If you are not already familiar with series LLCs or with the new Indiana series LLC statute that takes effect on January 1, 2017, you may want to read the articles at Part I, Part II, Part III, Part IV, and Part V.
In the first of these articles, I compared a series LLC to a parent LLC with subsidiary LLCs, and I stated that one difference between the two concepts is that a master LLC does not own its series in the same sense that a parent company owns its subsidiaries. Instead, the interest that makes up each series is held by persons who may or may not also hold interest in the master LLC or in other series. Although I believe that is commonly the way series LLCs are set up, I think it may be possible to set up a series LLC so that the master LLC does, in fact, hold part or all of the interest in its series. Let’s look at four possible structures, using the example of a real estate developer than develops and owns three apartment buildings.
Now that we’ve discussed the formal public filings necessary to set up a master LLC and series, we’ll turn out attention to the content of operating agreements.
As mentioned in the last post, every master LLC must have an operating agreement, and prudence dictates that it be in writing, even though the statute does not, at least not expressly. As a starting point, the operating agreement for a master LLC should have all the same elements as an operating agreement for a traditional LLC.
The first article on series LLCs contained some basic concepts and terminology. The second and third ones addressed the fundamental questions of whether a series is a separate entity (answer: yes, but it lacks some of the attributes of a separate entity) and of what defines or constitutes a series (answer, at least as contemplated by the Indiana statute: a portion of the interest in the master LLC designated as the series). We’ll return later to some other metaphysical questions, but this article discusses the more mundane issue, how does one set up a series LLC in Indiana?
Organizing the Master LLC
As with a traditional LLC, a master limited liability company is formed by filing articles of organization with the Indiana Secretary of State. Ind. Code § 23‑18.1‑3‑1 and § 23‑18.1‑6‑1. An existing LLC can be converted to a master LLC with appropriate amendments to its articles of organization, but the amendment requires unanimous consent of the members, regardless of any provision of the operating agreement permitting the articles of organization to be amended with less than unanimous consent. Ind. Code § 23‑18.1‑3‑2. It appears that it is permitted, but not necessary, for the articles of organization to include the names of the series that may be designated. See Ind. Code § 23‑18.1‑6‑7, discussed below.
The second of this group of articles on series limited liability companies addressed the question of whether a series is an entity under Indiana law and concluded that the best answer is probably, yes, even though it lacks some of the attributes that one would ordinarily expect of an entity. But exactly what is it that makes up a series?
The definition of “series”
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[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.
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.
On March 23, Indiana’s governor signed House Enrolled Act 1336 which adds to the Indiana Business Flexibility Act to provide for series LLCs. In general, I think it’s a good thing that Indiana has joined the dozen or more other states (plus D.C. and Puerto Rico) with series limited liability companies. I expect to post a detailed analysis of the bill, pointing out the good and the bad, before too long. In the meantime, here’s a letter I wrote in support of the bill.
February 16, 2016
VIA email Senator.Zakas@iga.in.gov
With the bankruptcy courts’ inconsistent treatment of a debtor’s LLC membership rights, how should someone structure a limited liability company to maximize the possibility that, should the member file for bankruptcy protection, the member’s noneconomic rights will not end up in the hands of a bankruptcy trustee and, possibly, a subsequent acquirer? With the current state of case law, there seems to be no sure-fire way, but the following factors may help. Please recognize, however, that other, these factors may run counter to other goals and the decision to include them should be made cautiously with the advice of counsel.
- Avoid LLCs owned by one person or by a married couple. There appears to be no way of preventing a bankruptcy trustee from acquiring the economic and noneconomic rights in a single-member LLC or in, in the case of joint bankruptcy of a married couple, a limited liability company owned entirely by two spouses.