For several years now, the State of Delaware has permitted a single limited liability company (“LLC”) to create designated series of members, managers or limited liability company interests, each having separate rights, powers or duties with respect to specified property of the LLC. This type of LLC is commonly called the “Delaware Series LLC.” This corporate structure has the potential to greatly reduce risk to the assets of the entire LLC, by limiting creditor recourse to only the assets associated with the relevant series within the LLC.
The Delaware Series LLC works because each series within it can be treated, in many important respects, as if it is a separate LLC. The separation effectively puts up a firewall, limiting creditors legal recourse to pursue the assets of the LLC generally. Creditors seeking to recover for liabilities of one series, are restricted to the assets of that series alone.
The prospect of using a Delaware Series LLC can be very attractive. There would be time and cost savings from not having to form a new entity before acquiring a new asset. There would also be less administrative burdens like having to file multiple annual reports for each company to the Secretary if State. In theory, a real estate investor, who may have previously formed a separate business entity for each parcel of real estate purchased, might now be able to form one company, hold all of the real estate assets in that company, and enjoy the same protection from liability for each separate assets afforded by separate business entities. This feature of the Delaware Series LLC would seem to allow the LLC to have separate investors for each series, with segregated liability as is the case in separate companies.
To form a Delaware Series LLC, (1) the LLC Agreement must create one or more series of interests; (2) the LLC must keep separate and distinct records for each series; (3) the assets associated with each series must be accounted for separately from the other assets of the LLC and each of the series and (4) the LLC’s certificate of formation must provide notice of the limitation of liability of a series. Recent amendments to the Delaware Limited Liability Company Act also confirmed the sufficiency of a general notice of the limitation on liabilities of a series without referring to any specific series by adding the following language to the Act:
Notice in a certificate of formation of the limitation on liabilities of a series as referenced in this subsection shall be sufficient for all purposes of this subsection whether or not the limited liability company has established any series when such notice is included in the certificate of formation, and there shall be no requirement that any specific series of the limited liability company be referenced in such notice.
Although neither the New Hampshire courts nor the Legislature has yet addressed the use of the Delaware Series LLC in New Hampshire, generally, Delaware and New Hampshire enjoy reciprocal legal recognition of their corporate entities. The question arises, however, whether or to what extent the courts in New Hampshire (or another non-Delaware jurisdiction) would respect the Delaware series LLC and prevent a creditor of one series of the LLC from reaching assets of the LLC generally or those of another series. There has been very little written about the series LLC and, more specifically, how well the series LLC will shield assets from creditors, especially if the assets are held outside of Delaware. Commentators on the subject have expressed uncertainty about whether or under what circumstances courts (especially outside of Delaware) will allow the internal liability shield to stand.
Perhaps in part because of the uncertainty about the enforceability of the Delaware Series LLC’s internal liability shield, Delaware amended its LLC Act in 2003 to confirm the ability to provide for the establishment of series of LLC interests. Some of the specific changes are discussed above. Delaware’s 2003 amendments to the Act do not, however, provide greater certainty about the protections a Delaware Series LLC may provide for assets held in New Hampshire (or elsewhere outside of Delaware) even though New Hampshire’s Limited Liability Company Act purposely provides that the laws of the State where a LLC is formed will govern its internal affairs and the liability of its members and managers. Until case law develops enforcing the internal protections of the Delaware Series LLC outside of Delaware, the liability protection effect of creating separate business entities will, in most circumstances, continue to outweigh the potential benefits of the Series LLC mentioned above.
Daniel J. Norris is a director of the corporate department with the law offices of McLane, Graf, Raulerson & Middleton, Professional Association. Mr. Norris can be reached at 603-628-1408 or [email protected].