Series vs Standalone Entities
Cost-Benefit Analysis: Series LLCs vs. Standalone LLCs
When structuring a business, investment portfolio, or fund, selecting the right legal entity is critical. For investors and fund managers handling multiple assets or ventures, two common options are forming a Series Limited Liability Company (Series LLC) or creating multiple standalone Limited Liability Companies (LLCs). Additionally, Delaware offers a related structure known as Series Limited Partnerships (Series LPs), which provides similar advantages to Series LLCs. Each option has distinct advantages and drawbacks. Below is a cost-benefit analysis to guide your decision-making, with a focus on fund management considerations.
Overview of Series LLCs
A Series LLC is a unique legal structure that allows for the creation of separate “series” or “cells” under one parent LLC. Each series operates independently with its own assets, liabilities, and members, while benefiting from centralized management and administration.
Benefits of a Series LLC
Cost Efficiency:
Formation Costs: A single filing creates the parent LLC and facilitates the formation of multiple series without additional filings.
Annual Fees: States that permit Series LLCs typically charge one annual fee for the parent LLC, covering all series.
Administrative Simplicity:
A single operating agreement can govern the entire Series LLC, simplifying record-keeping and compliance.
Asset Protection:
The assets and liabilities of each series are legally segregated, insulating one series from the liabilities of another.
Scalability:
New series can be added without forming entirely new entities, making this structure ideal for managing multiple similar ventures.
Specific Benefits for Fund Management
Investment Segregation: Each series can represent a distinct portfolio or investment, isolating risks and liabilities.
Customizable Exposure for Limited Partners (LPs): Investors can participate in specific series, tailoring their exposure to individual investments.
Cost Savings: Centralized administration under one Series LLC reduces legal and operational costs compared to standalone LLCs.
Risks and Challenges of a Series LLC
Legal Uncertainty:
Series LLCs are not universally recognized across states or internationally, complicating operations across jurisdictions.
Limited case law leaves uncertainties about how courts may treat individual series.
Tax Complexity:
Each series generally requires separate tax filings, increasing administrative burdens.
Administrative Dependency:
The parent LLC must remain in good standing to maintain the validity of all series.
Separate books and records must be meticulously maintained for each series to preserve liability protections.
Audit Costs:
Auditors often charge per series rather than consolidating, which may negate expected cost savings.
Lack of Experience
Counterparties, including banks, administrators and custodians, particularly junior staff members, may lack experience in handling series entities or may mistakenly believe these are merely different classes of shares within the same entity. This misunderstanding could lead to inadvertent cross-liability risks, undermining the benefits of a series LLC.
Overview of Standalone LLCs
A standalone LLC is an independent legal entity with its own operating agreement, tax filings, and legal responsibilities.
Benefits of Standalone LLCs
Legal Clarity:
Standalone LLCs are recognized across all U.S. states, reducing legal uncertainty.
Established case law provides clear guidance for members and operations.
Full Autonomy:
Each LLC operates independently, shielding one entity’s issues from affecting others.
Specific Benefits for Fund Management
Investor Confidence: Standalone LLCs are easier for investors and counterparties to understand, especially those unfamiliar with Series LLCs.
Customizable Governance: Each LLC can have a unique operating agreement, offering flexibility for diverse strategies.
Costs and Drawbacks of Standalone LLCs
Higher Costs:
Separate filing, annual report, and registered agent fees for each LLC can accumulate, typically around $1,000 per year per LLC.
Increased Administrative Burden:
Each LLC requires its own operating agreement and compliance processes, increasing time and resource demands.
Segregation Costs:
While each LLC inherently protects its assets, maintaining multiple entities can become costly for smaller portfolios.
Making the Choice: Key Considerations
Number of Investments or Portfolios:
A Series LLC is cost-effective for managing multiple similar investments under one structure.
Standalone LLCs are better suited for individual investments or portfolios with diverse strategies.
Investor Preferences:
Series LLCs may appeal to investors comfortable with innovative structures.
Standalone LLCs offer traditional and widely understood arrangements.
Jurisdiction:
Standalone LLCs are preferable when operating in jurisdictions where Series LLCs are not recognized.
Risk Tolerance:
Series LLCs provide innovative asset protection but carry legal ambiguity.
Standalone LLCs deliver established protections with greater certainty.
Budget and Scale:
Series LLCs offer cost savings for smaller-scale funds.
Larger funds with diverse strategies may benefit from the autonomy and flexibility of standalone LLCs.
Conclusion
The choice between a Series LLC and standalone LLCs depends on the specific needs of your fund or business. While Series LLCs provide scalability and cost-efficiency, they come with legal and tax complexities. Standalone LLCs offer clarity and autonomy but generally at a higher cost. Delaware’s Series Limited Partnerships (Series LPs) provide an additional option with similar benefits to Series LLCs. By carefully weighing factors such as investment number, investor preferences, operational jurisdictions, and risk tolerance, you can select the structure that best aligns with your strategy and goals.
