Series Llc’S: Not Good Enough For The Aba

In the last five years promoters have been touting the benefits of a Series LLC. But in a new report, an American Bar Association Committee has questioned the viability of the Series LLC.

We all know that an LLC can offer significant asset protection for real estate and other assets. If you have three pieces of real estate you form three separate LLC’s for maximum protection. But the series LLC, as claimed by promoters, can offer asset protection without having to form multiple entities. Instead, they claim, you can form just one LLC and place your assets into various series within the LLC where they are protected from each other.

We have never liked the series LLC because conceptually it all doesn’t make sense. If you form one entity and it is sued, all of the assets within that entity are exposed—whether they are in separate series (or buckets or whatever else the promoters use to describe them) or not. Significantly, there is not one court case extending asset protection to assets held in a separate series. I personally do not want to put my assets into an entity and hope for the best in a future court ruling. By using separate LLCs we have the certainty that assets in a remote LLC will not be exposed to claims brought against a target LLC. The series LLC does not offer such certainty.

The Series LLC has also been sold as a state fee savings device. By using a series LLC holding, for example, four assets it is claimed that you only have to pay one filing fee instead of four fees for four separate LLCs. That argument worked until the state of California decided that each series would be taxed as a separate LLC. So instead of paying just $800 for one series LLC in California you would pay, in our four asset example, $3200 for the series—the same as if you’d used four separate LLCs with greater certainty of protection. While not every state is as aggressive a tax collector as California, you can be certain that some will follow suit and charge a filing fee per series.

Due to the issues of asset protection certainty and illusionary filing fee savings, we have not, and will not, prepare series LLCs for our clients.

The American Bar Association ("ABA") now agrees with this opposition.

As a public service the ABA assists with the drafting of model laws that states can use across the country. Their committee, the National Conference of Commissioners on Uniform State Laws, approved by the original Uniform Limited Liability Company Act ten years ago. With the increased usage of LLCs, it was time to revise the original act, and the committee spent three years reviewing proposed charges.

Importantly, after looking into the series LLC, the ABA committee decided not to endorse them. The committee noted that the series LLC originated in Delaware for use in mutual fund and structured finance transactions and then stated:

"What’s good for Delaware and highly sophisticated deals is not necessarily good for the LLC law of other states. A philosophy that works wonders for ‘high end’ transactions may be bad medicine for the thousands of more prosaic but nonetheless important closely held businesses that choose to house themselves within the LLCs."

Concerns about the various unknowns posed by the series LLC were presented. These included whether the supposed "internal liability shield" would be respected in states that do not have series provisions, whether bankruptcy would consolidate all of the series into the parent and the general drafting and record keeping complexities of the series LLC.

In the end, the committee declined to accept the series concept. This is a significant development. When the nation’s brightest lawyers take a three year look and then pass on endorsement of the series LLC everyone—lawyers and clients—should take note.

Our firm will not put our clients into a series LLC. Beware of promoters who would sell you otherwise.