ill. Comp. Stat. § 180/37-40(b)(“[t]he limited liability company and any of its series may elect to consolidate their operations as a single taxpayer to the extent permitted under applicable law....”).
[41] 805 Ill. Comp. Stat. § 180/37-40(b).
[42] See Sandra Mertens, Series Limited Liability Companies: A Possible Solution to Multiple LLCs, 84 Chi.-Kent L. Rev. 272, 277-84 (2009). Some commentators have suggested assessing “whether an individual series is actually carrying on a separate business” as a test to see whether the series can be treated as a separate entity for tax purposes. McLoughlin & Ely, supra note 1, at 11 (citation omitted).
[43] Mertens, supra note 44, at 280.
[44] McLoughlin & Ely, supra note 1, at 10.
[45] McLoughlin & Ely, supra note 1, at 11.
[46] Amanda J. Bahena, Series LLCs: The Asset Protection Dream Machines?, 35 J. Corp. L. 799, 805 (2010) (arguing, for predictability, that bankruptcy courts should not permit limited liability for each series, nor allow series to file for bankruptcy separately).
[47] Id. As mentioned, deliberate undercapitalization is one way courts have pierced the corporate veil and ignored the series’ internal divisions.
[48] Id., footnote and accompanying text.
[49] See id., at 806.
[50] See id.
[51] 805 Ill. Comp. Stat. § 180/50-1.
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