Businesses often attempt to segregate different properties or activities from others so that any liability involving one activity or property does not jeopardize the others. Usually this is accomplished through use of separate entities or subsidiaries. For example, a developer with apartment buildings in Chicago, Oak Brook, and Joliet may set up three limited liability companies (“LLC”) so that a suit arising out of an accident at the Chicago building does not put the Oak Brook and Joliet buildings at risk. This approach works fairly well as long as the number of properties or activities is not too great and as long as personal liabilities do not arise out of code violations. However, as a real estate developer or investor’s portfolio grows, so do the administrative costs and burdens of multiple entities. Delaware has come up with a unique way of dealing with this situation.
The Delaware Limited Liability Company Act (“Act”) permits the creation of multiple and separate series within one LLC. Each series may serve like a separate or “subsidiary” LLC within a “parent” LLC, without the creation of separate entities.
According to the Act, an LLC may create a different series by designation of member or manager groups or by creating classes of LLC interests, which possess separate duties and obligations. Series may be tied to specific assets and may have separate business purposes. One series may be terminated without affecting the other series. A series may make distributions to its own members without regard to the financial condition or members of the other series.
Debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series are enforceable only against the series to which they relate, and not against the assets of the LLC generally or the assets of any other series. This protection is available as long as each series is maintained separately. Books and records must be kept for each series, and the assets of each series must be held and accounted for separately. In addition, the Certificate of Formation filed with the Delaware Secretary of State must identify the entity as a series LLC so that third parties are notified of the limitations in their dealings with the LLC.
A series LLC is a cost-efficient asset protection vehicle for real estate investors and developers. For example, assume that the developer has five buildings in Chicago, eight in Oak Brook and three in Joliet, each worth between $500,000 and $5,000,000. The Delaware series LLC can save thousands of dollars in startup costs and ongoing administrative costs. The filing fee for a single Delaware series LLC is $50 while the filing fees for forming sixteen separate Illinois LLCs would be $6,400.
A series LLC might be used in many other situations to address a variety of other estate planning or business needs and situations that arise from transactions involving different properties, management personnel or employee groups. The series LLC concept is new and its many possible applications are as of yet undefined. Nevertheless, we anticipate substantial future interest and use of series LLCs. Please contact us if you wish additional information on this new form of entity.