This is the last of eight articles on series LLCs and the new Indiana series LLC statute that will take effect on January 1, 2017. Earlier articles are:
Part I, Basic concepts and terminology
Part II, Is a series an entity?
Part III, What constitutes a series?
Part IV, Setting up an Indiana series LLC
Part V, Operating agreements for Indiana series LLCs
Part VI, Alternatives for ownership structure
Part VII, Federal income taxation of series LLCs
Ever since Delaware adopted the first series LLC statute in 1995, commentators and practitioners have expressed concerns about the structure. The proposed Treasury Regulation published in 2010 (discussed in Part VII) answers some of those questions, but the near absence of court decisions dealing with series LLCs leaves many others unanswered.
The most common concern is whether courts will recognize internal limited liability (see Part II for a discussion of that concept), particularly courts in states other than the one in which the series LLC is organized, and especially in states that do not have their own series LLC statute. An analysis of the choice of law principles that govern such a decision is far beyond the scope of these articles, but the concern will remain until it is addressed in published court decisions. As a result, many practitioners appear to be avoiding series LLCs altogether or restricting their use to organizations that conduct business or own property only within the state of organization.
Even if courts recognize internal limited liability in principle, they will likely apply the same principles of veil-piercing to master LLCs and their series that they apply to traditional LLCs. The usual form of veil-piercing holds the members of a limited liability company liable for the obligations of the company, allowing the creditors of the company to reach the assets of the members. Veil-piercing is an extreme remedy, but it happens. Courts consider several factors in deciding whether to disregard the liability shield, one of which – the failure to observe required corporate formalities – is discussed here and here. (I am surprised to discover that the Indiana Business Law Blog has never discussed all the factors in veil-piercing. Perhaps we will.)
A subset of veil-piercing, known as the alter ego doctrine, allows creditors of one company to reach the assets of a related company. Under the Indiana version of the alter ego doctrine, four additional factors are added to the usual factors that favor piercing the veil. They are:
- The two entities have similar names
- The entities have similar business purposes
- The entities share common owners, managers, and employees
- The entities share common offices, telephone numbers, and business cards
Each of those factors affect how easily it may be for people to mistakenly believe that the business with which they are doing business is one and the same as another entity. All four of the above factors are likely to be present in many series LLCs. Moreover, if the master LLC owns interest in one of its series, or if a series holds interest in another series, there will be two avenues to veil-piercing, traditional veil-piercing to allow the creditors of a series to reach the assets of its members and alter ego veil-piercing to allow the creditors of a series to reach the assets of a related entity.
Whether Indiana courts will apply the alter ego doctrine to series LLCs, in either the same form or a modified form, is an open question. In the absence of an answer to the question, anyone who uses a series LLC should minimize the presence of the four factors listed above. Some of them may be difficult to eliminate entirely without significant adverse effect on the company’s business purposes, but others can be eliminated or at least minimized with relatively litte expense or effort (for example, by providing separate mailing addresses, telephone numbers, and business cards for each series).
Even so, the Indiana series statute practically requires that series LLCs will satisfy one of the above factors, that of similar names. The name of the master LLC must include the suffix “-S” after the corporate designation (e.g., “LLC-S”), and the name of each series must include the entire name of the master LLC and the word “series.” A possible way of eliminating that factor is for the series to adopt dissimilar assumed business names, but whether that is permissible is, itself, an open question because the series LLC statute does not expressly authorize a series or a series LLC to adopt an assumed business name. Given that a traditional LLC can adopt an assumed business name, and given that each series must be treated as a separate entity, one would think a series should be able to adopt an assumed business name — if it were not for the fact that Indiana series LLC statute is so specific about the names of master LLCs and series. Would the use of assumed business names undermine the General Assembly’s obvious intent that the entities within a series LLC be unmistakably identified as such? On the other hand, would Indiana courts conclude that the policy reasons for including that factor in the alter ego analysis are satisfied by the use of names prescribed by the statute? There is currently no answer to those questions.
The proposed Treasury Regulation that clarifies that each series is to be treated as a separate entity (see Part VII) expressly leaves open at least two other questions of federal taxation:
- Is each series to be treated as a separate entity for federal employment tax purposes?
- Is each series to be treated as a separate entity for employee benefit purposes, such as qualified plans?
We do not attempt to answer those questions or even to examine all their ramifications.
The mention of employee benefits raises a host of other legal questions involving the identification of the “employer.” For example, are all the series considered a single “employer” for determining whether they are subject to the Family Medical Leave Act? There are similar questions under the Fair Labor Standards Act, the Occupational Safety and Health Act, and other regulatory schemes. It is conceivable that most or all state law questions can be answered by the statutory provision that, if certain conditions are satisfied, each series must be treated as a separate entity (see Part II), but it is unlikely that all questions of federal law can be answered so easily.
Perhaps the largest set of unanswered questions lies in the applicability of the Bankruptcy Code to series LLCs. As we discussed in a recent set of articles beginning here, bankruptcy courts have not even developed a uniform approach to the bankruptcy of a member of a traditional LLC, much less a series LLC. The extent to which bankruptcy courts will recognize the parts of a series LLC as entities separate from each other and separate from their owners is, in my view, a wide open question.
Secretary of Defense Donald Rumsfeld once said that there are “known knowns” (things that we know), “known unknowns” (things that we know we do not know), and “unknown unknowns” (things that we do not know that we do not know); and it is the latter category that often causes the most trouble. As my colleague John M. Cunningham observed in his book Drafting Limited Liability Company Operating Agreements, Rumsfeld could have been talking about series LLCs.