Best Practices: What is a Series LLC, Anyway?

While most participating SBA lenders are familiar with loan structures involving a traditional limited liability company (“LLC”), fewer understand the variation called a Series LLC. Series LLCs offer a variety of protections for borrowers, yet it is a relatively new business structure concept that is still not widely understood. A Series LLC is a type of limited liability company that allows for the creation of multiple distinct series within a single LLC – essentially, it is an entity within an entity where a series can have its own assets, liabilities, members, and managers, and operate independently of the other series within the LLC. This structure provides a significant degree of separateness for individual series, meaning that the assets of one series are protected from the liabilities of other series within the same LLC. This can be particularly advantageous for businesses that want to segregate different lines of business, investments, or properties while maintaining the simplicity and flexibility of a single LLC structure; however, such legal structure is the creation of state law and can only be formed in a state that authorizes the formation of a Series LLC.

By way of example – John and Sally are partners who own two diners (e.g., John’s Diner and Sally’s Diner). They open their business by forming one traditional LLC to own both diners. John’s Diner is not successful and can’t meet its rent obligations to the landlord, while Sally’s Diner is very profitable. John’s Diner’s landlord sues the LLC for back rent. What’s the result? In the event of a judgment, the profits the LLC gets from Sally’s Diner can be reached by John’s Diner’s landlord and business assets used by both diners can be levied and liquidated to satisfy the landlord’s judgment pertaining to John’s Diner. Conversely, John and Sally establish a traditional (or a “parent”) LLC to operate their business venture. However, John and Sally also form a Series LLC for each dining location. Now, assuming that each Series LLC was properly formed and maintained, in accordance with state law, each diner will be associated with a separate series by which the assets of each diner will be protected from the creditors of the other. In this example, since John’s Diner is operating through a Series LLC (as opposed to the transitional LLC), the landlord of John’s Diner will not be able to reach the profits or tangible assets of Sally’s Diner even though both diners are subsidiaries of the parent LLC.

For most participating SBA lenders, a related issue that arises in connection with a Series LLCs that are debtors is what name to use for the Series LLC on the financing statement. When a Series LLC is a debtor on a financing statement, the name used must begin with the name of the series limited liability company and include any required words or abbreviations indicating it is a limited liability company. Additionally, some states require for the name of the Series debtor to contain a phrase “Protected Series,” or “Series 1,” or use the abbreviation “PS.” For example, if the series limited liability company is named “ABC LLC,” the name on the financing statement should be “ABC LLC Protected Series” or “ABC LLC PS” or “ABC LLC Series 1.” Having said that, within the states that do not use such generic names, it is currently unclear how to identify a Series LLC as a debtor in a financing statement when the Series LLC does not have a clearly identifiable name or a name that is distinguishable from the names of other organizations. As such, more legislation is needed from the states’ legislative bodies to address this issue and provide useful guidelines for clearly naming and registering a Series LLC debtor in a unique and distinguishable way that may resolve the uncertainty.  In any event, Lenders must work with its legal counsel to ensure its financing statement adheres to the local jurisdiction’s Series LLC’s requirements.

For further assistance please contact the attorneys at Starfield & Smith, P.C. at 215-542-7070 or email us at info@starfieldsmith.com.