Series LLC Business Entities: Advanced Planning Tool Leveraging Tax and Other Practical Benefits While Avoiding Pitfalls

Transcription

1 Presenting a live 110-minute teleconference with interactive Q&A Series LLC Business Entities: Advanced Planning Tool Leveraging Tax and Other Practical Benefits While Avoiding Pitfalls TUESDAY, MARCH 20, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Joseph C. Mandarino, Partner, Stanley Esrey & Buckley, Atlanta John M. Cunningham, Of Counsel, McLane Graf Raulerson & Middleton, Manchester, N.H. Jeffrey H. Lerman, Managing Partner, Lerman Law Partners, San Rafael, Calif. Attendees seeking CPE credit must listen to the audio over the telephone. Please refer to the instructions ed to registrants for dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

2 SERIES LLCs: EMERGING OPPORTUNITY OR TRAP FOR THE UNWARY? A LIVE 110-MINUTE WEBINAR PROGRAM WITH INTERACTIVE Q&A SPONSORED BY THE LEGAL PUBLISHING GROUP OF STRAFFORD PUBLICATIONS TUESDAY, MARCH 20, 2012, 1 PM (E.S.T.) SERIES LLC BUSINESS ORGANIZATION LAW IN GENERAL AND UNDER OF THE DELAWARE LIMITED LIABILITY COMPANY ACT AN INTENSIVE OVERVIEW BY JOHN M. CUNNINGHAM 1 OUTLINE I. INTRODUCTION... 2 II. SERIES LLCS UNDER DLLC ACT ? CHIEF STATUTORY CHARACTERISTICS... 5 III. COMMON USES OF DELAWARE SERIES LLCS... 6 IV. POTENTIAL NON-TAX ADVANTAGES OF CONDUCTING A BUSINESS THROUGH ONE OR MORE SERIES OF A SERIES LLC RATHER THAN THROUGH ONE OR MORE WHOLLY OWNED SINGLE-MEMBER LLCS AS NON-SERIES LLC SUBSIDIARIES... 7 V. POTENTIAL NON-TAX RISKS OF CONDUCTING A BUSINESS THROUGH ONE OR MORE SERIES OF A DELAWARE SERIES LLC RATHER THAN THROUGH ONE OR MORE WHOLLY OWNED SINGLE-MEMBER LLCS AS NON-SERIES LLC SUBSIDIARIES... 8 VI. INSTRUCTIONS TO GIVE TO SERIES LLC CLIENTS EXHIBIT A EXHIBIT B TABLE OF EXHIBITS Diagrams of (i) ABC, LLC, a Delaware series LLC with three members and two series; and (ii) XYZ, a Delaware non-series LLC with three members and two wholly owned subsidiary single-member LLCs Comparison of liability shields provided by ABC, ABC s series, XYZ, and XYZ s single-member LLCs EXHIBIT B Certificate of formation for Delaware series LLC 1 John Cunningham is of counsel to the New England law firm of McLane, Graf, Raulerson & Middleton, Professional Association. His practice is focused on LLC formations and business entity restructuring. He is the author of Drafting Limited Liability Company Operating Agreements, the leading generic (i.e., nonstate specific) LLC formbook and practice manual; and, with Vernon R. Proctor of the Delaware Bar, he is co-author of Drafting Delaware LLC Agreements, a formbook and practice manual under the Delaware Limited Liability Company Act. Both books are published by Wolters Kluwer Law & Business. Mr. Cunningham may be reached by phone at (603) and by at [email protected].

