Virginia’s New Series LLC – Uses, Benefits and Drawbacks

As of July 1, 2020, the “Series Limited Liability Company,” became the newest addition to Virginia’s legal entity landscape.  Set forth in a new Article 16 of Virginia’s Limited Liability Company Act, Virginia’s act is modelled on the Uniform Protected Series Act and brings a relatively new business structure to Virginia.  Essentially a variant of a traditional limited liability company, a Series limited liability Company (“Series LLC”) attempts to provide the benefits of a tiered multi-organizational structure to a single entity.  A Series LLC is a single limited liability company with one or more “series” that each function as separate legal persons distinct from the parent Series LLC and from any other series of the Series LLC. 

Formation and General Characteristics

A series is formed by filing a “statement of protected series designation” with the State Corporation Commission and paying the required $100 filing fee.  Each year a separate $50 annual registration fee is required to be paid by both the Series LLC and each individual series.  Both fees are the same as those charged to a traditional LLC.   The registered agent and registered office for each series are the same as that for the Series LLC.  The name of each series must begin with the name of the Series LLC and contain the language “protected series”, “P.S.” or “PS”.  Members of a series are either the Series LLC itself or “associated members”.  An associated member of a series must also be a member of the Series LLC.  However, all of the members of the Series LLC do not have to be associated members of each series.  This means that a series can be virtually identical to a wholly owned subsidiary or it can have a different ownership mix (subject to the requirement that all associated members are also members of the Series LLC).  Management of a series can be by a manager or managers or by its associated members, if any. 

As with any LLC structure, governance is largely controlled by the relevant operating agreement.  A Series LLC operating agreement is expected to be more complex than that used for a traditional LLC, as it not only governs the Series LLC, but also each individual series and the relations between the series.  Under the new law, liability for associated members for the acts of a series and remedies of judgment creditors against associated members are handled and treated in the same manner as if the series were a stand-alone LLC.  This is a significant benefit in that under Virginia law, creditors of a member of an LLC can only access such member’s membership interest via a charging order.  This does not allow the creditor to sell or exercise any management rights (as opposed to creditors of shareholders in a corporation who can obtain actual ownership of the debtor’s stock). 

Assets may be held by either the Series LLC or may be held in the name of an individual series.  However, to benefit from the separate legal liability protections, both the Series LLC and the respective series must create and maintain records of sufficient specificity to allow a reasonable disinterested individual to identify and distinguish each asset from all other assets of the Series LLC and any other series.  Detailed record keeping will be critical.

Uses, Benefits and Drawbacks      

As is apparent from the discussion above, much of the law regarding a Series LLC is designed to mirror the legal status of a traditional LLC while at the same time eliminating some of the extra administrative burdens associated with establishing multiple separate LLCs.  This makes Series LLC’s particularly attractive for businesses that benefit from segregating assets and different lines of business.  Real estate investing is a natural fit for a Series LLC with the desire of most real estate investors to segregate assets.  Also, larger enterprises with unrelated business activities could benefit from separating the different business activities into different series.  

However, what is the actual benefit?  Some observers have cited reduced administrative costs and the potential for simplified documentation.  While in some states there may be reduced filing and registration fees for Series LLCs, the fees are exactly the same in Virginia.  Further, the operating agreement for a Series LLC will undoubtedly be more complex than that used for a traditional LLC in most circumstances, increasing the costs at formation; and if an operating agreement is also used at the series level, then there is even less likelihood of reduced documentation and cost.  Add to this the fact that, contrary to traditional LLCs, the individual series in a Series LLC are generally prohibited from participating in mergers, reorganizations, conversions and domestications directly, and a Series LLC may actually be a more restrictive option than a traditional multitiered limited liability entity. 

An additional area of concern is how Series LLCs will be treated in bankruptcy.  While the Virginia statute for Series LLCs attempt to define each series as a separate legal person, it is unclear if a bankruptcy filing could be accomplished for a single series or if the entire Series LLC would need to file.  This is a significant risk factor that could be avoided under a traditional multi-entity approach.

At the beginning of this article I mentioned that Series LLC were relatively new.  From a certain perspective that is correct, however, they have been around since 1996.  As of this writing less than 20 states have adopted legislation authorizing Series LLCs.  How a series will be treated outside of Virginia is not clear and will depend on the specific jurisdiction.  Until more jurisdictions permit Series LLCs and until there is more certainty about how the entity will be treated in a bankruptcy context, it is not clear that the Series LLC provides any substantial benefits over the traditional LLC model. 

For more infomration, please contact Pender & Coward's corporate and transactional team.