SERIES STRUCTURE 101s - Pros, Cons and Pitfalls
Introduction
After our last Series LLC post gained some attention, we thought we would elaborate on it.
The Series LLC structure has been generally adopted since its inception in 1996. However, despite being around for over 25 years, not every state recognizes SERIES LLC structures. Moreover, there is always a potential risk for cross-liability among different Series within the structure.
The Series LLC structure is typically used to setup multiple strategies or funds that are similar to one another and generally run by the same Investment Manager. Perhaps because Fundviews Capital operates one structure with multiple and many Investment Managers under the same structure we take this risk more seriously.
We believe it is best practice to segregate between Series as much as you possibly can. To start, every Series has its own Bank account, and its own Tax ID. Each Series has its own documentation which includes a specific Operating Agreement, Series supplement PPM, and Subscription Agreement. Each Series has its own Form D and Bluesky filings. Each Series has its own set of Financials, and there does not exist any “common” or “general” assets or liabilities that are not tagged to a specific Series. For this reason, the Series structure as a whole does not even have its own Tax ID, because there will never exist any assets or liabilities that are not within a Series.
One of the most important pieces of the puzzle is that each of our Series invests for and on behalf of their own account. If a Series makes an investment or opens an account somewhere the registered owner is “___________ Series of Fundviews Series LLC” and not just “Fundviews Series LLC”.
While this structure has extraordinary benefits for operational and legal efficiencies, it still of course comes at a cost (risk). Generally larger groups that either expect to launch multiple funds and SPVs with Fundviews or expect a significant amount of capital raise will opt to setup their own SERIES structure or standalone fund structure. We also accommodate these clients and can still help to handle all of the launch process and ongoing operations as an outsourced COO (Chief Operating Officer) service. They lose some cost efficiency but have their own structure for the long run.
New Series Structure
Fast-forward to August 2019. The Delaware statute was amended to allow for the state registration and recognition of one or more series of a Series LLC. The incumbent Series structure is now referred to as the “Protected Series LLC”. The new type of Series is called the “Registered Series LLC”. This new Registered Series LLC was created to address some of the issues with the initial structure that likely held it back from mass adoption. You do, however lose some efficiency.
Benefits of the Registered Series LLC
For starters, the Registered Series LLC allows you to file for each Series you create with the state legislature. It also allows you to receive a Certificate of Formation, Certificate of Good Standing etc. for each Series as opposed to only receiving for the primary Series LLC shell.
Of course, this lends itself to further asset and liability protection between and within Series. In addition, you can now file UCC filings and properly register loans to the Series specifically and not to the entity as a whole.
Drawbacks of the Registered Series LLC
For starters, a Registered Series LLC must pay $300 annual franchise tax for the entity as a whole (so much the Protected Series) but now also has an additional cost of $75 per series per year in franchise tax. The names convention must begin with the primary (overarching) LLC name (which even though not required, we also did anyways).
It is unclear if more states will adopt the Series structure given these changes, but we do think this is a step in the right direction. It takes time for adoption to occur, but it all starts with groups like ours doing the research and due diligence to determine the best practice.
Best Practice of a Series LLC
Registered Series LLC instead of Protected Series LLC
Separate Bank accounts
Separate Tax ID
Separate Form D filings
Separate Blue sky filings
Separate Operating Agreements
Separate Series-PPM supplement
Separate subscription agreement
Separate Financials for each series
No “Crossing” of assets
Separate investment registration
Loan agreements and UCC filings separately registered to a specific Series
At Fundviews Capital we value efficiencies, but there is a balance between risk and reward. We want to make sure first and foremost that our clients and their assets are well protected.
**The above reflects the personal opinions of the author, and is not to be considered investment or legal advice or advice of any kind.
