Tuesday, May 26, 2020

Virginia Series Limited Liability Company Registration Coming in July

In its 2019 Session, the General Assembly amended the Virginia Limited Liability Company Act to permit the registration of “Series Limited Liability Companies” beginning on July 1, 2020.  A Series Limited Liability Company can separate and keep distinct the assets and liabilities of one of its arms of operation from a separate arm by designating each a “Protected Series.” A common example used to explain the nature of a Series LLC is that of the Landlord who owns and leases multiple units. Beginning in July, that Landlord can register each rental unit (or however many assets it chooses) as a “Protected Series” within the umbrella of the primary Series Limited Liability Company. The Series LLC landlord can designate a shopping center in Alexandria as “Protected Series A”, an office building in Richmond as “Protected Series B”, a parking garage in Virginia Beach as “Protected Series C”, et cetera. Each will constitute a separate operational entity within the same master LLC.

The benefit of Protected Series designation is that the assets and liabilities of each Protected Series will be viewed as separate and distinct from the other, with each series having the same limited liability as though it were an entirely separate limited liability company. Each Protected Series can have its own different manager. Each Protected Series can even have separate membership interests (though all members of the series must be members of the governing Series LLC). Using our Landlord analogy, owners of a Series LLC who own multiple units in a shopping center can designate each a separate Protected Series, designate a separate manager for each Protected Series and have separate members with differing ownership interest in each unit, all governed by the same operating agreement. A lawsuit against one Protected Series would have no effect on the assets or liabilities of another within the same Series LLC. Each can sue and be sued in its own name and have the same powers and purpose of the overarching Series LLC. As an LLC, it is also treated as a distinct pass-through entity for Federal Tax purposes.

The drawback to Series Limited Liability Companies, and its Protected Series designations is that there is little reduction in paperwork. Each Protected Series must be separately registered with the State Corporation Commission. Each Protected Series must pay a separate registration fee. The protections provided to Protected Series are effective only if adequate records are maintained to distinguish how each Protected Series obtained its assets, which themselves must be sufficiently described. The Code also restricts the ability of a Protected Series from merging with a different entity or domesticating in a foreign jurisdiction, and from taking advantage of other functions available to other LLC’s. When considering that the asset protections provided by Protected Series designation can be (and have been) achieved by the use of single purpose LLC’s, it’s not always obvious the characteristics of those businesses that would be better served by utilizing Protected Series designation instead of setting up a new limited liability company that is wholly or partly owned by another LLC.

Protected Series LLC’s have been available (first in Delaware) in other jurisdictions for 20 years, but the number of jurisdictions that have enabling legislation for them remains the minority, and the enabling legislation that permits Protected Series designation in those jurisdictions is not uniform. There remain several questions regarding how other states and federal laws will treat the Virginia Series LLC. It is not even entirely clear how other aspects of Virginia law will apply. For example, does a professional license issued to a Series LLC apply to all Protected Series therein?

The attorneys at Walsh, Colucci, Lubeley & Walsh, P.C. will continue to review the rollout of Protected Series LLC documents and guidance from the State Corporation Commission and are available to assist you with questions that you have regarding this new form of business entity. For more information please contact Michael Kalish at mkalish@thelandlawyers.com or (703) 680-4664.