Series Limited Liability Companies and New York Real Property Transactions, Part II
Types of Series
Written by Vincent Danzi, Senior Legal Counsel
For the purposes of this article we are going to apply descriptive labels to these three common types of LLC series, as listed below:
(2) “Protected Series” connotes series which are liability remote from the Series LLC which contains them and liability remote from the other series, as well.
(3) “Registered Series” connotes series which are both liability remote and “publicly registered”.
These three types of series are reviewed herein using Delaware’s Limited Liability Company Act provisions as examples simply because of Delaware’s primacy as the choice of jurisdiction in entity formation, and not because the issues underlying the different types of series are specific to Delaware.
The Delaware Limited Liability Company Act, 6 Del.C. §18-215(a) permits an operating agreement to provide for one or more, “designated series of members, managers, limited liability company interests or assets. Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations, and any such series may have a separate business purpose or investment objective.” The series described in this section can be used internally by the members and managers to divide up the responsibilities and privileges associated with specified property or obligations. There is no special formation requirement to gain this power to establish series as it is part of the default Delaware Limited Liability Company Act.
However this section is chiefly operative as to the members and managers of the LLC, and not necessarily to the outside word contracting with the LLC. If this were the only type of series permitted to be formed, the Series LLC would likely not be very popular (or, for that matter, significantly different from what can be accomplished within a traditional LLC using a variety of membership classes instead of series). The ability to silo off assets and liabilities from unrelated creditors in a fashion similar to how a traditional, separate LLC is used, is not available through the use of a Basic Series such as this. To accomplish that, the organizers must look to establish a “Protected Series” or a “Registered Series”.
Delaware law allows for the creation of a “Protected Series”. Unlike the Basic Series provided for in DE Title 6 §18-215(a), the creation of a Protected Series requires some special organizational procedure beyond merely including the power to create them in the operating agreement. Additionally, the creation and maintenance of Protected Series requires special internal bookkeeping.
First, records for the assets associated with such series must be maintained separately from the other assets of the limited liability company, and from those of any other series:
“Records maintained for a protected series that reasonably identify its assets, including by specific listing, category, type, quantity, computational or allocational formula or procedure (including a percentage or share of any asset or assets) or by any other method where the identity of such assets is objectively determinable, will be deemed to account for the assets associated with such series separately from the other assets of the limited liability company, or any other series thereof.”
Secondly, a notice of the limitation on liabilities of a series must be included in the Certificate of Formation (Articles of Organization). However, the notice does not need to be specific to any particular series, or even refer to series currently in existence:
“Notice in a certificate of formation of the limitation on liabilities of a protected series as referenced in this subsection shall be sufficient for all purposes of this subsection whether or not the limited liability company has established any protected series when such notice is included in the certificate of formation, and there shall be no requirement that (i) any specific protected series of the limited liability company be referenced in such notice, or (ii) such notice use the term protected when referencing series or include a reference to this § 18-215.”
As §18-215(b)(1) through (12) makes plain, a Protected Series of a Series LLC has all the basic liability protection and power to conduct business that an independent LLC would have. However, while these provisions give a Protected Series liability protection and power similar to that enjoyed by a separate LLC, and in a relatively informal way, the Protected Series still lacks a formational step required of debtor entities under the Uniform Commercial Code: a “public organic record”.
The next and last type of series we will review was developed to address those situations where it is necessary for a series to pledge collateral in a financing statement filed in accordance with the UCC. Where it is necessary for a series to pledge personal property assets under the UCC, as in the case of mezzanine financing, for example, the solution is the “Registered Series”.
Under Article 9 of the UCC, a creditor can file a financing statement as one of the means of perfection of a security interest in personal property. Of crucial importance in the drafting of a financing statement is that the name of the debtor be properly depicted. Section 9-503(a)(1) of the UCC provides that the name of the debtor that is an LLC is only sufficient if it, “provides the name that is stated to be the registered organization's name on the public organic record most recently filed with or issued or enacted by the registered organization's jurisdiction of organization which purports to state, amend, or restate the registered organization's name.”
The UCC regards an LLC as a “registered organization”. A “registered organization” is organized by, “filing of a public organic record.” As regards limited liability companies and similar business entities, a “public organic record” is a record available to the public for inspection, “consisting of the record initially filed with or issued by a state or the United States to form or organize an organization and any record filed with or issued by the state or the United States which amends or restates the initial record.”
The Basic Series and the Protected Series require no such filing and therefore would not be regarded as a “registered organization”. Since there are no stated rules of perfection by filing for non-registered organizations, a security interest in assets held in a Basic Series or in a Protected Series cannot be perfected by filing a financing statement under Article 9 of the UCC. This is why the “registered series” was created. “A registered series is formed by the filing of a certificate of registered series in the office of the Secretary of State.”
As with a Protected Series, asset records for any registered series must account for the assets associated with such series and be maintained separately from the other assets of the limited liability company, or any other series. Also as with a Protected Series, a notice of the limitation on liabilities of a registered series must be included in the Certificate of Formation (Articles of Organization). Essentially a Registered Series is a Protected Series that meets the qualifications of a “registered organization” under the UCC, and the core of those qualifications is a filing requirement.
As we have seen, the three main types of series have different uses, and different organizational and maintenance burdens associated with them. The informality of the creation of Basic Series and Protected Series means that those structures are not appropriate for certain types of transactions and activities. The Registered Series was therefore developed to re-introduce only the most necessary formalities back into the process, chiefly that requirement that business entities have a “public organic record”, as such term is used in the UCC.
In our next article, we will examine the insurability of a series of a foreign Series LLC as an owner of real property in a state such as New York, which has not adopted the structure in its domestic Limited Liability Company Act.