Since the late 1980s, when the State of Wyoming adopted this country’s first limited liability company statute, limited liability companies have become more and more common in the business world. A limited liability company is a hybrid entity that has attributes of both corporations and partnerships. As with a corporation, the owners of a limited liability company (referred to as members) are protected from personal liability for business debts and claims. On the other hand, the members report business profits or losses on their personal income tax returns. This tax treatment is similar to the treatment provided to partners of a partnership. Moreover, a limited liability company does not contain the same restrictions of ownership as does an “S”-corporation (e.g. the shareholders must be United States’ citizens and must be individuals). As a result of the advantages of limited liability companies, their popularity has exploded over the past decade and a half.
Recently, some states legislatures have amended their respective state statutes to permit a new type of limited liability company: the series limited liability company. Delaware (one of, if not the nation’s most business-friendly states) first authorized the use of series limited liability companies in 2004. Thereafter, the state legislatures in Iowa, Oklahoma and Illinois have likewise amended their state statutes to provide for series limited liability companies.
A series limited liability entity is a single legal entity that has the ability to partition its assets and liabilities among various “cells” or “series,” without the need to create separate entities. The enabling statutes provide that the liabilities of a particular series are enforceable only against the assets of that series. Each series can be tied to specific assets and can have different members and/or managers. Also, each series can have its own separate business purposes and a series can be terminated without affecting the other series of the limited liability company. Further, the debts, liabilities and obligations incurred with respect to a particular series are enforceable only against that series, and not against the assets of the limited liability generally or any other series of the limited liability company.
As a result, series limited liability companies would be desirable for an individual and/or entity that owns several pieces of real estate or franchises and wishes to keep each property or franchise separate for liability purposes; but desires to have all projects or franchises maintained under one limited liability company for ease of administration and management.
The downside to the series limited liability, particularly for a Pennsylvania resident or entity, is that most states (including Pennsylvania) do not recognize series limited liability companies. An entity formed in one state cannot conduct business in another state unless it is first qualified to do business in the non-formation state. In all likelihood, a non-series limited liability state might apply the series limited liability legislation of the forum state to internal disputes among the members. On the other hand, it is highly unlikely that a non-series limited liability state would apply the series limited liability legislation of the forum state as to creditors and other third-parties who are not bound by the forum state’s series limited liability legislation. We will keep you updated on the future implications of series limited liability companies.
— Andrew Berenson