3 I. INTRODUCTION 1) Welcome; self-introduction; introduction to this presentation a) Good afternoon, ladies and gentlemen. I m John Cunningham. I m of counsel to the New England law firm of McLane, Graf, Raulerson & Middleton, Professional Association. b) My contact information is in the first footnote of this outline. My practice is focused on LLC formations. 2) The purpose of this presentation a) My purpose during the next 30 minutes is to provide a brief but intensive review of series LLC non-tax law and thus, I hope, to provide a solid non-tax background for the main focus of this seminar, which is on series LLC federal and state taxation. b) I will assume that all attendees of this seminar have at least a basic knowledge of series LLC business organization law under one or more series statutes. 3) This sentence outline. A copy of this sentence outline is available for download from the Strafford website. To the extent that time permits, I will follow this outline rather closely in this presentation. You may want to follow my presentation in your copy of the outline. 4) Definition of series LLC; diagram in Exhibit A What is a series LLC? The definition is essentially the same for all nine U.S. jurisdictions whose LLC acts contain series provisions. a) Under DLLC Act , a series LLC is an LLC whose LLC agreement establishes or provides for the establishment of one or more LLC series substructures called LLC series. In dealing with series LLCs, it is very important to understand the difference between a series LLC and an LLC series and to use these terms accurately and consistently. b) Series established by series LLCs under are similar in some respects to wholly owned subsidiary single-member LLCs formed by non-series LLCs. c) However, as discussed further below, there are, under , a number of major non-tax differences between (i) series established by series LLCs; and (ii) wholly owned subsidiary single-member LLCs formed by non-series LLCs. And numerous legal risks attend series that do not attend subsidiary single-member LLCs. d) Exhibit A to this outline contains diagrams of (i) ABC, LLC, a Delaware series LLC with two series; and (ii) XYZ, LLC, a Delaware non-series LLC with two wholly owned subsidiary single-member LLCs. Before I proceed further in my discussion of LLC law, let s take a look at Exhibit A. ABC and its series and XYZ and its single-member LLCs will be the reference entities 5) The awkwardness of the term series. a) The word series ends with an s, which makes it look like a plural noun. However, when it refers to a cell of a series LLC, the word is in fact singular. b) To avoid confusion, in this presentation I ll generally use the term series LLC to refer to an LLC that is formed by its members as an LLC legally authorized to 2

4 establish individual series; and I ll often refer to these series as LLC series. 6) Series limited partnerships, etc. Under Delaware law, not only series LLCs but also series limited partnerships, series statutory trusts and other entities, including specialized insurance entities, may provide for series-like subsidiary organizations. 7) I will focus on Delaware series LLC law. a) Series LLC jurisdictions. i) As you may know, nine U.S. jurisdictions have thus far adopted series LLC provisions in their LLC acts namely, in alphabetical order, Delaware, the District of Columbia, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas and Utah. The LLC act of the Commonwealth of Puerto Rico also contains series provisions. ii) I know of no state that is currently considering the adoption of series LLC provisions in its LLC act. Over the past several months, several states, including California, Maine and New Hampshire, have considered the possibility of including series LLC provisions in their LLC acts but have decided not to do so. b) Delaware as the preeminent series LLC jurisdiction i) The first state to adopt series provisions in its LLC act was Delaware, in Delaware invented series LLCs. Delaware series LLCs were based on mutual funds, often in corporate form, with multiple diverse investment portfolios. ii) Many key concepts of Delaware series LLC statutory business organization law, as set forth in the Delaware Limited Liability Company Act ( DLLC Act ) , are reflected in the series LLC provisions of all other jurisdictions. iii) However, it is probable that a substantial majority of series LLCs are being formed under the DLLC Act rather than under other state LLCs that provide for series LLCs. c) Focus on Delaware. Thus, I will focus today on Delaware series LLC law, and all references below to series LLCs will be to Delaware LLCs. However, please be aware that there are significant differences in the series provisions of the LLC statutes of the nine U.S. series LLC jurisdictions. 8) My Delaware Book as the basis for this presentation. a) With Vern Proctor of the Delaware Bar, I am the co-author of a Delaware formbook and practice manual entitled Drafting Limited Liability Company Operating Agreements, published by Wolters Kluwer Law & Business. Chapter 5 of that book provides a detailed discussion of Delaware series LLC law. It also contains a model certificate of formation for a series LLC and a model series LLC operating agreement (called an LLC agreement under the DLLC Act). Chapter 5 is the basis for my presentation today. b) The above model LLC agreement is for a three-member LLC, taxable as a partnership, whose members have formed their LLC to invest, over time, in multiple parcels of Delaware real property. The members want to hold each of these parcels in a separate Delaware LLC series. I understand that in Delaware, this is a common use for series LLCs. 3

