What is the Best Structure for your SPVs? LLC vs. Series LLC

2 min read

Sep 27, 2022 9:51:29 AM | Assure

Since their inception in 1977, Limited Liability Companies (LLC) have been the preferred method of organization for Special Purpose Vehicles (“SPVs”). LLCs gave individuals limited liability and pass-through tax treatment, without the restrictions on investors imposed by an S Corporation. 19 years later Delaware created the Series LLC, giving LLCs even more functionality making them an attractive alternative to corporations.

Limited Liability Company
SPV-01Over two-thirds of new companies formed today are LLCs. LLCs are formed relatively quickly and offer customizable internal company agreements that allow businesses to determine their own structure and rules. This has made LLCs popular for Special Purpose Vehicles (SPVs) because an SPV can create a custom structure and rules for a single specific investment detailing how company expenses will be borne by its members, the rules for buying a membership interest, and the rules governing distributions to members.
There are many advantages to using an LLC for your SPV. LLCs, especially Delaware LLCs, are universally recognized by investors around the world. Courts have upheld and given favorable treatment to the custom rules set up by LLCs and have declined to apply their own rules when deciding cases involving disputes among LLC members.

Series Limited Liability Company Structure
Using a Series LLC saves time and money. Several states have made it possible to create Series LLCs. Delaware was the first to allow Series LLCs. Other states followed, including Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah, Wisconsin, Washington D.C., and Puerto Rico. A Series LLC is a type of limited liability company in which the certificate of formation for the Series Limited Liability Company (the “Master”) provides for the establishment of one or more designated “Series” entities, with each Series’ assets, operations, debts, liabilities and obligations segregated and accounted for independently from the Master and from other Series formed pursuant to the Master’s certificate of formation and operating agreement. This allows companies to pay only one franchise tax payment and one registered agent fee for the Master and all Series, regardless of how many Series are created under the Master.

The Series LLC structure (as illustrated above) is an entity with separate and distinct interests. This structure allows each series to have its own members, conduct its own business, open its own bank account, and remain insulated from claims against other Series. However, it is important to treat each Series as if it were its own LLC for accounting purposes. Keeping the assets and liabilities for each Series separate from each other is key to preserving the liability shield that Series create. If assets are comingled, it is possible that a court may break the liability shield between the Series. Additionally, some states do not recognize Series LLC structures, and charge annual fees for each Series within the LLC when the Series LLC operates as a foreign LLC in their jurisdiction. California, for example, charges an annual $800 per Series for foreign Series LLCs.

Maintain Entity-01Whichever structure you decide to use as your SPV, Assure, through Glassboard is equipped to facilitate the creation of investment entities at volume with a management structure that is efficient and cost-effective. Assure provides experience and expertise in setting up and maintaining the administrative obligations of investment funds. Through Glassboard, Assure streamlines the entity set-up process by:

(1) filing a certificate of incorporation with the applicable state agencies;
(2) providing off-the-shelf operating agreements for regular or Series LLCs;
(3) handling the administrative filings for the Master, including maintenance of the registered agent, franchise tax fees, dissolution, and final tax reporting;
(4) providing off-the-shelf operating agreements for each Series entity set-up under the Master, specifying that each Series is designed to invest in one or more portfolio company securities (each subsequent Series becomes effective upon the creation of the Series operating agreement through Glassboard).

If an SPV has unique needs, Assure is fully capable of working with the SPV Organizer and its counsel to modify the structure and documents, as necessary.