November 16, 2005

On August 16, 2005, Public Act 94-607 became effective in Illinois, thus amending the Illinois Limited Liability Company Act to allow Series LLCs. While the concept of Series LLCs has been around since 1996 when they were allowed in Delaware, this is the first time they have been permitted in Illinois. Generally, a Series LLC is a limited liability company that has separate "mini-LLCs" within the larger entity, each with separate members, managers, assets and liabilities, and business interests. The LLC itself, and not the individual series, is now treated as the legal entity under Illinois law.

Increased Efficiency, Reduced Liability

Holders of multiple businesses and assets have always sought ways to segregate them in order to isolate any related liabilities. Traditionally, business owners accomplished this segregation by placing each business in a different limited liability company. For example, a real estate developer that owned various properties would often create new limited liability companies to hold each property. The main inefficiency created by this approach is that the real estate developer is required to pay administrative costs and government fees for each separate limited liability company. In a Series LLC, the same real estate developer could hold all the properties in one limited liability company, but with a separate series created for each property. The State of Illinois would require the real estate developer to pay only one annual franchise fee, potentially saving the company thousands of dollars per year.

Series LLCs also give holders of various businesses and assets a new method by which to isolate related liabilities. The debts and liabilities incurred by a particular series would be enforceable against the assets of that series only and not against the assets of the larger LLC or any of the other series within it. In order to receive this protection under the amended act, the LLC must treat each series separately. Independent books and records must be kept for each series, and the assets of each series must be held and accounted for separately. Also, each series can have its own business purposes, and one series can be terminated without affecting the other series within the LLC. Furthermore, distributions can be made to the members of a particular series without regard to the financial condition of the other series.

A Series LLC also could be used by a business with multiple operating divisions to create an equity compensation program for its employees. For example, the company could give key employees of each series an equity interest tied to that specific series, rather than the entity as a whole. This approach would let a company reward employees of productive divisions, while protecting them from any negative impact from a less successful division.

Uncharted Waters

Although Series LLCs can be used in interesting and creative ways, there are uncertainties and pitfalls that may result. Since Series LLCs are a relatively new concept, there is very little case law exploring their intricacies. It is unclear, for example, what might happen if a limited liability company were to use an asset or group of assets in connection with the business activities of two or more series of the LLC.

From a tax perspective, it is also unclear whether a company having two series should be treated as one or two tax entities. "At this point, we have not seen any definitive guidance regarding the tax treatment for these entities," said Brian R. Israel, CPA, Ostrow Reisin Berk & Abrams, Ltd. "Although there may be a position to take allowing a single income tax return to be filed in certain circumstances, there would still need to be a separate accounting performed for each series. The accounting could get somewhat complex depending upon the complexities of the varying ownership within each series. As a result, overall accounting costs would not necessarily be reduced."

Additionally, only a handful of states (including Delaware, Iowa and Oklahoma) currently allow Series LLCs. Therefore, limitation of liability provisions might be challenged under the laws of a foreign jurisdiction if the entity has operations in a state that does not also recognize Series LLCs.

Both in Illinois and across the United States, Series LLCs represent uncharted waters for companies and their attorneys. While the potential benefits are alluring to business owners, they must be careful how they proceed. At this stage, businesses and their advisors should be aware of the potential uses of Series LLCs, but must be cautious about using them.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.