5 9) Series LLCs bibliographical notes. a) Drafting Limited Liability Company Operating Agreements. Drafting Limited Liability Company Operating Agreements provides what I believe is the most detailed analysis of the series provisions in DLLC Act, and of series LLC liability risks. b) ALI-ABA. On February 28, 2012, ALI-ABA presented a seminar on series LLCs. The seminar materials, by Allan Donn, Bruce Ely, Robert Keatinge and Bahar Schippel, are extremely useful with respect to LLC series business organization law, other non-tax law, and the federal income taxation of series LLCs and LLC series. c) LLC treatises. Excellent discussions of series LLCs may also be found in, among other sources, the Ribstein-Keatinge and Bishop-Kleinberger LLC treatises. 10) Key points in this presentation. I doubt I can cover all of the key points in this presentation in the time available to me. So I ll briefly summarize these points below. a) Three structures by which multi-owner groups can hold multiple assets. There are three main LLC structures of which I m aware that multi-owner groups can hold and/or operate multiple assets: i) First, they can hold them in a number of separate multi-member non-series LLCs, each of which owns one of the assets. This is obviously a legally and administratively complex and potentially quite expensive way to proceed. ii) Second, they can hold them in a non-series multi-member LLC holding company that owns multiple single-member LLCs, each of which holds one of the assets. iii) Third, they can hold them in a series multi-member LLC that has multiple LLC series, to each of which the series LLC has associated one of the assets. b) The general superiority of the second structure. I am not a big fan of Delaware series LLCs, even for use exclusively in Delaware. [LL1]I think that most clients can get all the legal benefits of Delaware series LLCs without their substantial legal risks by using wholly owned subsidiary Delaware single-member LLCs. The only costs in doing so are the initial and annual fees clients must pay with respect to these singlemember LLCs which they do not have to pay in respect of LLC series. c) Potentially countervailing cost considerations. The Delaware state formation for forming an LLC is only $190 (assuming a $50 fee for 24-hour formation service); and the Delaware annual franchise tax is only $250. (Of course, if you form a Delaware LLC and don t have an office in Delaware, you must also pay an annual registered agent fee of about $200.) In some cases, this cost consideration may favor the use of series LLCs e.g., in situations in which a multi-member LLC holds a large number of assets or operations in a series LLC jurisdiction and these assets or operations do not pose significant litigation risks for the series LLC, its members or its series in non-series jurisdictions. d) The core federal tax issue. I m unaware of any significant federal or state tax advantage of series multi-member LLCs over non-series LLCs that have one or more wholly owned subsidiary single-member LLCs and that allocate subsidiary profits among the members on a schedular basis. But Joe Mandarino is the expert on this question. 4

6 II. e) Ethical issues for lawyers in forming series LLCs for clients. I think that the known and unknown legal risks involved in using Delaware series LLCs are so great as to pose significant ethical and malpractice risks for lawyers who form them for clients unless these lawyers fully advise their clients about these risk them in writing and the clients agree in writing to accept the risks. risks. f) You may disagree. You may well disagree with what I just said. If so, please feel free to challenge me in the 10- or 15-minute Q&A period. SERIES LLCS UNDER DLLC ACT CHIEF STATUTORY CHARACTERISTICS 1) The triple liability shield of Delaware series LLCs. Each series established by a series LLC has a statutory internal liability shield that protects: a) The members associated with the series in the series LLC s LLC agreement from claims against the series by third parties; b) The LLC series from claims against the other series of the series LLC; and, amazingly (and incredibly), c) The LLC series from claims against the series LLC itself. 2) Exhibit B. Exhibit B of this outline provides a very detailed summary concerning the liability shields of ABC and its series and XYZ and its single-member LLC subsidiaries. Exhibit B is a key component of this outline. 3) Non-entity status of the series of Delaware series LLCs. a) Section does not expressly provide that series are not entities. However, it seems clear that they aren t entities under that section. That is, even though, under , they have various entity characteristics, such as the power to hold property, to enter into contracts, to sue and to be sued, they are not [LL2]legal persons separate from the series LLC itself and independent of it, and they lack certain key characteristics of organizations that are entities. b) For example: i) Section does not require the filing of a certificate of formation or other entity formation document with the Secretary of State in connection with the formation of a series; ii) All of the series of a series LLC are terminated when the series LLC is dissolved ( (k) (second sentence, first clause)); and iii) Under , series have no statutory power to make statutory conversions into or to merge with other business entities or to be domesticated in another jurisdiction. 5

