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Five Important Goals of the Series LLC Operating Agreement
By Gardi, Haught, Fischer & Bhosale LTD
August 12, 2016
The Five Important Goals of the Series LLC Operating agreement
By Isaac Franco
A series LLC operating agreement varies somewhat from a traditional LLC operating agreement because of the way the businesses are each structured. A traditional LLC is a single legal entity with one set of owners (members) and assets, requiring a less complicated operating agreement. For a series LLC in Illinois, a master LLC must authorize to establish series, or related businesses which would include an unlimited number of “series LLCs”. The series structure allows the flexibility to have separate assets, business objectives, managers and members—all while reducing the burden of annual state filing fees. This is why the series LLC operating agreement is more complex, and should be sure to accomplish five important goals:
1. Establish The Master Company’s Intent To Authorize Series LLCs
Within its operating agreement, a series LLC must authorize the company’s ability to establish series. Once done, the company can file a Certificate of Designation which will allow them to create new series LLCs under the master LLC.
2. Identify The Management Form of Each Series LLC If Different From the Master
There are two forms of management available to an LLC: (1) member management and (2) manager management. When an LLC is member-managed, the company’s owners (members) make decisions regarding the company. A manager-managed LLC is managed by its designated manager. When an LLC is manager-managed, owners do not make the daily decisions of a company; the manager does. To avoid any confusion, it is imperative that the management forms be specified for each of the series if they are different from the master.
3. Identify The Members and/or Managers of Each Series LLC if different from the Master
One of the benefits of the series LLC is the flexibility of varying ownership and management. If a company series has ownership that differs from the master, it is a good idea to identify:
· Each member and their proportionate interest in the series; and
· Each member’s capital contribution in the series.
It is also important to specify each member and manager’s duties, rights and obligations in each series LLC, if it is different than the master.
4. Establish the Separateness of Each Series LLC
In order to reap the legal protections afforded the series LLC, the operating agreement must specify the separateness of each series. It also must adhere to the following:
“Pursuant to Section 37-40 of the Illinois Limited Liability Company Act, the debts, liabilities and obligations incurred contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the Limited Liability Company generally or any other series thereof, and unless otherwise provided in the operating agreement, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Company generally or any other series thereof shall be enforceable against the assets of such series.”
5. Keep Master LLC or Series LLC Funds Separate
Separate accounts should be created and used for each series. A perfectly good series LLC operating agreement can be rendered useless if series LLCs are not treated like separate, distinct companies from one another (i.e., funds are comingled).
If your series LLC operating agreement addresses the five points above, you and your LLC are well on the way to a successful venture. If you would like to discuss specific corporate law concerns or your series LLC operating agreement contact the attorneys at Gardi, Haught, Fischer & Bhosale, Ltd. Request a case evaluation below.
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