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Monday, April 25, 2016

Tennessee Series LLC Basics: Liability Separation with a Single Entity

What is a “Series LLC”?  It's a limited liability company that has elected to allow the creation of separate series.  According to the statute:
  • Notwithstanding anything to the contrary set forth in this chapter, or under other applicable law, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing, with respect to a particular series established . . . shall be enforceable against the assets of such series only, and not against the assets of the LLC generally, or any other series of the LLC . . .
T.C.A. § 48-249-309.  This broad provision allows for the segregation of liabilities into each series, without having to form separate LLCs. As stated above, the segregation is allowed notwithstanding other provisions of the Revised Limited Liability Company act, and it's even allowed regardless of other applicable law.
The main attraction of a Series LLC is this: separation of liability using only one entity and paying only one annual fee.  This easily creates and dissolves “series” without having to create new companies.
Although there are requirements as to how to establish a series, none of those requirements include having to file again with the Secretary of State. Thus, the ultimate benefit to utilizing a Series LLC is that it allows a business entity to form separate ‘‘series’’ between which an internal liability shield can be established.  It also minimizes legal, regulatory, accounting, transfer and recordation fees that might otherwise result when forming a new LLC or transferring assets between or among two or more LLCs.  Accordingly, the benefit of the use of a Series LLC in the context of real estate transactions is that it will allow an owner to segregate liabilities among its various properties.
Until 2013 there was some uncertainty as to Tennessee franchise and excise taxes, but this was resolved with guidance issued in 2013, which essentially treats each series separately for franchise and excise tax purposes. Significantly, this will allow each series to apply for the Family Owned Non-Corporate Entity exception if applicable residential real estate is held by a series and thereby avoid the franchise and excise tax.  This makes this structure ideal for someone holding a number of residential real estate properties.  The specific requirements of this exception are outside the scope of this update, but should be explored for family owned residential rental property.
What are the downsides?  Series LLC may not be a great choice if the LLC is going to have business in states (or countries) that do not explicitly recognize Series LLCs, since there would be too much uncertainty of law.  Another downside is that the Tennessee law, unlike Delaware’s Series LLC act, does not specifically state that each series can in and of itself hold real estate, so some title insurance companies will not insure property held that way.  A possible workaround is to hold the property in the name of the LLC but on behalf of a series, since the Tennessee Series LLC law allows the “LLC documents” to establish separate series with “specified property or obligations of the LLC”.  If certainty of law is of particular concern, one might consider using Delaware’s law, or simply using separate LLCs.  However, for many deals the Tennessee Series LLC will be better than simply holding everything in one LLC, when separate LLCs are not practical or economical.  
What are the requirements for the Series LLC? In addition to the notice requirement in the articles of organization filed with the Secretary of State and the requirements that the LLC documents establish a series, the LLC member also must make sure that:
  1. “Separate and distinct records are maintained for any such series”, and
  2. “the assets associated with any such series are reflected and held in such separate and distinct records, directly or indirectly, including through a nominee or otherwise”, and
  3.  the assets are accounted for in “separate and distinct records separately from the other assets of the LLC and the assets of any other series of the LLC”.  
Therefore, a Series LLC is only appropriate for a person willing to keep the proper records. 

Co-authored with J. David Wicker