7 4) Association of series LLC members, managers, assets, etc. with particular series established by these LLCs; series business and investment purposes a) Under , a series LLC may, through appropriate language in its LLC agreement, associate with any of its series all [LL3]or any part of the series LLC s members, managers, assets, liabilities, lines of business or limited liability company interests. b) The series LLC may also give each LLC series its own business or investment purpose. 5) Forming Delaware series LLCs. A non-series LLC becomes a series LLC simply by: a) Stating in its certificate of formation that each of its series has the internal liability shield described above (see model certificate in Exhibit B); and b) Providing for the establishment of series[ll4] in its LLC agreement. 6) Requirements for validity of series liability shields. At least in the Delaware courts, the liability shield of each Delaware series must be respected if, in general, the series LLC maintains relatively detailed written records concerning the members, managers, and assets of the series. III. COMMON USES OF DELAWARE SERIES LLCs 1) Series LLC uses general remarks. a) Investment entities vs. operating entities. Delaware series LLCs may sometimes be appropriate for use by LLCs that are engaged in investment activities, such as the conduct of hedge funds; but they are generally not appropriate for use in operating businesses, such as manufacturing, sales, or transportation, if these businesses operate outside series states or if they or their series or their members may be sued outside series states. This is because investment entities, as compared with operating entities, are generally far less likely to incur claims by third parties. b) Series LLCs and asset protection. Series LLCs are sometimes said to be useful for general business and family asset protection purposes. They generally aren t; as discussed below, there are very serious questions about the validity of the liability shields of LLC series. 2) Main actual uses of Delaware series LLCs. The three main specific uses of Delaware series LLCs are as follows: a) Hedge funds, etc. Delaware series LLCs are used as hedge funds, venture capital funds, mutual funds and similar investment arrangements. In these series LLCs, specified separate members, managers and investment portfolios are generally associated with each series established by the LLC. b) Vehicles for acquiring and holding real property. They are used as vehicles to acquire and hold real property. In these series LLCs, each parcel of real property of the LLC is generally held in a separate series. c) Oil and gas deals, etc. They are used as vehicles for oil and gas deals. Series 6

8 IV. LLCs may also be used for other kinds of fractional interest deals. d) Many persons use series LLCs simply to save single-member LLC filing fees. This is often an imprudent course of action. POTENTIAL NON-TAX ADVANTAGES OF CONDUCTING A BUSINESS THROUGH ONE OR MORE SERIES OF A SERIES LLC RATHER THAN THROUGH ONE OR MORE WHOLLY OWNED SINGLE-MEMBER LLCS AS NON-SERIES LLC SUBSIDIARIES In choosing whether to use series established by a series LLC to hold and conduct business and investment activities, the main non-tax choice of entity that lawyers normally must make is between (i) a series LLC that will hold and conduct these activities in series; and (ii) a non-series LLC that will hold and conduct these activities in wholly owned subsidiary single-member LLCs. Series established by series LLCs differ from wholly owned single-member LLCs of non-series LLCs in the following principal non-tax respects: 1) Ease and low cost of formation. Once an LLC is formed as a series LLC, it can form series simply by following the series formation provisions in its LLC agreement. It does not have to file a separate new certificate of formation for each new series. To form wholly owned single-member subsidiary LLCs, you need to file a separate certificate of formation for each subsidiary. 2) Liability shield considerations a) The liability shield of a LLC series protects the members associated with the series from claims against the series by third parties and it protects the series LLC from claims against the LLC series. This is also the case for non-series LLCs and their wholly owned subsidiary single-member LLCs. b) However, as noted above, the liability shield of an LLC series also protects the LLC series from claims against the LLC series. The liability shield of a single-member LLC whose member is a non-series LLC does not protect the single-member LLC from claims against non-series LLC. See Exhibit B. 3) Single filing for federal securities law compliance purposes. 4) Attractiveness for some investors. For some potential investors, series LLCs may be attractive simply because they are novel and inventive. 7

