NCCUSL Releases Revised Draft of Uniform Series of Unincorporated Entities Act

Series LLCs are an innovative form of alternative entity in which in which multiple "series" are incorporated into a single limited liability company. Each series can have different ownership and management structures and own different assets.  The various series are, at least in theory, protected from liabilities incurred by other series within the company.  The series LLC was first enacted in Delaware but has since been adopted in a number of other states. We have previously posted on some potential pitfalls with using series LLCs as well as related asset protection issues.

The Uniform Law Commission (ULC, also known as the National Conference of Commissioners on Uniform State Laws or NCCUSL), develops and formulates uniform laws which are often adopted by all or a vast majority of the states. It has been involved in the codification of (among many other widely-adopted statutes) the Uniform Commercial Code.  The NCCUSL formed a drafting committee in 2013 to prepare a Series of Unincorporated Business Entities Act (the "Series Act"). The reporter's introductory note on an early draft of the Series Act stated that “[t]he first reading provoked extensive and spirited discussion, which was at times quite skeptical.”  Earlier committee drafts and notes are posted by the NCCUSL.  

The Committee has recently issued a revised draft of the Series Act.  The draft Series Act may be applied to general partnerships, limited partnerships, and LLCs (existing series entity laws generally apply only to LLCs, although Delaware Revised Uniform Limited Partnership Act and the Virginia Business Trust Act also incorporate seldom-used series provisions).

The Preferatory Note to the revised draft addresses ten key issues:

  • What business needs does the protected series construct uniquely serve?
  • Will jurisdictions that have not adopted protected series statutes respect the internal shields of protected series established in other jurisdictions?
  • How does this act make sure (or as sure as possible) that other areas of law will accommodate the protected series construct?
  • Given that a protected series has most of the powers of a legal entity and, for liability purposes, is entirely distinct from the series organization and other protected series of the series organization, should a protected series be characterized as an entity or at least a legal person?
  • What does the public need to know about a protected series?
  • What does it mean to associate property with a protected series?
  • How is a protected series managed in the default mode (i.e., absent a contrary agreement)?
  • What is the relationship of a series organization’s foundational agreement to a protected series established by the series organization?
  • In the default mode, what is the relationship between: (i) a protected series and the series organization; and (ii) if a series organization has established more than one protected series, among the protected series established by the series organization?
  • What are the rights of a person who becomes a transferee of the rights of a person associated with a protected series?

Of particular interest are issues surrounding creditors' rights and bankruptcy.  As LLC Law Monitor notes:

[H]ow will the Series Act ensure that other areas of law will accommodate the protected series construct? For example, will the federal Bankruptcy Act respect the internal liability shields of an LLC’s series? If not, the shields are of little value. Another example: Article 9 of the Uniform Commercial Code (UCC) determines where to file financing statements that give notice of liens against a debtor’s assets, but Article 9 has no provisions dealing with series LLCs.

There are other significant issues raised in the Note, but these three are the critical issues. The Note provides no answers. It will be difficult for the drafters of series legislation to tailor a proposed law to meet the needs of businesses if the drafters cannot identify the business needs for series entities. And if the internal liability shields of a protected series will not be respected by other states or by bankruptcy law, the major motivation for series LLCs disappears.

To some extent this is a chicken-and-egg problem. If all the states have series LLC statutes, the internal liability shields of protected series will presumably be recognized nationwide, and it would seem likely that bankruptcy law and the UCC would be amended to deal adequately with protected series. But without changes in those other laws or pressure from businesses lobbying for series LLCs, it’s questionable whether many states will be motivated to bother with the necessary legislation for series LLCs.