March 30, 2016 Series LLCs: Proceed with Caution Boston 470 Atlantic Avenue, Suite 400, By Steven M. Shishko Boston, MA 02210 Although Series LLCs have been around since 1996, when Delaware first authorized them, Telephone (617) 235-8600 they have not been used which much frequency; not because they don’t offer significant Facsimile (617) 612-4129 benefits but because of the uncertainty surrounding many of the legal issues. (There are significant tax issues as well but I leave that discussion to the tax attorneys and CPAs.) This is due in large part to the fact that only a minority of states and jurisdictions (including Metro-West Delaware) have so far allowed the formation of Series LLCs. Massachusetts is not one of 200 Highland Avenue, Suite 301, them. Needham, MA 02494 A Series LLC is a form of limited liability company that consists of a “master” LLC and Telephone (617) 235-8600 separate “subsidiaries” or “series”. It is akin to a corporate entity with separate operating Facsimile (617) 612-4129 divisions, however, unlike operating divisions which do not have separate legal distinction, each series is treated as a separate legal entity. The primary advantage of a Series LLC, therefore, is that it enables a business to create just one legal entity—the master LLC—yet maintain the ability to separate assets and liabilities of one series created under the master LLC from the assets and liabilities of any other series created under that same master LLC. With a Series LLC, each series can have its own members, managers, interests and assets, with its own businesses or investment objectives, separate and distinct from the master LLC and from each of the other series under the master LLC. Once the master Series LLC is formed, new series can be created contractually (rather than with additional state filings) through addenda to the master LLC operating agreement. Despite the creation of only one Steven M. Shishko LLC, each series is treated as a separate legal entity for state law purposes and can, among [email protected] other things, enter into contracts, hold real estate and sue or be sued, all in its own name without having an impact on the master LLC or any of the other series under that master http://www.BeaconLawGroup.com LLC. There are a few businesses that necessarily lend themselves to using the Series LLC model, including real estate development and management. Currently, real estate owner-investors in Massachusetts with more than one property who want to make sure that any liability attributable to one property does not impact any of their other properties, will typically create a separate legal entity for each of their properties. Consequently, each entity will require its own formation documents, annual filings, tax returns and fees, making the costs and administration quite burdensome. Under the Series LLC model, a real estate owner with multiple properties would need to create only one LLC and put each property into a separate series, therefore achieving the same benefits of using multiple LLC entities without the attendant burdens. Despite the potential benefits of the series LLC, however, there are still many risks and uncertainties that deter widespread adoption. As only a minority of states have authorized series LLCs, it is unclear whether the states which have not authorized the model would recognize the legal distinction between the series and afford the expected protection. For a Delaware series LLC being used for an asset portfolio located only in Delaware, this may not be an issue. But if that same business has third party creditors in Massachusetts (which has not authorized the creation of series LLCs), then the Massachusetts courts might disregard the legal distinction between the series and expose the assets and interests of each series to these third parties. As well, the status of the series LLC model in bankruptcy is uncertain. As a separate entity, arguably one series could file for bankruptcy protection. However, bankruptcy law requires that the filing be made by a “person”, which, under the Bankruptcy Code, includes partnerships and corporations but does not specifically list LLCs. Although Delaware and a few other states expressly provide that an LLC is a “person” for such purposes, it is not clear in other state laws or in the Bankruptcy Code itself that an LLC series would itself be considered a “person” in which to avail itself of the bankruptcy laws. As a result, filing for bankruptcy protection for one series could ultimately place the master LLC and all of the other series under that master LLC in bankruptcy. An unintended and possibly disastrous consequence. There is very little case law that provides any guidance on how these issues would be evaluated and treated. Eventually, as more states adopt the Series LLC model and the case law evolves, they could easily become a “go to” vehicle for certain types of assets and businesses. Until then, however, the risks and uncertainties outweigh the benefits and clients would be wise to carefully consider whether the business structure is appropriate for their own particular needs and risk tolerance. The above information is designed to provide a helpful overview of a relevant topic. It does not constitute legal advice nor should it be construed as such. Please do not take action based on the above information without seeking formal legal advice. If you would like additional information, please contact Steven M. Shishko by email at [email protected] or by phone at 617-600-4808. .