Acumen Law Group, LLC

The Series LLC: Sure Bet or Risky Business?

Common legal sense dictates that business owners operating multiple businesses, or holding multiple assets, organize each business or asset as a separate entity.  The reason for this is simple: in the event that one of your businesses is sued, you don’t want the other businesses to be exposed to liability (especially if those other businesses have significant amounts of assets).  Before the advent of the series LLC, business owners would have to pay a separate filing fee for each legal entity to the Illinois Secretary of State. Currently, the filing fee for a single LLC in Illinois is $500, and the required annual filing fee is $250.  For the owner of a fleet of 20 taxicabs, these filing fees can be burdensome ($10,000 in initial filing fees and $5,000 in annual filing fees).  Enter the series LLC, a means of lifting (some of) that costly burden.

Like the name suggests, a series LLC is a single limited liability company with multiple series.  Each series within the company is separate and legally distinct from the remaining series.  In other words, each series is insulated from the risks and liabilities of the other series under the same company.  One can organize the different series with separate managers, members, even operating agreements.  Despite the separateness of each series, the Illinois Secretary of State treats the entire series LLC as one entity.  One entity = one filing fee and one annual report.  For our friend with a fleet of 20 taxicabs, this means that although each cab within the fleet can be designated as its own series, the fleet as a whole is only responsible for paying a single series LLC filing fee (currently $750 plus $50 for each series).  To illustrate the significant cost savings, the taxicab company with 20 series would pay $1,750 in initial filing fees, as compared to $10,000 in initial filings for 20 separate  LLCs.

To create a series LLC, one must designate the series in the master operating agreement for the company and file a Certificate of Designation with the Secretary of State.  The operating agreement must explicitly provide for the limitation of liability.   This limitation of liability should be upheld by courts if the following conditions are met:  (1) each series maintains its own records; (2) each series holds its assets separate and apart from the assets of other series; (3) the operating agreement provides for separate accounting of assets and liabilities; and (4) the company provides notice of the liability limitation in its Articles of Organization.  Failure to fulfill these conditions can produce severe results.  For example, a court may completely disregard the separate status of each series and apply all of the assets of the series LLC to satisfy any creditor’s claim.  It cannot be stressed enough that business owners must observe all the formalities and operate each series separately.

Although the series LLC has been around in Illinois since late 2005, there is little precedent interpreting the provisions of the Illinois LLC Act authorizing series LLCs.  While the Illinois LLC statute specifically states that each series is treated as a separate entity in all respects, the application of the statute has not been fully tested by the courts.  Adding to the uncertainly, only seven states currently have series LLC statutes, so an Illinois series LLC cannot be certain that another state without a series LLC statute will honor the separateness of each series in the LLC.  Additionally, the IRS has not yet provided any guidance on how the series LLC should be taxed, and there is little case law addressing series LLCs in bankruptcy.  For these reasons, prudent business owners (and their attorneys) would be be well advised to ensure that the series LLC complies with all the strictures of the Illinois LLC Act and that the conditions discussed in this article are met.

There are a number of other relevant issues and concerns regarding the series LLC in Illinois.  Depending on the nature of your business, the series LLC may or may not be a wise vehicle.    If you are interested in learning more about the series LLC please feel free to contact us to speak with one of our attorneys at Acumen Law Group.

Authored by Dominika Szreder Fard, Esq.

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