Two weeks ago Montana joined the nine other states that have authorized series LLCs. Montana Governor Steve Bullock signed House Bill 362 on April 12, 2013, amending the Montana LLC Act to authorize series LLCs, effective October 1, 2013.
Series LLCs. A series LLC is a type of LLC that can be used to partition an LLC’s assets and members into separate cells, each of which is called a series. Each series can have its own designated members and managers, and each can own its assets separately from the assets of the LLC or any other series. Each series can enter into contracts in its own name, and sue and be sued separately from the LLC or any other series. The liabilities of each series will be enforceable only against the assets of that series.
Series LLCs are promoted as a way of avoiding the costs and inefficiencies that result from using multiple LLCs. For example, an owner of multiple real estate parcels could place each parcel in a separate series in one LLC, instead of using multiple LLCs. There would then be only one annual filing fee and only one operating agreement, yet any liabilities from the operations of any parcel would not be enforceable against the other parcels.
Other States. The states have not exactly been jumping on the bandwagon for series LLCs. It’s more like a slow-moving wagon train. Other than Montana, nine states have authorized series LLCs, beginning with Delaware in 1996 and most recently Kansas in 2012. The census is: Delaware, Illinois, Iowa, Kansas, Nevada, Oklahoma, Tennessee, Texas, and Utah. The states have authorized series LLCs by adding the appropriate provisions to their existing LLC statutes, rather than by adopting new, standalone statutes.
I have previously written about series LLCs when Texas and Kansas each passed their series LLC laws, when the IRS proposed regulations for series LLCs, and when the Securities and Exchange Commission limited the use of series LLCs for broker-dealers.
Montana. The Montana statute is similar in many respects to the Delaware Act. The records of each series must account for its assets separately from the assets of the LLC or any other series, and the articles of organization must set forth the liability limitation of each series. All documents filed with the Secretary of State must reflect not only the name of the LLC but also the names of all series of members.
There are some unusual provisions in the Montana statute. The first is a change to Section 35-8-202, which lists the items that an LLC’s articles of organization must set forth. The amendment adds a new subsection (h): “if the limited liability company has one or more series of members, the operating agreement of each series of members in writing. ” (Emphasis added.) This is the only reference in the bill to a series operating agreement, and it’s unclear what the operating agreement of a series would be. The Act’s definition of an operating agreement refers only to an agreement for the entire LLC. Mont. Code Ann. § 35-8-102(23).
It’s also odd that if the LLC has one or more series of members, then the “operating agreement of each series,” whatever that is, must be included in the articles of organization that are publicly filed with the Secretary of State. The Montana Act does not otherwise require that an operating agreement be filed with the articles of organization, with good reason. LLC operating agreements often contain detailed, private information that the members don’t want to make publicly available, such as information about the LLC’s management, members, investors, compensation, distributions, and so on. The states usually require the filing of only a streamlined document, with basic information such as the LLC’s name, address, and registered agent, in order to form an LLC. Operating agreements normally need not be filed or made publicly available.
The other issue I take with the amendment is that it does not establish whether a series has the powers of an entity, i.e., the power to own property and incur obligations in its own name, to make contracts, and to sue and be sued. Delaware, for example, clearly sets out the powers of a series: “Unless otherwise provided in a limited liability company agreement, a series established in accordance with subsection (b) of this section shall have the power and capacity to, in its own name, contract, hold title to assets (including real, personal and intangible property), grant liens and security interest, and sue and be sued.” Del. Code Ann. tit. 6, § 18-215(c).
The Montana amendment contains one provision that may have been intended to address the powers of a series. Current Section 35-8-107 of the Montana LLC Act sets out the powers of an LLC, and the amendment adds a new subsection (2): “This section [i.e., the list of an LLC’s powers] applies to a limited liability company that has one or more series of members.” This language may have been intended to mean that the powers of an LLC are also the powers of a series of an LLC, but it doesn’t say that. It simply says that the powers of an LLC are not limited if it happens to have one or more series of members.
Comment. Series LLCs have not become widely used. In some respects series LLCs are a solution looking for a problem. There are many unresolved legal questions about series LLC issues, such as bankruptcy, taxation, liability limitations, and piercing the veil, and corporate lawyers are leery of using them. Professor Goforth has provided a good discussion of these issues in Carol Goforth, The Series LLC, and a Series of Difficult Questions, 60 Ark. L. Rev. 385 (2007).