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Editorial 10 MIN READ

The series LLC, three decades in: Delaware invents a new kind of series

Senate Bill 89 split the series into two forms, and the registered series is the one institutions will ask for

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 7 sections
  1. What Senate Bill 89 actually did
  2. Why Delaware bothered
  3. What the registered series does not do
  4. Illinois is still the cheap domestic option
  5. The state map in November 2019
  6. Who the new registered series is actually for
  7. Sources

elaware now has two kinds of series LLC. Senate Bill 89, signed by Governor Carney on June 19, 2019 and effective August 1, kept the old protected series at 6 Del. C. § 18-215 and added a new registered series at 6 Del. C. § 18-218. The registered series is the one that can deliver a certificate of good standing, the one that can be a constituent party to a merger on its own, and the one a secured lender is going to ask for when you offer a cell as collateral.

This is the biggest structural change to the series LLC since the form was enacted in 1996. The twenty-month update to the map we last drew in March 2018 and the full argument from July 2016 is that Delaware has now split the series into two juridical animals, and the rest of the country will spend the next several years deciding whether to follow.

What Senate Bill 89 actually did

The 150th General Assembly passed SB 89 on June 18, 2019. Governor Carney signed it the next day. The bill amended the Delaware Limited Liability Company Act in several places, but the operational heart of the change is the creation of a new section, 6 Del. C. § 18-218, which authorizes a "registered series" as a separate filing with the Delaware Division of Corporations.

Under the new regime, a Delaware series LLC may establish two distinct types of series under the same master LLC. A "protected series" under § 18-215 is formed the way every Delaware series has been formed since 1996: by notice in the certificate of formation that the LLC may establish series, plus provisions in the operating agreement creating the series and recording the members, managers, assets, and liabilities. No state filing is required for each protected series. The shield is internal. The public record of the protected series' existence lives in the operating agreement and nowhere else.

A "registered series" under § 18-218 is different. It is formed by filing a Certificate of Registered Series with the Division of Corporations, signed by an authorized person, containing the name of the registered series and the name of the Delaware LLC of which it is a series. The filing fee is $110. Once filed, the registered series is a separate "association" and a separate "person" under the act. It can sue and be sued in its own name, hold title to property in its own name, and receive a certificate of good standing from the Division in its own name. It can merge with or convert into another registered series of the same LLC under § 18-219 and § 18-220. It pays its own annual tax of $75 (the new § 18-1107(n) franchise tax for registered series), separate from the $300 owed by the master LLC under § 18-1107(b).

The registered series retains the internal liability shield of § 18-215(b), which SB 89 did not disturb. A registered series is still, in other words, a series. It is not a new entity. It remains a cell within a master LLC whose members can amend the operating agreement to change its terms. What is new is that the state now knows it exists.

Why Delaware bothered

The drafting committee's stated goal, in the Council of the Corporation Law Section synopsis that accompanied the bill, was to address a single recurring problem: transacting parties cannot easily verify the existence, good standing, or authority of a protected series. A lender taking a security interest in the assets of a protected series has historically had to work from the operating agreement plus representations from the manager, because there is no state record to search. A title insurer asked to insure title held by a protected series has had the same problem. A merger counterparty cannot reliably search the state's records to confirm that a particular protected series exists or has the authority its manager claims for it.

The registered series solves those problems by putting the cell on the state's public roster. A UCC-1 financing statement filed against Series A of Master LLC will have a state-recognized debtor. A certificate of good standing exists for that series. A merger certificate under § 18-219 is a public filing. The shield and the internal series structure are unchanged; what changes is the evidentiary posture of the series when it has to deal with the outside world.

The operational trade-off is the annual tax, the filing fee, and the separate administrative overhead. A master LLC with ten registered series owes Delaware its own $300 tax plus $75 per registered series, a total of $1,050 per year, compared with $300 per year for a master LLC with ten protected series. A rental-property operator with forty cells who converts all of them to registered series is writing a $3,000 tax check annually instead of a $300 one. That is a meaningful swing for a portfolio whose whole point is cost efficiency.

What the registered series does not do

The new § 18-218 does not resolve the two structural questions that have shadowed the series LLC since 1996. It does not make the series a bankruptcy debtor on its own. It does not bind non-Delaware courts to recognize the internal shield when a series owns property in a non-recognizing state. Treasury's 2010 proposed regulations under 26 CFR § 301.7701-1, which would treat each series as a separate entity for federal tax purposes, remain proposed and are still not named on the IRS Priority Guidance Plan.

The bankruptcy question is the sharpest. The Bankruptcy Code defines a "person" at § 101(41) by reference to types of entities that include corporations, partnerships, and limited liability companies, and the definition of "corporation" at § 101(9) sweeps in unincorporated associations. A registered series is an association under Delaware law. Whether that makes it a person eligible to be a debtor under § 109 is a question that has not been answered by any court, and SB 89's drafters explicitly declined to take a position on it. The synopsis notes that registered series are intended to facilitate transactions with third parties and does not address federal bankruptcy eligibility.

