Series LLCs in PA – Uncertainty Lessens
September 7, 2016
Series LLCs are gaining traction across the country and, although Pennsylvania does not (yet?) permit the formation of Series LLCs, it has taken a major step in solidifying their acceptance here.
A Series LLC is a limited liability company that is organized to permit separate cells or “series” within one organization, each of which may have its own members, managers, distributions, assets and liabilities. In doing so, organizers do not have to form separate entities and can potentially save significant money in organization costs and filing fees and, if applicable to the business of the organization, time and expenses associated with regulatory approvals. Series LLCs have been most frequently used for investment funds, real estate investment companies, and captive insurance companies, but could be a viable structure for any business that operates multiple divisions or operations, so long as the required separation between the business units can be maintained.
In 1996, Delaware became the first state in the U.S. to permit formation of Series LLCs. Since then, eleven states (plus Puerto Rico and the District of Columbia) have adopted legislation to permit formation of these associations. Pennsylvania has declined to follow suit. Until recently, there has been significant concern on the part of Pennsylvania practitioners as to whether Pennsylvania would respect the limited liability of a series in a Series LLC formed in, say, Delaware, but whose operations are conducted in Pennsylvania. In other words, would a Pennsylvania court respect the limited liability of a series of a Delaware Series LLC if an action was brought in Pennsylvania against the series? Or would Pennsylvania disregard the shield of the series, and because Pennsylvania does not permit the formation of Series LLCs, perhaps “pierce the veil” of the series so that each series within the Series LLC would become answerable for the liabilities of each other as well as for the Series LLC itself?
By adopting the recent Association Transactions Act in 2014, Pennsylvania took a significant step to address this concern. Pennsylvania followed the Uniform Business Organizations Code, making clear that the laws of the jurisdiction of formation of a foreign association (e.g. Delaware in the illustration above) would not only govern the internal affairs of the association and the liability of its members for debts, obligations or other liabilities of the association, but would also govern the liability of a series or protected cell of a foreign association.
This legislative action has paved the way for businesses operating in Pennsylvania to consider forming as a Series LLC in Delaware or one of the other jurisdictions where they are permitted. Unfortunately, as with any new entity, with very little case law applying various business laws and concepts to the Series LLC, it will take time to resolve the uncertainties associated with these entities. For example, federal and state tax treatment of Series LLCs is evolving, though with the IRS issuing proposed regulations in 2010, it appears settled that series of a Series LLC will be treated as separate entities for federal taxation purposes. Other issues that remain unclear until there is more case law to provide guidance are how bankruptcy laws and security interests will be applied to Series LLCs.
In all cases, the decision of whether to use the Series LLC must involve a careful weighing of the benefits against the limitations and uncertainties associated with this form. If limited liability among the multiple series is a critical component of the organizer’s objectives, then the cost savings obtained by using a Series LLC may not outweigh the risk that a bankruptcy court may refuse to recognize the limited liability among the separate series.
For more information regarding Series LLCs and other alternative entities, please contact a member of the Firm’s Corporate & Tax Practice Group.
Kathy P. Granbois concentrates her practice in corporate and business law, including mergers and acquisitions, entity formation, corporate finance, joint ventures, sales and distribution, and commercial matters for clients ranging in size from family-owned businesses to publicly traded companies. Kathy’s practice also includes the formation and counseling of nonprofit corporations.