This week I talk about some strategies to further protect your Delaware Series LLC investors, especially when operating in states that do not recognize series structures.
Of course, it is SyndiCat’s business to go on and on about the Series structures. But here are some practical action points to further tighten asset protection for your LPs:
1. Maintain Separate Books and Records for Each Series: Financial accounts, EINs, and all governance documents should be isolated for each series. This helps prevent commingling and strengthens liability shields.
2. Clear and Comprehensive Operating Agreement: Spell out the creation, management, and liability segregation between series, with explicit clauses for indemnity, dispute resolution, and asset ownership. A well drafted Master Operating Agreement will do the job!
3. Transparent Series Designation and Notice Filings: Include notice of each series in the Certificate of Formation and, where possible, register “Protected” or “Registered” Series with the Secretary of State. This puts third parties on notice and helps enforce liability segregation.
4. Separate Banking, Contracts, and Tax Filings: Use individual bank accounts and execute all contracts, leases, and other agreements in the name of the specific series. Apply for separate CIKs, EINs and file taxes for each series when possible.
5. Internal Agreements and Documentation: Ideally avoid inter-series transactions. But if unavoidable, then draft inter-series agreements for any such transaction(s). Also, document all transactions with third parties to reinforce separateness.
6. Appropriate Insurance Policies: Another (expensive) option is to obtain insurance tailored for both the master LLC and each series. This extends asset protection if a state disregards the series structure. But, it is always better (and perhaps cheaper) to Register the Series with the relevant state (Strategy 7 below).
7. Legal Filings or Registration in Nonrecognizing States: Consider forming separate LLCs or registering the relevant series as foreign entities in states where the series shield may not be recognized. Always safer to annually pay a few hundred Dollars to the state than worry.
8. Regular Compliance and Audits: Perform internal and/or external audits to avoid bookkeeping errors and demonstrate that series operations are truly independent.
Fiduciary Duty Mapping: Clarify GP (manager) / LP (member) duties in the respective Operating Agreements. Be extra mindful when there are cross-series relationships & transactions that might generate potential conflicts.
These steps help reinforce the legal separation between different series and boost investor protection in uncertain jurisdictions.
If you’re looking to create new SPVs, you’re welcome to browse Propel(x) SPVs page. If you want help deciding which option to choose for your next SPV, you are welcome to…
Cheers!
