[This is the second of several articles on series LLCs, especially Indiana series LLCs. Go here for Part I, which includes an introduction to the concept of series LLCs and some terminology.]
Is a series an entity?
That’s the question almost every lawyer asks when first introduced to series LLCs. It is really shorthand for a lot of other questions: Can a series enter into its own contracts? Can it sue and be sued in its own name? Can assets be titled in the name of the series, as opposed to the name of the master LLC? And so on.
One answer is yes, a series is an entity, except when it’s not. A slightly more satisfying answer is that a series is an entity but lacks some of the attributes that one would ordinarily expect an entity to have. In other words, there is no single, definitive answer.
A series is an entity. Maybe.
The first part of the above answer comes directly from the Indiana statute, but so does the first “maybe.” And the second. Ind. Code § 23‑18.1‑4‑4(a) provides, “A series with limited liability must be treated as a separate entity to the extent set forth in the articles of organization of the master limited liability company.”
Note the words “a series with limited liability.” There are two types of limited liability. The first type is that the creditors of the LLC cannot reach the assets of the LLC’s members or managers. The second type, the one that is unique to series LLCs, is that creditors of one part of the LLC, i.e., a series, cannot reach the assets of the other parts of the LLC. (For ease of reference, I’ll refer to the second type as “internal limited liability” or “internal liability limitations.”) When the section of the statute quoted above speaks of “a series with limited liability,” it must refer to internal limited liability because the first category is an attribute of all LLCs.
Although internal limited liability is included in the usual concept of series LLCs described in Part I, the Indiana statute appears to contemplate the possibility of a series without it. In particular, Ind. Code § 23‑18.1‑5-1(a) provides that a series has limited liability only if certain conditions are satisfied, one of which is, “Notice of the limitation on liabilities of a series as referenced in this subsection is set forth in the articles of organization of the master limited liability company.” It appears then, that one could create a series under a master LLC that does not have limited liability, and that series would not qualify as a separate entity under Section 4(a), quoted above. Precisely why one would do that is a mystery because everything I can think of that could be done through a series LLC without internal limited liability, and without the series being treated as a separate entity, could be done with a traditional LLC.
Additional uncertainty lies in the last part of Section 4(a), “to the extent set forth in the articles of organization of the master limited liability company.” Imagine articles of organization of a master LLC that provide for series with internal limited liability but either fail to provide for the series to be treated as separate entities or provide for the series to have some, but not all, attributes of a separate entity. How a court would deal with such a situation is an unanswered question.
For the remainder of this article and the ones that follow, I will address series LLCs formed under articles of organization that provide for limited liability for all series and call for all series to be treated as separate entities to the maximum extent permitted by the statute.
A series is an entity. Mostly.
A series has some, probably most, of the attributes that one normally expects an entity to have. For example, a series can do all of the following in its own name:
- Enter into contracts
- Sue and be sued in its own name.
- Hold property in its own name, including real property and both tangible and intangible personal property.
- Grant liens and security interests.
- Conduct business.
- Exercise the powers of a limited liability company.
In addition, it can be dissolved separately from the master LLC.
On the other hand, under the Indiana statute, a series appears to lack some of the attributes of a separate entity. For example, there is no provision in the Indiana statute for a series to undergo any sort of conversion into another type of entity, such as a corporation, with continuity of identity. In fact, there appears to be no possibility for the series to exist outside the master LLC under which it was formed.
So it is relatively safe to think of a series as a new type of entity. Except when it is not.
[Read Part III here.]