Although the United States comprises only about five percent of the world's population, it has been estimated that the U.S. is home to nearly three-quarters of the globe's litigation. Over the years, entrepreneurs have sought ways to protect their personal assets from the risks associated with their business enterprises.
For more than a century, the corporate form of business organization was the favored method of achieving limited liability protection. However, this advantage was offset by the double taxation of corporate profit distributed to shareholders.
In recent years, a new form of business organization, the Limited Liability Company (LLC), has increasingly become the entity of choice for many business people and their legal counsel. An LLC provides owners (known as "members") with both limited liability and the option of being taxed like a partnership on a more favorable, "pass-through" basis.
One inherent drawback to a standard Limited Liability Company is that when there are a number of assets owned by the LLC, all those assets are subject to the claim of a creditor against any one of them. For example, if an LLC owned an apartment building and a shopping center, a judgment for an injury that occurred in the apartment building would be enforceable against all of the LLC's assets, including the shopping center. One way to protect other LLC assets from a claim against just one of them is to create a separate Limited Liability Company for each asset. The solution is imperfect because if someone has a dozen separate properties, she would need to create a dozen different LLCs, with the inevitable administration and costs associated with setting up and maintaining numerous entities.
Delaware was a pioneer in developing the Limited Liability Company and continues to improve upon the concept. The Delaware Limited Liability Company Act provides for the creation of separate "series," where assets and liabilities can be segregated into distinct cells within the umbrella of a single Limited Liability Company. Using the prior example, if the LLC held the apartment building in one series and the shopping center in another, a judgment against the apartment building series would be enforceable against that series, and no other. It would not be enforceable against the shopping center series even though both series are within the same LLC. The strategy is especially useful when there are "dangerous" assets, those that have a higher likelihood to trigger a liability, as well "safe" assets (i.e., cash or securities), within the same Limited Liability Company.
The Series LLC form of organization also allows for flexibility in that each series can be organized for a separate business purpose, new series can be added and others terminated, and each series can make distributions to its members without regard to the financial condition of another series. An additional advantage of Series Limited Liability Companies is that each series can have different members and managers, so that each entity can be tailored to reflect the needs of that particular asset or business enterprise without affecting other series within the Limited Liability Company. For instance, if the members of the Limited Liability Company want to provide a key employee of a particular series with an ownership interest in that venture, the members could add that employee as an additional member of that particular series, allowing the individual an opportunity to share in the risk and returns of that enterprise without giving him or her an ownership interest in any other series within the Limited Liability Company.
As with other forms of business organizations, certain formalities must be observed. For instance, each series' assets must be held and accounted for separately from the others. Likewise, separate books and records must be maintained for each series. Separate tax returns for each series may also be required. However, Limited Liability Companies can elect to be treated like a partnership for tax purposes so that profits pass through to its members, avoiding the double taxation associated with profits of corporations.
A Delaware Series Limited Liability Company can provide protection, flexibility, favorable tax treatment and other benefits under the right circumstances. The attorneys at The Law Offices of Marc J. Lane would be happy to discuss your unique situation with you, and help you design the best form of business entity to meet your special needs.
John J. Lapinski serves as an Associate Attorney, and the Firm Administrator for The Law Offices of Marc J. Lane, a Professional Corporation, and its investment affiliates, Marc J. Lane & Company and Marc J. Lane Investment Management, Inc. Mr. Lapinski is a graduate of Chicago-Kent College of Law (J.D.) and Elmhurst College (B.S.).
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.