9 V. POTENTIAL NON-TAX RISKS OF CONDUCTING A BUSINESS THROUGH ONE OR MORE SERIES OF A DELAWARE SERIES LLC RATHER THAN THROUGH ONE OR MORE WHOLLY OWNED SINGLE-MEMBER LLCS AS NON-SERIES LLC SUBSIDIARIES Series LLCs pose numerous types of non-tax risks as compared with non-series LLCs. 2 All of these non-tax risks that arise from the uncertainty that presently pervades series LLC business organization law. (There is currently only one reported series LLC case of which I m aware; and it is a Maine case that addresses a relatively minor series issue.) This uncertainty generally does not exist in the case of single-member LLCs that are wholly owned subsidiaries of non-series LLCs. 3 The following are a few of the relevant risks: 1) Doubtfulness as to the validity of Delaware series liability shields in non-series states, etc. It is unclear whether the courts of (i) states whose LLC acts do not provide for series LLCs, and (ii) states whose series LLC provisions differ significantly from Delaware series LLCs, will respect the liability shields provided to series LLCs and their series under DLLC Act a) It may be hypothesized that if a third party brings a claim against an LLC series in a non-series state, the series LLC and all of its series, including the series being sued, may be at risk of being treated as a single general partnership. 2) Federal bankruptcy issues; creditors rights issues in general a) It is unclear whether federal bankruptcy courts will respect the liability shields of Delaware or other series arrangements available under Some bankruptcy law experts take the view that bankruptcy courts will not respect these arrangements. b) In particular, these experts question whether, as provided in , the assets of each individual series of a Delaware series LLC will be shielded from claims against the series LLC itself, since, among other considerations, these assets are owned under by the series LLC itself, not by any particular series of this LLC. c) It is unclear whether LLC series may file for bankruptcy. 2 At this writing, there has been only one published case concerning series LLCs under any LLC statute namely, the decision of the federal district court of Maine in GxG Management LLC v. Young Bros. & Co., 2007 WL (D. Me. Feb. 21, 2007). In that case, the Maine court held that a Delaware series LLC that had transferred to one of its series the boat that was the subject of the suit had retained, despite the transfer, a sufficient ownership interest in the boat to maintain the suit. In my view, this case is unlikely to exercise a major impact on the courts of other states in considering series LLC legal issues such as those outlined below. 3 The core issue under the series LLC provisions of many state LLC acts is whether, in a legally meaningful sense, a series established by a series LLC is, or may be made, an entity for any state law purposes. These purposes include, in addition to those discussed below, contract law purposes and agency law purposes. An excellent article on this general topic is Rutledge, SR056 ALI-ABA 845, Again, For the Want of a Theory: The Challenge of the Series to Business Organization Law. 8

10 d) It is unclear whether a security interest in the assets associated with a series may be enforced against the series LLC that owns the assets. 3) State property law issues. It is unclear whether non-series states and states whose series LLC provisions differ significantly from the series provisions of will view each separate series of a Delaware series LLC as separate from the series LLC itself for purposes of state property law rules, such as those governing: a) Property ownership, registration and titling; b) Divorce; and c) Descent and distribution. 4) CERCLA and other environmental statutes. It is unclear whether the separateness of the various individual series of Delaware series LLCs will be respected for purposes of operator liability rules and other rules under the Comprehensive Environmental Response, Compensation and Liability Act ( CERCLA ) and other federal and state environmental statues. 5) Investment Company Act of Series LLCs and their series raise many issues under the ICA of ) Perfection of security interests in personal property under the UCC. Series LLCs and their series raise serious issues under UCC Article 9. 7) Securities law disclosures. It would appear that to the extent that a series LLC or its series are securities for federal or state securities law purposes, extensive disclosures must be made about the risks inherent in series LLCs and their series in order to avoid securities law liabilities. 8) Charging order protections. It is unclear whether series LLC members that are associated with LLC series are entitled to LLC statutory charging order protections at either the series LLC level or the LLC series level. VI. INVESTOR WARINESS; LAWYER MALPRACTICE RISK AND DISCLOSURE DUTY 1) Investor wariness. Because of the above and other unanswered legal issues, some investors who might be willing to invest in non-series LLCs may be unwilling to invest in series LLCs. 2) Lawyer disclosures. As briefly described below, the above legal uncertainties arguably require lawyers forming series LLCs, as a matter of self-protection from malpractice and ethical claims, to make relatively detailed disclosures to their clients about these uncertainties and to obtain written informed consents from these clients. In particular, lawyers must disclose to their series LLC clients, as indicated above, the non-tax advantages and disadvantages of series LLCs as compared with non-series LLCs that hold separate investments and lines of business in multiple single-member LLCs. 9

