Expert Advice When You Need It Most
Posted almost 2 years ago. Applies to Illinois, 1 helpful vote, 0 comments
1
Understanding Series LLCsWhat is a Series LLC? How does it differ from an ordinary LLC? A major reason for creating an LLC is to achieve limited liability for the owner(s) from activities carried on by the company. In the case of the Series LLC, this form attempts to carry that protection one step further, by protecting the assets in each separate series from liabilities created by the activities in another series. If you think of the LLC as a honeycomb, with each cell full of honey being a separate series, it may help to understand the concept. Whatever assets are placed in each cell, or series, are, theoretically, immune from claims arising against another series. 2
What the Statute Says About Separating Series from Each Other's LiabilitiesThe amendment to the LLC act which authorizes Series LLCs says: in the event that an operating agreement creates one or more series, and if separate and distinct records are maintained .... and the assets associated with any such series are held ..... and accounted for separately from the other assets of the limited liability company, or any other series .......... THEN the debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series ONLY, and not against the assets of the limited liability company generally or any other series ....... 3
Why a Series LLC, why not just create separate LLCs?The State filing fee to create an LLC in Illinois is $500. Every year the LLC must file a report and pay a fee of $250. An LLC authorized to create series has a filing fee of $750, plus $50 for each series created. The annual filing is $250 plus $50 for each series. This is intended as a cost saving as you can create an unlimited number of series, and pay only $50 for creating each, and $50 annually to keep them. Think of the saving if a taxi company formed a Series LLC, then created a separate series for each cab. If cab 11 has an accident, with liability in excess of insurance, none of the rest of the cabs would be in jeopardy. 4
So What's Wrong with That?The requirements of the act are pretty strict. You have to keep the assets of each series separate from all the others. No common bank account(s). No borrowing against the assets of Series A to fund Series C. AND you need to keep separate books for each series. That's a lot of accounting time and expense. Perhaps any saving accomplished in creating the series will be lost in the cost of complying with the act. WORSE, if you fail to comply, you may have a statutory failure which destroys the walls between the series, and allows liability of one to effect another, defeating the whole purpose. 5
Is That It?No. The ultimate test of any liability limiting device, is how it will stand up in the event of an insolvency (bankruptcy). What if Cab 11 (above) runs over a crowd of people, creating claims totaling millions more than its insurance. The unpaid injured parties, all seeking to be paid, force the whole company into bankruptcy. The company claims they can only have the assets of Series 11 (the cab). The bankruptcy judge may apply a doctrine called "substantive consolidation" essentially ruling that all the assets of the whole LLC, not just those in the series that caused the injuries, can be reached by the claimants. This, of course defeats the whole purpose. And bankruptcy judges have written articles threatening to do just that. 6
Is There Anything Else I can Do to Separate Assets from Liabilities?Maybe. If the assets you're seeking to separate are passive income generators, like real estate - separate rental properties for instance - you can place them in separate out-of-state LLCs which are less expensive to form and maintain than Illinois LLCs. So long as these LLCs are just holding companies, not engaged in an active trade or business, they are not required to register in Illinois, even if the real estate is located here. Savings in fees are huge. Colorado, for instance, has a $50 filing fee vs. $500 in Illinois. The annual report costs are $10 vs. $250. If each building is owned in a totally separate LLC, there is no concern about a statutory failure, no concern about substantave consolidation 7
OK, That Saves State Fees, What About Lawyer Fees?If you create 10 separate LLCs all to own property for you and your spouse, or you and a partner or two, it stands to reason the documentation will be almost identical for all of them. They can be "cookie cutter" documents, Although there will be costs associated with each, it would be unusual if 10 cost 10 times what one did. Find LLC LawyersRelated Searches |