Möbius strip, a one-sided surface that can be constructed by affixing the ends of a rectangular strip after first having given one of the ends a one-half twist. This space exhibits interesting properties, such as having only one side and remaining in one piece when split down the middle.
Klein bottle, topological space, named for the German mathematician Felix Klein, . . . not constructible in three-dimensional Euclidean space but [with] interesting properties, such as being one-sided, like the Möbius strip; being closed, yet having no “inside” . . . ; and resulting in two Möbius strips if properly cut in two.
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Back in the day – say, 1990 – limited liability companies (LLCs) were the cutting edge of business entity law. Today, LLCs dominate entity formation, and the cutting edge has moved further out – to the notion of a “series,” a quasi-separate, quasi-person existing within an LLC.
Business lawyers are generally familiar with series of stocks and bonds, but those series have nothing to do with the LLC series discussed in this article. To avoid confusion, this article refers to protected series, which, as we will see, are the Mobius strips or Klein bottles of entity law.
The Protected Series Construct
The protected series comprises an identifiable set of assets segregated within a limited liability company (or also, under Delaware law, within a limited partnership), with the following features:
Those “associated” assets constitute the series, and a series is empowered to conduct activities in its own right. A series and its associated assets are responsible only to persons asserting claims pertaining to those assets or activities.
The associated assets are not responsible to persons asserting claims arising from the assets or activities of the LLC itself or from any other set of assets segregated within the LLC (i.e., from any other series within the LLC).
One or more members of the LLC may be, but are not necessarily, associated with the series.
The profits of the series inure to the benefit of only the members associated with the series, or if there are none, the LLC itself.
Thus, an LLC that has protected series perforce has “internal shields” – i.e., the partitions confining the assets and liabilities of each series to that series alone. These shields are conceptually and practically quite different from the shield that protects the owners of an entity from automatic liability for the entity’s obligations.
As detailed below, no one knows whether the internal shields will work in bankruptcy. Accordingly, this article is a warning label, not an operator’s manual.
What’s Old and What’s New?
The protected series has long existed in the context of series of investment trusts (particularly Delaware statutory trusts) and in the kindred context of captive insurance companies. However, in those contexts:
the construct has the blessing (and supervision) of the relevant regulators; and
the internal shields are not at issue, because:
involuntary creditors are as plentiful as unicorns; and
voluntary creditors will promise not to challenge the internal shields.
In 1996, Delaware amended its LLC and limited partnership statutes to provide for protected series. At that time, the thought seemed to be a combination of “why not?” and “perhaps in some circumstances an LLC or LP might work marginally better than a series within a Delaware statutory trust.” None of the key architects of the series provisions of the Delaware LLC and LP statutes then envisioned, let alone advocated, using series to compartmentalize the activities of operating businesses.
That attitude may well remain “best practices.” For example, the LLC Committee of the ABA Business Law Section has begun drafting a model operating agreement for a multi-member Delaware LLC with protected series. The project assumes that the LLC will be an investment vehicle and not an operating business or holding company.
However, anecdotal evidence suggests that many “series LLCs” are indeed used for operating businesses and holding companies and that many lawyers are recommending (or at least countenancing) such purposes.
Twelve states, the District of Columbia, and Puerto Rico now have series provisions in their r