The non-recognizing-state problem is also unchanged. If a registered series of a Delaware master LLC holds real estate in Ohio, Ohio's recording statutes treat the titleholder as whatever the Ohio recorder accepts. Ohio has not enacted a series LLC statute. A creditor of the master LLC or of a different series who obtains an Ohio judgment may argue that the internal shield is a matter of Delaware internal affairs that Ohio need not enforce against Ohio-situs property. The registered series gives Delaware a clearer public record and a better evidentiary base, but it does not answer the choice-of-law question. That is still going to be litigated, probably in the jurisdictions whose real estate is being held.

Section 199A, enacted in December 2017, remains in force and sunsets at the end of 2025. Treasury's final regulations under T.D. 9847, published January 22, 2019, and the Rev. Proc. 2019-38 safe harbor for rental real estate issued September 24, 2019, have settled most of the immediate 199A planning questions for real-estate series. Each series that qualifies as a trade or business under Section 162 gets its own qualified business income calculation, its own wage-and-capital limitation above the threshold, and its own specified-service-trade- or-business analysis. The Rev. Proc. 2019-38 safe harbor requires 250 hours of rental services per enterprise per year and separate books and records, which a well-run series LLC already maintains. The 199A overlay, in other words, has stopped being novel and become routine.

Illinois is still the cheap domestic option

The most-adopted series jurisdiction after Delaware remains Illinois, and the fee reduction under Public Act 100-0571 has now had two full years to settle in. The articles of organization fee for an Illinois series LLC is $400. Each certificate of designation under 805 ILCS 180/37-40 is $50. The annual report is $75 plus $50 per series in effect on the last day of the third month preceding the anniversary month. An Illinois operator with ten rental properties held as separate series pays $400 to form plus $500 in certificates of designation, and an annual bill of $75 plus $500.

The comparison to Delaware's new registered series regime is stark for a domestic operator. Ten Delaware registered series cost $110 each to file, totaling $1,100 up front, plus the Delaware master LLC filing fee of $90 and a registered agent. The annual tab is $300 for the master plus $75 for each registered series, or $1,050. Illinois's ten series cost $900 up front and $575 per year. For a cost-sensitive domestic portfolio, Illinois is cheaper up front, much cheaper annually, and produces better documentation than a Delaware protected series.

What Illinois does not produce is a Delaware certificate of good standing for the individual cell. That is the lever SB 89 pulled, and it matters only if the series is dealing with a counterparty that cares about Delaware specifically. An institutional lender securing debt against the assets of a specific cell will probably ask for Delaware. A title company insuring title held by the cell may ask for Delaware. A private investor buying out one cell of a multi-series fund will probably ask for Delaware. The smaller the counterparty, the less the Delaware premium buys.

The state map in November 2019

Nineteen U.S. jurisdictions now have some form of series LLC statute on the books. The core group is unchanged from last year: Delaware, Illinois, Iowa, Kansas, Missouri, Montana, Nevada, Oklahoma, Tennessee, Texas, Utah, and Wisconsin, with later adopters Alabama (2014), the District of Columbia (2011), Indiana (2016), and Puerto Rico (2017). North Dakota enacted a series statute that took effect in 2018. South Dakota added one effective 2018. Virginia enacted the Uniform Protected Series Act in 2019, effective July 1, 2020.

Virginia's adoption matters because it is the first state to enact the Uniform Law Commission's 2017 Uniform Protected Series Act as such, and because the ULC's model takes positions on several of the structural questions that the Delaware and Illinois statutes leave open. The UPSA provides explicit choice-of-law rules, explicit statements on judgments against a protected series, and a requirement that protected series publicly file a "protected series designation." A Virginia protected series, in other words, looks more like a Delaware registered series than like a Delaware protected series. If more states follow Virginia down the UPSA path, the two-track Delaware model may end up being a short-lived transition rather than a stable end state.

Delaware's new § 18-218 is not the UPSA. It is a Delaware-specific creation that preserves the terse § 18-215 protected series alongside a new registered-series filing. The General Assembly has historically preferred to keep Delaware's entity law Delaware-specific, and the Council of the Corporation Law Section has been explicit that SB 89 is not an endorsement of the UPSA approach. For the practitioner, this means the two-track system in Delaware is likely to be durable, and the question for a new formation is not Delaware-or-ULC but which of the two Delaware options applies.

Who the new registered series is actually for

For an existing Delaware series LLC that has been operating cleanly under the protected-series model and has no lender, title insurer, or merger counterparty asking for state-level evidence of a specific series, converting is not free and not necessary. The old § 18-215 shield is unchanged. The operating-agreement-level documentation that has served for two decades still works for intra-LLC disputes and for ordinary trade-creditor claims.

For a series being pledged to an institutional lender, for a series being sold as a stand-alone asset, or for a series entering into a merger with another series, the registered-series filing is cheap insurance. The $110 filing fee and the $75 annual tax buy a state-issued certificate of good standing, a public filing that names the series, and a clean UCC debtor name. The incremental overhead is trivial against the cost of fighting over whether a protected series was validly formed and who its managers were at the time of the transaction.

For a new Delaware series LLC being formed this quarter, the honest answer is that the registered-series route should be the default for any cell that is expected to hold significant assets or transact with outside parties, and the protected-series route is fine for internal sub-accounting that stays inside the master LLC. The marginal annual tax of $75 per cell is the price of being able to prove to the outside world that the cell exists.

The form is now twenty-three years old and, for the first time in that history, Delaware has given the rest of the country something concrete to copy or reject. The next few years of state legislation will tell us which it is.

Sources

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