By: Robert C. Hackney
Should I form a Wyoming Series LLC for my business?
The short answer to that question, that I will explain in detail below, is that if you are in one of two distinct businesses, I would seriously consider it.
Progressive Wyoming
Why would you consider Wyoming to being with, if your business is not located in Wyoming? Wyoming is an interesting state, with vast natural resources, a large land mass and the smallest population of all 50 states, with just under 600,000 residents. Despite its size, Wyoming has been on the forefront of business innovation for some time. In 1977, Wyoming was the first state to adopt a limited liability company statute that permitted anyone to form an LLC. More recently, in early 2018, Wyoming passed a number of pro-blockchain laws which are more advanced than any other state. Also in 2018, as part of their revamping of business laws, they modified their corporate code to permit the creation of Series LLCs.
The Series LLC
In 1996, Delaware created a new entity called the Series LLC. This concept allows one LLC to create a number of different series or units under the same LLC entity. The idea is that each different series or unit can own distinct assets and can incur liabilities separate from the other units and can even have different managers and different members. The concept is that there is no need to file a number of different LLCs to hold different assets. Why have multiple filings of multiple entities, when you can create one entity that acts as an “umbrella” over the different “divisions?”
This, theoretically, should reduce costs and paperwork. To further explain the concept, compare it to a corporation structure where there is a parent company and a number of subsidiaries. Now use that analogy and simplify it further by imagining that each subsidiary does not need to be a separate entity for state filing purposes the way subsidiary corporations are structured.
The Series LLC is more like a corporation with separate divisions, but because the whole LLC concept is a hybrid to begin with, each “division” is treated separately for management, liability and sometimes even ownership purposes, without having to be formed separately under state law. (All of this is probably not as confusing as I have just made it sound).
What other states have adopted Series LLC laws?
States that allow the formation of a Series LLC are Alabama, Delaware, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, Tennessee, Texas, Utah, and most recently Wyoming. In addition, the District of Columbia, and Puerto Rico also have enacted legislation permitting the formation of Series LLCs in their jurisdictions.
States to Avoid
Upon initial review, Minnesota, North Dakota and Wisconsin appear to also have approved of the Series LLC concept, and mention the word “series” in their LLC laws. Unfortunately, these states are clearly not Series LLC states, since their laws do not limit liability to each individual series, which defeats the main purpose of a Series LLC. These three states have similar language in their statutes that say, in effect, that a series is defined as ““a category of membership interests, within a class of membership interests, that have some of the same rights and preferences as other membership interests within the same class, but that differ in one or more rights and preferences from another category of membership interests within that class.” What this says to me is that, just like preferred stock in a corporation, you can give different benefits to different classes of owners, but there is no limitation of liability for each series. Stay away from these states if you are considering a Series LLC.
For various reasons relating to the wording of their statutes and additional requirements imposed on the Series LLC in these states, I would also stay away from Montana, Texas, and Kansas. In fact, the most popular states with the most flexible laws are Delaware, Nevada, and now Wyoming. I predict that Wyoming will become a major player in this area. In addition, while I recommend Delaware, Nevada and Wyoming, if you are operating a real estate investment business in a state like Tennessee and all of your real estate is located in that state, check out the Tennessee Series LLC. In a situation like that, there may be no need to incur the cost of being authorized to do business in the home state (Tennessee) and the state of formation (for example, Delaware).
The Uniformity Issue
The reason that it is hard to pick which state to use is because there is no uniform Series LLC law. When limited liability companies became popular, the Uniform Law Commission came out with the Uniform Limited Liability Company Act. The Uniform Law Commission is a non-profit that promotes uniformity among state laws in an effort to bring stability to critical areas of the law, by researching and drafting suggested uniform laws. What you find among the states in the area of LLC state laws are mostly laws that are based upon the Uniform Limited Liability Company Act, with variations, of course. So far, no such legislation has been suggested for the Series LLC, and consequently, the law is presently a hodgepodge of laws with no uniformity.
Who Should Use a Series LLC
Until the creation of the Series LLC most real estate syndicators and other real estate investment groups would create a separate LLC for each parcel of real estate. This keeps each of the properties separated legally and keeps each property away from creditors of the other properties. The Series LLC simplifies the administrative aspects of having a variety of different LLCs for different real estate projects. Using a Series LLC, you could have five different real estate projects, for example, and have each one in a different series of the same LLC. Each project would have its own loans and debts which would be separate from the others and there would be really no crossover in liability between each different series. Each series could have its own Manager and its own investor/owners. This concept reduces complication and reduces some of the expenses involved in maintaining a number of different and separate limited liability companies.
The other most popular area for using a Series LLC is in the hedge fund and venture capital business. The traditional way that hedge funds have been structured is by creation of either a limited partnership or a limited liability company. With the advent of the Series LLC, that has now become a popular investment vehicle as well. Many people in the hedge fund industry view the Series LLC as a special purpose bankruptcy remote entity, which simply means that each series is separate from each other series for liability or bankruptcy purposes. The assets of each series are protected in the event another series incurs liability and its assets are at risk.
In a hedge fund or money management program, for example, the sponsor of the overall Series LLC would offer different investment programs in each series, and each series would have its own asset manager. The sponsor of the Series LLC and the manager of each program would share fees, all of which would be properly disclosed. Using this method, a company that manages a large amount of assets can offer a wide variety of investment programs to its clients, all through one umbrella Series LLC.
While international law is beyond the scope of this article, about twenty percent of all Series LLCs that have been formed are being used in various ways outside the United States. Primarily, these Series LLCs are involved in multi-national real estate holdings, although some are involved in the energy industry.
Possible Disadvantages of the Series LLC
• Audit costs for a Series LLC would be no different than for multiple LLCs.
• The IRS presently views each series of a Series LLC as a separate entity for tax purposes, including the filing of tax returns.
• Some states don’t recognize the Series LLC, so if you are operating in one of those states, the separation of liability may not apply.
• The bankruptcy remote aspects of the Series LLC have not been tested in all bankruptcy jurisdictions.
• Because case law is so sparse with regarding to a Series LLC, don’t put any assets of a series in any state that is not a Series LLC state.
• There may be legal issues for ERISA investors in a Series LLC hedge fund, check with the fund sponsor in advance.
Conclusion
With careful planning, the Series LLC can be a valuable asset as an investment vehicle. Don’t overlook this potential opportunity. Wyoming is business friendly, and is positioning itself to be a major player in the Series LLC industry. Consider Wyoming, and not just Delaware and Nevada if you are looking into formation of a Series LLC.