11 VII. INSTRUCTIONS LAWYERS SHOULD CONSIDER GIVING TO GIVE TO SERIES LLC CLIENTS The following are basic [LL5]guidelines I would suggest on how lawyers should instruct clients who want to form series LLCs: 1) Warn the client in writing about the above numerous and unresolved and serious legal risks that may arise from the use of series LLCs, and warn them that there may be legal risks of which we have not yet become aware. 2) Instruct the client to conduct only the series LLC s less risky activities in LLC series i.e., activities unlikely to trigger third-party claims; and to conduct the riskier ones through wholly owned subsidiary single-member LLCs. 3) Instruct the client, to the extent possible, not to conduct series LLC business in nonseries jurisdictions Delaware or to hold series assets (or, for that matter, the client s non-series assets) in non-series jurisdictions. 4) Instruct the client to avoid undertaking transactions between the series of their series LLC. 10

12 EXHIBIT A DIAGRAMS OF (i) ABC, LLC, A DELAWARE SERIES LLC WITH TWO SERIES; AND (ii) XYZ, LLC, A DELAWARE NON-SERIES LLC WITH TWO WHOLLY OWNED SUBSIDIARY SINGLE-MEMBER LLCs ABC, LLC, A DELAWARE SERIES MULTI-MEMBER LLC WITH TWO SERIES Preliminary note. ABC is taxable as a partnership. It has three members individuals Able, Baker, and Charlie. It has two series Series 1 and 2. Under ABC s LLC agreement, Able and Baker are associated with Series 1. Charlie is associated with Series 2 Able Baker Charlie Able Baker ABC Charlie Series 1 Series 2 XYZ, LLC, A DELAWARE NON-SERIES MULTI-MEMBER LLC WITH TWO WHOLLY OWNED SUBSIDIARY SINGLE-MEMBER LLCs Preliminary note. XYZ is taxable as a partnership. It has three members individuals Able, Baker, and Charlie. ABC has two wholly owned subsidiary single-member LLCs Single-Member LLCs 1 and 2. Under XYZ s LLC agreement, Able and Baker have schedular allocations of ABC s income and loss from Series 1, while Charlie has a schedular allocation of ABC s income and loss from Series 2. Able Baker Charlie XYZ Able Baker Charlie SMLLC 1 SMLLC 2 11

