Will the Series LLC kill off holding companies?

(To read Mike’s in-depth post on the Series LLC, click here)

But will it catch on? Will it lead to the extinction of the popular holding-company structure?

The answer will depend on the finance community’s comfort with the construct. In other words, can a lender safely secure a loan with a Series’ assets.

It will also depend on whether the business community can overcome the following wrinkles/hurdles:

• Selling securities – For SEC purposes, is the LLC (as a whole) the “issuer”? Or is the issuer the individual series? The availability of an exemption under Regulation A or Regulation D could rest on that answer. On the other hand, if the Series LLC is a buyer of securities (i.e., an investment fund), is the series accredited (i.e., holds $5MM in assets) if the LLC is deemed to be an accredited investor–or must each Series attain accredited investor status on its own? Any buyer or seller of securities should affirm that the Series LLC doesn’t create unnecessary regulatory obstacles.
• Interstate operations – Only 15 states have series LLC statutes. If you have a business that is confined within the State of Ohio (i.e., an apartment building in Lakewood), then you have little reason to be hauled before a court within a state that does not recognize the Series LLC form. But if you have interstate dealings, and a contractual provision (or common law) dictates that another state’s law will apply to a dispute, then you might find yourself with a judgment against the entire LLC. One way to mitigate that risk is for the LLC to hold no assets directly, but rather all assets being placed within a series. Another way is to clarify the liability and choice of law within each interstate contract.
• Record-keeping – There are certain prerequisites to enjoy the Series LLC’s liability silos. For some of them, your lawyer can ameliorate risk on the front end, such as by carefully drafting the articles of organization and the operating agreement. But the Series LLC also depends on your commitment to fastidious record keeping concerning the separateness of the assets within each Series. This isn’t merely a theoretical discussion; a judgment creditor will almost certainly conduct in-depth discovery on the quality of a Series’ record keeping. It might ultimately be simpler for a judgment creditor to pierce a Series LLC’s veil than to pierce a holding company’s structure.
• Re-titling assets – If you want to convert a real estate holding company structure into a Series LLC, you should record a notice that the Series is the title holder (perhaps via an Affidavit of Facts, per ORC 5301.252). A lender could insist on a quit-claim deed. If such a deed is required, then exemption (m) would likely allow a LLC to avoid the conveyance fee. These costs should be factored into the decision of whether to convert to a Series LLC.
• Tax implications – The Series LLC does one thing better than a holding company: allowing some members to associated with some assets, but not other assets, and in varying proportions. But keep in mind that you will likely have created multiple taxpayers (i.e. partnerships filing Form 1065s), so there is no efficiency created from that perspective. See Fed. Reg. 119921-09 (Proposed Reg. 2010).

Attorney Michael Rasor will be advising businesses and investors on Series LLCs. Contact Mike at [email protected] with inquiries on articles of organization, titling of assets, and operating agreement provisions.