Series LLC: A History Part 1

In 1996 a new kind of LLC was introduced in Delaware. Called a Series LLC, this new entity offered the same benefits as a regular LLC with one, significant difference. A Series LLC was permitted to create an unlimited number of completely self-contained subsidiaries, also called Cells. Under Delaware law, each subsidiary, or Cell, was given the full legal rights available to any other formal business structure.

In fact, using the term subsidiary is probably a little misleading. In the case of a Series LLC, each subsidiary was permitted to have separate owners, separate management, hold title to assets, and operate completely independently from the others. What you were effectively doing was removing the requirement to establish a new LLC every time you wanted a separate company. You could simply establish a new Cell under the existing LLC and use that for your next business project.

But even more importantly, the new Delaware law also specifically provided full legal protection between the Cells. The acts and debts of one Cell would not be chargeable against the other Cells, as long as things were properly structured. Under the new Delaware law, if one subsidiary became the target of litigation, the others could not be named in the lawsuit as well, nor could the assets of one subsidiary be targeted by creditors of another.

The law also provided Series LLCs with the same creditor protections that regular LLCs (and corporations) enjoy. A Series LLC is legally considered to stand apart from you as the owner, as a separate and distinct legal entity. That means you won’t necessarily be held responsible for paying the debts of the Series LLC or any of its subsidiaries, unless you have signed a personal guarantee. Your financial liability is limited to whatever assets or cash you’ve invested into the entity. The reverse is also true. A Series LLC and its Cells are generally safe from your personal creditors. Someone suing you personally won’t necessarily be able to reach inside your Series LLC or any of its Cells and liquidate business or investment assets, unless you have used any of those assets to personally guarantee the debt

The Delaware law was immediately popular with real estate investors and other asset-rich clients. It provided a way to divide up asset portfolios safely, and without creating numerous companies. Not only that, owners stood to save money; in some cases thousands of dollars per year. Rather than paying multiple set up fees, annual report fees and resident agent fees each year, a Series LLC owner could look forward to just one annual report fee and one resident agent charge. In states with expensive annual filing requirements (in Massachusetts, for example, the current annual report fee is $500 per business structure), Series LLC owners could save thousands.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

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