11.22 Limited Liability Companies

11.22.1

In General

Limited liability companies are a form of business entity created by state statute to take advantage of the features of both corporations and partnerships. Although the most advantageous aspect of the limited liability company is its tax status, there are several other features which make it an attractive type of entity.

A limited liability company combines the advantage of the limited liability of a shareholder in a corporation with the federal tax benefits of partners in partnerships. Additionally the limited liability company provides added flexibility in the management of the company and distribution of profits.

Different terminology is used in limited liability companies as opposed to corporations and partnerships. Examples of the most commonly used terms are as follows:

Manager

A manager is a person designated by members to manage the limited liability company. This person is similar to a corporate officer or a managing partner of a partnership.

Member

This is an owner of an interest in the limited liability company. A member may be a partnership, general or limited, another limited liability company, a trust, an estate, an association, a corporation, a custodian or nominee or an individual.

Operating Agreement

This is the document agreed to by the Members (owners) which governs the management of the limited liability company in the conduct of its business and distribution of profits. This document must be in writing. The operating agreement is similar to the corporate charter and by-laws for a corporation or the partnership agreement for a partnership.

11.22.2

Series Limited Liability Company

Series Limited Liability Company

This is a new type of limited liability company. A "series llc" is a limited liability company under which a distinct series of ownership, management and economic rights is recognized such that each series owns and controls specific assets which are liable only for the debts and obligations incurred by that specific series. The goal is that the financial situation of one series will not affect the financial situation of any other series without having to set up a separate llc for each series.

Only a few states have adopted statutes permitting organization of "series limited liability companies" and it is unclear whether the limited liability features of each series will be recognized as to federal obligations or by states which have not adopted statutes permitting "series" llcs. The statutes governing limited liability companies, particularly "series" llcs, vary widely from state to state. Therefore, consult with your local underwriting counsel for specific guidelines in this area.

Several states have adopted statutes permitting organization of "series limited liability companies" and it is unclear whether the limited liability features of each series will be recognized as to federal liens or by states which have not adopted statutes permitting "series" llcs. The statutes governing limited liability companies, particularly "series" llcs, vary from state to state.

States and territories where a Series LLC can be formed:

Alabama Code of Alabama Section 10A-5A-11.

Delaware (Limited Liability Company Act) ^ 6 Del. Code Ann. §18-215.

District of Columbia Code Ann. §29-802.06.

Illinois 805 ILCS 180/37-40.

Indiana Code Section 23-18.1-1-1 to 23-18.1-7-4.

Iowa Code Ann. §490A.305.

Kansas K.S.A. 17-76,143 (2012).

Missouri  Mo. Rev. Stat §347.186.1.

Montana (Montana Limited Liability Act) Montana Ann. Code §35-8-304 et seq.

Nevada (Nevada Revised Statutes) Nevada Rev. Stat. Montana Ann. Code §86.296.

North Dakota N.D. Cent. Code §§10-32-17.5, 10-32-48, 10-32-56.5.a, 10-32-56.7. North Dakota allows series LLCs, but does not specifically provide for a liability shield between the different series.

Oklahoma 18 Okla. St. Ann. §§2005(B), 2054.4.

Tennessee T.C.A. §48-249-309.

Texas Business Organizations Code §§101.601 to 101.621, 21.152(A),(C),(D), 21.153(A), 21.361(A)(2).

Utah Revised Limited Liability Company Act § 48-2c-606.

Virginia House Bill 2272 which will be effective 7/1/19 provides for creation of series LLCs and is apparently based on the Uniform Protected Series Act.

Wisconsin Wis. Stat. Ann. §183.0504. Wisconsin allows series LLCs, but does not specifically provide for a liability shield between the different series.

Wyoming Wyo. Code Section 17-29-211.

Considerations in review of a Series LLC include:

  1. Is the Series LLC created and domiciled in the state where the land is located;
  2. Does the law of the state in which the land is located authorize domestic Series LLCs;
  3. Does the Series LLC strictly comply with the legal requirements for a Series LLC;
  4. Does the certificate of formation set forth the name of the Series LLC (e.g. the name of the asset);
  5. Does the certificate of formation designate managers or members for each specific Series LLC;
  6. Is the certificate of formation amended when a new Series LLC is established;
  7. Does the LLC Agreement contain provisions creating a Series LLC structure;
  8. Do contemporaneous internal records document the separateness of the Series LLC assets from other Series LLC assets;
  9. Does the law of the state where the series is formed provide for authorization of a series in the company agreement or certificate of formation;
  10. Does the law of the state where the series is formed provide for the determination of the governing authority of a series;
  11. If the Mother LLC is manager managed, the Series LLC must be manager managed, and if the Mother LLC is member managed, the Series LLC should be member managed;
  12. Do not issue a policy insuring title in a Series LLC if the law of the state of the land does not authorize a Series LLC;
  13. Do not disregard a lien or bankruptcy against the Mother LLC and do not disregard a bankruptcy or federal lien against another Series LLC.

Transactions involving a Series LLC require approval by a Senior Underwriter.