The Limited Liability Company (LLC) has fast become the business entity of
choice in the U.S. The LLC allows business owners to achieve limited liability
for debts of the business while being taxed on a relatively unrestricted pass
through basis.
The Delaware Series LLC Act provides for the
creation of separate “series” within an LLC whose debts and other liabilities
are enforceable against that Series alone. The Act also provides that classes or
groups of members can be established, having whatever rights the LLC agreement
says they have. The combination of the two provisions allows a Series to be
treated in many ways as a separate LLC. Thus, the Series provisions in the
Delaware LLC Act allow for the creation of separate protected “cells” within one
limited liability “container” without the need to create separate entities, thus
avoiding the inefficiencies associated with multiple related entities. The
concept is similar in function to the segregated portfolio companies and
protected cell companies designed for the mutual fund and captive insurance
industries in Bermuda, Guernsey, the Cayman Islands, Mauritius and Belize.
The Act allows a Delaware Series LLC agreement to designate Series of members, managers or
LLC interests that have separate rights and duties with respect to specific LLC
property or obligations. So, each Series can be tied to specific assets and can
also have different members and managers. If the various Series within an LLC
have different members or different membership rights, each Series may be
treated as a separate LLC for income tax purposes, eliminating some of the
administrative advantage of the Series LLC. A Series LLC pays one filing fee and files one income tax return each
year.
Each Series can have its own separate business purposes. A Series can be
terminated without affecting the other Series of the LLC. A Series can make
distributions to its own members without regard to the financial condition of
the other series.
Most importantly, the Act provides that debts, liabilities and obligations
incurred, contracted for or otherwise existing with respect to a particular
Series are enforceable against that Series only, and not against the assets of
the LLC generally or any other Series of the LLC. However, to obtain this
protection, each Series must be treated separately. Books and records must be
kept for each Series and the assets of each Series must be held and accounted
for separately. Finally, in order that the public knows that it is dealing with
a Series LLC in Delaware, it must be put on notice by the inclusion of the Series imitations
in the LLC’s Certificate of Formation filed with the Delaware Secretary of
State.
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.
Benefits of Filing a Limited Liability
Company
The LLC provides protection to its owners for debts unrelated to the
business in that LLC property and LLC interests themselves generally cannot
be directly seized or attached by creditors of debtor members. Instead, such
creditors are limited to a “charging order” issued by a court requiring the
LLC to divert payments to the debtor member to the creditor.
However, the charging order does not provide the creditor with voting
rights, such as the right to vote for a distribution. If no distributions
are made to the debtor member, neither are distributions made to the
creditor. Furthermore, in some cases, the creditor may be taxable on the
debtor member’s share of LLC income, whether he receives a distribution or
not. Thus the charging order is not a particularly attractive remedy for a
creditor.
Segregating “dangerous” assets and businesses into separate entities away
from other assets, especially “safe” assets, is always a good idea from an
asset protection point of view. For example, an individual who owns a gas
station and a rental home shouldn’t own both within the same entity. Neither
should an individual with a large amount of liquid assets (cash, securities,
etc.) to protect hold the cash in the same entity as a business.
Best practices would dictate that every distinct business or major business
asset be segregated into a different limited liability entity. In an ideal
situation, someone with 25 rental properties would have 25 separate LLCs,
one for each property. However, this isn’t always practical because of
administrative costs and government fees that must be paid for each LLC.
What can such a business owner do to protect his assets from liabilities
unrelated to those assets in a cost-effective way?
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