An ordinary LLC erects a wall of limited liability between the LLC and its owners – generally, LLC owners cannot be sued for LLC debts. A Series LLC erects walls of limited liability between different divisions of the same LLC, meaning that one division cannot be held liable for the debts of the other. Each division can be separately owned and maintains separate books and accounts. The Series LLC itself is essentially a master LLC whose Articles of Organization and Operating Agreement provide for quasi-independent subordinate divisions.
As of July 1, 2012, only Kansas, Delaware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas and Utah have authorized the creation of Series LLCs under state law. If your ordinary LLC was not organized under the laws of one of these states, you cannot convert it to a Series LLC – you will have to form a new LLC in one of the foregoing nine states. Even if your place of business or primary market is located in a state that does not allow the formation of Series LLCs, some states, such as California, allow you to operate as a “foreign LLC” within state borders; thus, will recognize and protect the distinctive aspects of a Series LLC.
The Decision to Convert
Converting to a Series LLC might be appropriate if your business is expanding into new services or product lines that each have their own suppliers and customer base. Nevertheless, since conversion requires allocation of assets and liabilities and the creation of separate books and accounts, converting to a Series LLC could be complex if the existing LLC is already subject to many debts, liabilities, contractual obligations, tax bills or pending litigation. In this case, it might be better to liquidate the original LLC and create a new Series LLC from scratch.
To convert an ordinary LLC into a Series LLC, you must amend two documents -- the Articles of Organization and the Operating Agreement. The state-issued form that must be used to amend an LLC’s Articles of Organization is typically short and requires only basic information. Delaware, for example, requires only the name of the LLC and a description of the amendment. The amendment should identify the series and state that no series is liable for the debts or liabilities of the other. The amended Articles of Organization must be filed with the Secretary of State along with the applicable filing fee. Your LLC should similarly amend its Operating Agreement, although it doesn’t need to be filed with the state government.
Once a new Series LLC is created, the titles of property owned by the LLC should reflect which series each item of property belongs to (“Series B of Elm Holdings LLC”, for example). Although many states do not specifically require a formal change in title, changing titles to reflect the LLC’s new structure will make it more difficult for a creditor to attack the LLC’s limited liability barriers in the event of a dispute. In any event, the title of any and all new property acquired by the LLC should also reflect the name of the series that owns the property. Finally, diligently keep separate books and accounts for each series.