13 EXHIBIT B COMPARISON OF LIABILITY SHIELDS PROVIDED BY ABC, ABC S SERIES, XYZ, AND XYZ S SINGLE-MEMBER LLCs THE RELEVANT LIABILITY SHIELDS EVALUATIONS OF LIABILITY SHIELDS OF ABC AND ITS SERIES Under Delaware law, ABC s liability shield presumably protects from third-party claims against ABC the assets of ABC s members whom ABC does not associate with any ABC series. This liability shield may well also protect from these claims the assets of ABC s members whom it does associate with its series, but this is not entirely clear. Under Delaware law, the liability shields of ABC series protects from third-party claims against these series the assets of members of ABC that ABC s LLC agreement has associated with these series. EVALUATIONS OF LIABILITY SHIELDS OF XYZ AND ITS SERIES Under Delaware law, XYZ S liability shield protects the assets of Able, Baker and Charlie from claims against XYZ. This protection is strong in every U.S. jurisdiction. COMMENTS 1. PROTECTION AFFORDED BY LIABILITY SHIELDS OF ABC AND XYZ The indicated ambiguity concerning ABC s liability shields with respect to ABC members associated with ABC series is somewhat troubling. 2. PROTECTION AFFORDED BY ABC SERIES LIABILITY SHIELDS TO MEMBERS ASSOCIATED WITH THESE SERIES AND BY THE LIABILITY SHIELDS OF XYZ S SINGLE-MEMBER LLCS TO XYZ Under Delaware law, the liability shields provided to XYZ by XYZ s single-member LLCs protects the assets of XYZ from claims against its singlemember LLCs. This protection is very strong in all U.S. jurisdictions. The liability shields of XYZ s single-member LLCs do not protect the assets of XYZ s members, but these assets are protected by the liability shield of XYZ itself. There is a serious risk that the protection afforded by the liability shields of ABC s series to the assets of ABC members associated with these series may not be respected in non-delaware courts. By contrast, The shield afforded by XYZ s single-member LLCs to XYZ s assets is, as noted, strong in every state. 3. PROTECTION AFFORDED BY ABC SERIES LIABILITY SHIELDS TO ABC S SERIES FROM CLAIMS AGAINST OTHER ABC SERIES; AND TO XYZ SINGLE- MEMBER LLCS BY XYZ SINGLE- MEMBER LLC LIABILITY SHIELDS FROM CLAIMS AGAINST OTHER XYZ SINGLE- MEMBER LLCS 4. PROTECTION AFFORDED BY ABC SERIES LIABILITY SHIELDS TO ABC SERIES FROM CLAIMS AGAINST ABC; AND TO XYZ SMLLCS BY LIABILITY SHIELDS OF XYZ SINGLE- MEMBER LLCS LIABILITY SHIELDS FROM CLAIMS AGAINST XYZ Under Delaware law, the liability shields provided by ABC s series protect the assets of each of these series from claims by third parties against each other ABC series. Under Delaware law, the liability shield provided by each of XYZ s single-member LLCs protects the assets of each of these single-member LLCs from claims against each of XYZ s other single-member LLCs. There is a serious risk that the liability shield of each of the assets of each series of ABC from claims against other ABC series will not be respected by non-delaware courts. The shield provided by each of ABC s singlemember LLCs against claims against its other single-member LLCs is strong in every state. Under Delaware law, the liability shield of each of ABC s series protects the assets of each of these series from claims against ABC. Under Delaware law, the liability shield provided by each of XYZ s single-member LLCs does not shield these singlemember LLCs from third-party claims against XYZ, since XYZ s membership in these single-member LLCs is an asset of XYZ and gives XYZ an indirect ownership interest in the assets of its single-member LLCs. It is doubtful that the liability shield of any of ABC s single-member LLCs against third-party claims against ABC will be respected by any non- Delaware court or by a bankruptcy court. 12

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15 EXHIBIT C CERTIFICATE OF FORMATION FOR A DELAWARE SERIES LLC Certificate of Formation of ABC, LLC This certificate of formation is being executed as of, 20 for the purpose of forming a limited liability company under the Delaware Limited Liability Company Act, 6 Del. Code et seq. The undersigned person, having been duly authorized to execute and file this certificate of formation, certifies as follows: 1. Name. The name of the LLC is ABC, LLC (the LLC ). 2. Registered office and agent. The LLC's registered office is located at. The registered agent for service of process at this address is. 3. Notice of limitation of liabilities of series. Notice is hereby given: a. That under of the Delaware Limited Liability Company Act, the debts, liabilities, obligations, and expenses incurred by, contracted for, or otherwise existing with respect to any particular series of the LLC shall be enforceable only against the assets of that series and not against the assets of the LLC generally or against the assets of any other series of the LLC; and b. That unless otherwise provided in the limited liability company agreement of the LLC, none of the debts, liabilities, obligations, and expenses incurred by, contracted for, or otherwise existing with respect to the LLC generally or by any other series of the LLC shall be enforceable against the assets of that series. In witness whereof, the undersigned person has duly executed this certificate of formation as of the above date. C:\J2\Strafford series seminar ff\jmc Sentence Outline doc 14