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Here’s One More Thing You Can Do Legally In Nevada But Not In California

Suppose you are a real estate developer with two buildings and you anticipate that investors in each building will have different investment objectives.  If the buildings are placed in a single limited liability company, each building will be subject to the liabilities of the other.  In addition, conflicting investment objectives could lead to unnecessary internal disputes.  Although you could form separate LLCs for each building, this would increase filing, organizational and administrative costs.

One solution to this problem is the series LLC.  Formation of a series LLC with each building placed in a separate series will allow you to isolate the liabilities of each building and to provide different rights to investors in each building without the costs associated with forming two LLCs.

Unfortunately, series LLCs aren’t an option in California.  When the bill creating California’s new LLC act was introduced, it permitted series LLCs even though this was not a feature of the Revised Uniform Limited Liability Company Act (RULLCA) on which the bill was based.  However, the series LLC provisions were removed from the bill at the behest of the Secretary of State’s office.  See SB 323 (Vargas), Bill Analysis, Senate Judiciary Committee (Jan. 10, 2012).

Nevada permits the formation of a series LLC by including an appropriate provision in the articles of organization.  NRS 86.161(e)  At the other end of the life cycle, Nevada permits the separate dissolution of a series.  NRS 86.491(2)-(3).  For more on Nevada’s series LLCs, see Chapter 16 of Jeff Zucker’s and my book.

Another serious deficiency in California’s version of RULLCA (and RULLCA itself) is the utter failure to address the status of foreign series LLCs.  As the late Professor Larry E. Ribstein observed:

Under RULLCA, as under LLC law generally, the law of the state of formation governs members’ and managers’ liability for the LLC’s debts. A RULLCA comment states that it

does not pertain to the “internal shields” of a foreign “series” LLC because those shields do not concern the liability of members or managers for the obligations of the LLC.  Instead, those shields seek to protect specified assets of the LLC (associated with one series) from being available to satisfy specified obligations of the LLC (associated with another series).

NCCUSL therefore not only fails explicitly to address the issues concerning foreign LLCs, but goes out of its way to deter courts from using RULLCA’s general choice of law provision to resolve these issues.

An Analysis of the Revised Uniform LLC Act, 3 Va. L. & Bus. Rev. 35 (2008) (footnotes omitted).

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