The Republic of the Marshall Islands (RMI) has one of the finest bodies of corporate law in the world, having closely modeled their laws after the top corporate haven in the world: the State of Delaware. The RMI is a former U.S. dependency in the Pacific Ocean which is now entirely independent.
One of the most innovative and useful business entities provided for in RMI Law is the Series Limited Liability Company (LLC).
The RMI LLC Act provides for the creation of a “series” of segregated asset containers within a Series LLC whose debts and other liabilities are enforceable against that asset container alone. The Act also provides that classes or groups of members can be established. This allows each asset container to be treated as if it were a separate company. Thus, the RMI LLC Act allows for the creation of separate sub-companies within one umbrella limited liability company without the need to create separate entities. The concept is similar to the protected cell companies used by many insurance companies within the U.S. and elsewhere.
Unlike every offshore protected cell company law of which we are aware, there are no special limitations on the creation of an RMI LLC, so it could be used for any purpose except for banking, trust or insurance services.
The Act allows a Series LLC agreement to provide for separate members, managers, interests, business purposes, rights and/or duties with respect to the property or obligations held within each asset container. An asset container can be terminated without affecting the other asset containers within the Series LLC. An asset container can make distributions to its own members without regard to the financial condition of the other asset containers or the umbrella LLC.
Most importantly, the Act provides that debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular asset container are enforceable against that asset container only, and not against the assets of the Series LLC generally or any other asset container within the LLC.
The RMI Limited Liability Company Act provides for Series LLCs in Section 79, from which the following excerpts have been taken:
…A limited liability company agreement may establish or provide for the establishment of designated series of members, managers or limited liability company interests having separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations, and,
… any such series may have a separate business purpose or investment objective.
…the debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof…
For more information, or to receive a free copy of the complete text of the RMI LLC Act and a sample Certificate of formation, please send a request.
Practical Uses of the Series LLC:
The Series LLC can also be used to provide an economical framework allowing clients access to international investment programs not available to US persons.
Another obvious use for the series LLC is to hold multiple properties, businesses or other investments. Forming and maintaining ten separate LLCs would cost several thousand dollars in the year of formation and several thousand dollars each subsequent year. Instead, a series LLC can be used and each property, business or investment can be transferred to a separate series. This would achieve the goal of segregating the properties for asset protection purposes while saving several thousand dollars in startup costs and another several thousand dollars a year in ongoing administrative costs.
AND, if it became appropriate, any Series within the Series LLC could be “spun off” as a separate new LLC
Domestic U.S. Uses of the Series LLC
Another use for the series LLC might be to facilitate an equity compensation program in a business with multiple divisions. If each division were segregated into a separate series, the LLC could give the key employees of each series some sort of equity interest tied to that series only rather than equity interests in the entity as a whole. That rewards employees at productive divisions and protects them from the potential downside of another division.
Yet another use for the series LLC might be to make a de facto transfer that avoids gain that would otherwise be recognized on a transfer from one LLC to another LLC. For example, an existing LLC creates a new series within it, then issues 100% of the membership of the series in part for cash, and finally transfers a parcel of the land it already owns to the new Series. If the LLC is respected as a single tax partnership (i.e., the new Series is not treated as a separate partnership for tax purposes), the current income tax gain on the cash portion of the land exchange that otherwise would have been triggered in a transfer to a new LLC will have been avoided. In addition, since the transfer of the land was entirely inside the LLC, depending on local law, there may be no real estate transfer tax on the transfer whereas there may have been tax on the transfer of the land to a new LLC.
RMI Series LLCs can usually be formed within 1 business day. No client information needs to be given to the Registry so complete confidentiality can be maintained.
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