Conversion to a Series LLC

I argue that some of the important gray aspects of SLLCs are becoming clear, so I should comment on some of the considerations for converting a holding company to a SLLC and provide some of conceptual basis for them.

In brief: Series LLCs provide liability insulation when (1) property is formally allocated to a series and (2) separately accounted for. We recommend converting to a series LLC and allocating property or parcels in the name of a series of the LLC

Background

An LLC already takes advantage of the liability protections set forth by law in Nevada. By observing the requirements of the law, the LLC’s owners, managers, and employees will not held personally liable for the debts and liabilities of the entity. The only assets available to a creditor of the LLC are those assets of the LLC. Where substantial assets are owned by a company, business owners may choose to form separate LLCs for each asset in order for the liabilities of any one asset to be protected from claims arising from the operation of separate activities or assets. This creates an administrative burden that can be difficult to justify.

The series LLC is a vehicle that allows one entity to hold several assets and carry on several activitieswhile segregating the liabilities from any other activity or asset. This is accomplished by allocating assets or activities among the “series”—also called “cells”—of a single series LLC. While each series can have separate ownership and management the advantages are just as great for more streamlined structures with identical managers and members in each.

Requirements and Conventions

bee-honeycombThere are two keys to taking advantage of the series LLC structure’s protections: (1) allocation of assets and (2) financial accounting. Only assets which are insulated from each other receive protection. In Nevada, as in the majority of states with series LLC laws, there is no public registry of what series are promulgated by a series LLC or what they hold. It is a purely internal allocation but one which should have a reliable and maintainable format. As one part of this, some series LLCs name their series by a serial number (Series B of Smith Property Holdings LLC) and some choose a descriptive name (123 Elm Series of Smith Property Holdings LLC). The second requirement is that the assets of a series be accounted for separately. With real property, expenses such as taxes and maintenance are easily identified to the property giving rise the expense, thus making the holding of real property an excellent fit for the requirements of the series LLC structure.

Existing LLCs can be converted to a series LLC by amending their Articles of Organization to indicate that assets and liabilities may be held distinctly from others. No notice is required by statute to any party with which the series LLC does business that its assets are segregated. Because a series LLC may make certain assets inaccessible to a creditor without actually changing title to the property, allocation to a series may not be allowed by many loan agreements or may require consent of the secured party or other lender to avoid breaching an existing lending agreement.

That said, while not always required, it is often in the property-owner’s own best interest to put other parties on notice that assets have been segregated. Giving advance notice of segregation is a prophylactic in itself against claims as claimants who know that their potential recovery is limited may avoid suing at all. Full notice also reduces the risk that claimants who have initiated a suit may attempt to attach property outside the scope of recovery. While a claimant should not be able to unwind or pierce an allocation to series, giving them notice that the asset is segregated in advance should make it easier to release the property from any improper liens or other claims.

The most efficient way of giving notice is to actually pass title to any asset in the name of the series to which it has been allocated. This ensures that any contract or account will be entered into with the series and that all parties know the scope is limited. This is especially valuable for assets such as real property, aircraft, or automobiles where there is a formal registry of title. The disadvantage of taking title in the name of the series is that it may be more restrictive in the future. It may be more difficult to deal with some lenders, insurance companies, or utility companies. We sometimes see, for example, separate accounts for each name when it really would have been more efficient for all properties to be listed in a single account or related accounts.

Summary

  1. Amend Articles of Organization to change name and convert to a series LLC: expedite to accomplish amendment in advance of property acquisition
  2. Amend Operating Agreement
  3. Promulgate series supplements to create individual series
  4. Allocate properties to the series as they are acquired