This is the first of several articles about series limited liability companies in general and Indiana’s new series limited liability company statute in particular – a “series series” of articles. (Sorry. I couldn’t resist.)
Even as lame as that joke is, it demonstrates that terminology in this area can be very confusing, and the confusion is compounded by the fact that the series LLC statutes in different states use different words for the same concepts. Here are some rules I’ll follow throughout these articles.
- Generally, I’ll stick with the definitions contained in the Indiana statutes, and I’ll let you know when I don’t.
- For example, “series,” “series limited liability company,” and “master limited liability company” are defined in the Indiana series LLC statute, Ind. Code art. 23-18.1, specifically at Ind. Code ch. 23-18.1-2. I’ll often shorten “series limited liability company” and “master limited liability company” to “series LLC” and “master LLC.”
- “Limited liability company,” “interest,” “member,” “manager,” and other terms are defined in Indiana LLC statute (or Business Flexibility Act), Ind. Code art. 23-18, specifically at Ind. Code ch. 23-18-1. Of course, I’ll often shorten “limited liability company” to “LLC.”
- For ease of reference, I’ll assume that interest in a limited liability company is issued in “units,” with each unit being analogous to a share of stock in a corporation.
One more note before we get started. LLC aficionados will recognize that some of the introductory explanations are oversimplifications. Stay with me anyway. We’ll eventually get to the nuances.
What is a series LLC?
A series limited liability company is one in which at least some of the LLC’s units of interest are subdivided into groups, with each group called a “series.” Each series can hold its own assets, conduct its own business, enter into its own contracts, and incur liability in its own name, all apart from the rest of the LLC. Generally, a series has limited liability. (Note, however, that the Indiana statute appears to contemplate the possibility of series that do not have limited liability. More on that later.) In other words, the creditors of a series can reach only the assets held by that series; they cannot reach other assets held by the LLC, assets held by any other series of the LLC, or the personal assets of the members or managers. A limited liability company with articles of organization that authorize it to create one or more series is called a master LLC, whether or not it has actually created a series. A series LLC is a master LLC plus all series that have, in fact, been created.
Is a series simply a subsidiary LLC owned by the master LLC?
No, although there are many similarities to that structure, and it’s an alternative to using a series LLC. Despite the similarities, there are also many differences, beginning with the observation that a master LLC does not own its series in the same way a parent LLC owns its subsidiaries. Instead, the series is owned by the members who own the units of interest that comprise the series. The Indiana statute refers to those members as being “associated” with the series.
What is the advantage of a series LLC over a parent LLC that holds subsidiary LLCs?
Good question, Grasshopper.
A common answer is that setting up a new series is simpler, quicker, and cheaper that setting up a new LLC. That may be true in some circumstances, particularly in states that have large filing fees and relatively onerous procedures for new LLCs and lower filing fees and more streamlined procedures for new series. However, Indiana is not one of those states. Organizing an Indiana LLC involves simple procedures and modest filing fees.
Another answer is that series LLCs are rapidly gaining acceptance in some types of business, particularly real estate development, and that lenders and other investors may come to expect a series LLC structure. I’m not sure that’s true yet, but it may come to pass.
The answer I subscribe to is that we don’t yet know all the advantages series LLCs may hold over other structures. After all, it took several years, maybe a decade or more, for legal practitioners to gain comfort with and to recognize the advantages of LLCs, and now there are far more LLCs organized than corporations, limited partnerships, or other business structures.
I plan to organize a series LLC in Delaware. Can I now organize it in Indiana instead?
Not just yet. The new statute doesn’t take effect until January 1, 2017, but you could start now with a traditional Indiana LLC and convert it to a master LLC later, as the new statute permits.
[Click for Part II.]