Series LLCs are not new under the new Iowa LLC Act, but they are improved. One of the biggest current concerns is what happens to a Series if the LLC from which it was created dissolves. Iowa Code 489.1205(1) settles the issue, declaring that a series “is not terminated and its affairs shall continue despite the dissolution of the limited liability company…."
A Series is a separate and distinct part of the LLC. It has separate members, managers, rights, powers and duties with respect to its own property or obligations as well as its own profits, losses and distributions associated with such property or obligations. A Series can have a separate business purpose or investment objective than the LLC or another Series. Its distributions are dependent exclusively on the operations of the Series. It can be terminated without affecting the LLC or other Series within the LLC.
It is important to know that the debts, liabilities and obligations of a Series "shall be enforceable against the assets of that series only and not against the assets of the limited liability company generally...." Iowa Code 489.1201(2). Compare this language with 489.304(1) ("The debts, obligations, or other liabilities of a limited liability company...do not become the debts, obligations or other liabilities of a member or manager solely by reason of the member acting as a members or a manager acting as a manager.")
To establish a Series (a) the operating agreement must create the Series, (b) separate and distinct records must be maintained for the Series and its assets must be accounted separately from the assets of the LLC, (c) the operating agreement must provide for the limitation on liabilities described in 1201(2), and (d) a notice of the creation of the Series must be set forth in the certificate of organization.
Why create a Series? One reason is to coordinate discrete but related business ventures. For example each of a score of nursing homes may be owned by a different mix of investors but with a common manager. A real good reason to create a Series is to protect the core business from a risky venture. If your core business is selling widgets and you decide to dabble in real estate development, doing so within the same traditional LLC structure exposes your core widget business to the real estate division's creditors. Simply forming a separate LLC may not be enough because of the threat that the LLC veil will be pierced. A Series may protect you from veil piercing.
A careful reading of the Series provisions of the new Act (modeled after the Delaware statute) suggests that a Series may provide greater protection from veil piercing than forming a separate LLC, although it is untested in court. Go back and read 1201(1) and 304(1), above, to see what I mean.
-Marc Ward
(I wondered while writing this post whether an LLC can own an interest in its own Series? Interesting....)
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