What is a Series LLC?
For many entrepreneurs, organizing your business as a limited liability company (LLC) is a no-brainer.
In Virginia, you can be well on your way to ensuring your personal assets are protected from creditors of your business for just the $100 cost of filing your Articles of Organization with the State Corporation Commission. It doesn’t even take a whole afternoon to fill out the form!
But what if you want to divide liability and management within your limited liability company? What if, rather than just protecting your personal assets from the creditors of your business, you want to protect different divisions of your business from the liabilities of each other?
Historically, the best option was generally to form a whole separate entity. Unfortunately, that meant separate filings, separate governing documents, and a whole set of separate legal obligations to comply with.
A corporation accomplishes the same liability protection and can establish subsidiaries to allocate liability, but comes along with an added (and often excessive, for small business owners) formal corporate governance burden and far less flexibility in business structure.
Enter: the series LLC. It’s a form of limited liability company in which a parent LLC can form multiple child “protected series” and insulate the assets, liabilities, and management of each series from the other series, and from the parent LLC itself. A lawsuit against one of the protected series has no effect on any of the other series or the parent LLC. It’s like locking the assets of each series up in separate safes.
A Little Context on Series LLCs
Series LLCs were first permitted in Delaware nearly twenty-five years ago. Today, eighteen states (along with Washington, D.C. and Puerto Rico) provide for them. In 2019, the General Assembly teased Virginians by passing HB 2272, allowing the formation of a series LLC in the Commonwealth. The catch was that we’d have to wait until July 2020 for that law to take effect, presumably to provide time to work out the kinks in the legislation.
Just three months before the first iteration had a chance to come into operation, in April of 2020, HB 1149 delayed the effective date of the amendments authorizing series LLCs until July 1, 2021. As we approach what might just be the “Summer of the Series LLC,” it’s an excellent time to consider whether this new structure is a good fit for your business.
Is a Series LLC Right For You?
Series LLCs have commonly been used for wealth management between series. For example, real estate investors often create a protected series for each of their individual properties to avoid jeopardizing one property over the debts of another.
At Dunlap Law, we’ve explored the series LLC option in another context: splitting up liability in an existing LLC where two equal owners fundamentally do not agree on how to run the business anymore. A “conscious uncoupling” into separate businesses is not in the cards for this client. They share a vital common asset owned by the business that would be a major pain – and potentially impossible – to disentangle, but each owner considers the other’s management style to be risky and both want to do their own thing without worrying about the other exposing the entire business to liability and putting that vital shared asset at risk.
For now, they manage that risk as well as possible by carrying appropriate insurance, but we’ve already started planning ahead to establish a protected series for each owner come July. Each series can have its own bank account, hold title to property, and enter into contracts as though it were a separate entity while still governed by one cohesive (and comprehensive!) Operating Agreement.
This set up requires careful drafting and entrepreneurs should be diligent about maintaining books and records that reflect which assets belong to which series – but if your goal is to partition liability under one umbrella organization, then a series LLC might just be the right choice for you!
Stay In The Know
Stay tuned for more from us on this topic as Virginia’s series LLC law develops. Follow us on social media and subscribe to our newsletter and select “LLCs” as an interest to make sure you don’t miss our next LLC post!