You Cannot Be Series-ous!
-- by Molly Tranbaugh and Keith Geddings II
What are Series LLCs and Series Limited Partnerships and Why Use Them? Looking for an alternative to the Special Purpose Vehicle (SPV)? A Series LLC or Series Limited Partnership could provide the same benefits while allowing for a quicker and more efficient start-up process. Series structures enable individual entities which can function like SPVs. Instead of a traditional SPV structure with one investment vehicle, wherein there is a single group of investors and one entity holding an investment, in a series structure one master entity spawns multiple series entities. Each series is a distinct legal entity that can have its own strategy, economics, and investors, and each series makes and holds its own investments. Unlike an SPV, a series entity does not require a new operating agreement or partnership agreement to be drafted from scratch, which makes the process more streamlined and potentially more expedient.
How are Series LLC and Series Limited Partnerships Structured? Depending on the choice of LLC or Limited Partnership, either a Master Limited Liability Company or a Master Limited Partnership sits on top of the structure, and is the entity that spins out the series entities. Conceptually it is most easily understood as the parent entity. The governing document of the parent entity enables it to have multiple series, but doesn’t necessarily dictate the terms of each series. Instead, the unique terms of each investment, such as the investment strategy, management fees, carried interest, hurdle, and investment timeframes, are spelled out in a series-specific addendum. Preparing the addendum for a series is considerably less complex than drafting a new operating or limited partnership agreement for each investment, which means that it can typically be done more expediently and at a lower cost. The additional benefit of the series structure is the liability shield. When properly structured, the assets and liabilities of each series are contained within each individual series. As a result, the liabilities of one series should not affect the assets of another series or the parent entity.
What is the use case for a Series LLC or Limited Partnership? There are multiple instances where the series structure makes the most sense in place of an SPV. Perhaps you want to pursue multiple strategies, and have different investors interested in each. Or you may have a handful of LPs who are active co-investors, requiring you to spin up new investment vehicles frequently. An SPV would historically be the entity of choice to address any of these scenarios. If you find that you are frequently encountering situations that necessitate standing up an SPV, the series structure may provide a streamlined alternative.
Series LLC vs Series Limited Partnership. Choosing between a Series LLC and a Series Limited Partnership is better seen as a choice between management flexibility and meeting investor expectations. Series LLCs allow for members to take an active role in managing and operating a series without losing their limited liability protection. In the private funds world, investors, particularly high-net-worth individuals and institutional investors, are accustomed to the GP/LP dynamic, wherein the GP plays the active role and assumes several types of liability, and the LP is a passive player with limited liability. These investors may prefer a Series Limited Partnership as its structure and operations are familiar.
Series LLCs and LPs in Delaware. While other states offer similar statutes, Delaware is a very common choice for managers starting up a series, and investors may be more comfortable with Delaware entities. Delaware has statutes that explicitly allow for both Series LLCs and Series Limited Partnerships. Section 18-215 of the Delaware Limited Liability Company Act specifically allows for an LLC to establish multiple series with different members, managers, interests, and assets. The same statute also provides the liability shield language, specifying that the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to one series are only enforceable against that one series. Similarly, section 17-218 of the Delaware Revised Uniform Limited Partnership Act permits a partnership agreement to provide for one or more series of the partnership and for the assets and liabilities of each series to be kept separate from any other series under the master limited partnership. Managers must follow the rules very carefully to ensure the series is properly structured and that the liabilities of one series are not enforceable against the assets of another series or the parent entity.
Administrative Complexity. While setting up an additional series is meaningfully less complex than establishing a new LLC or limited partnership, there are still administrative burdens to managing a Series LLC or Series Limited Partnership. Under Delaware law, both Series LLCs and Series limited partnerships are required to maintain separate records for each series entity. As a practical implication, each series needs a separate bank account to meaningfully separate its cash assets from those of other series. Each series also needs its own EIN in order to file its own tax returns. One final caveat is the financial consideration, which cuts in favor of series entities. For Series LLCs and Limited Partnerships, only the master entity pays annual Delaware franchise taxes, rather than each series entity. Each standalone SPV, on the other hand, would be subject to franchise taxes.
Whether a series structure is right for you depends on the investment strategy that you are pursuing and the specific needs of your investors. These structures offer incredible flexibility for managers who are testing new investment theses, who frequently facilitate co-investments or use SPVs for stand-alone deals, and who need to accommodate investors who have nuanced investment requirements. If you’ve encountered any of the foregoing scenarios as a manager, the series structure could save you time and resources going forward.
