Led by Delaware, a number of states allow a “series” limited liability company. Think of the LLC itself as a building and each series as a cubicle within the building. If you follow the rules then the assets and liabilities in each cubicle are legally separate:  a creditor of one can’t get at the assets of another.

Thus, rather than forming a brand new LLC for each group of assets, a business can create separate series within one LLC, saving on state filing fees.

Apparently, Arizona really dislikes the series LLC. Arizona amended its LLC statute recently, and not only does the new statute not adopt the series concept for Arizona LLCs, it goes a step farther, refusing to recognize the concept even for LLCs organized in other states. Section 3901D of the Arizona statute provides that an Arizona resident who is a creditor of the series of a non-Arizona LLC can get at all the assets of the LLC, notwithstanding the laws of the state where the LLC was organized.

EXAMPLE:  NewCo LLC is formed in Delaware and has two series, Series X and Series Y, with Series X in the asbestos business and Series Y in the real estate business. Section 215 of the Delaware Limited Liability Company Act says that creditors of Series X can’t get at the assets of Series Y. But Arizona says they can, if they’re Arizona residents or the transactions took place in Arizona.

I wonder if that’s even constitutional. From law school I recall that states aren’t allowed to impose their own regulations on long-haul trucks if it impedes interstate commerce. This sounds similar.

But putting the constitutional question to the side, it’s hard to see the purpose of the law. NewCo LLC can keep the Arizona creditor away from its real estate assets by spending a couple hundred dollars more — in Delaware —and forming two wholly-owned subsidiary LLCs rather than two series. Just as likely, national companies using a series LLC will avoid doing business in Arizona, hardly a desirable outcome.

From the invention of the corporation hundreds of years ago to modern times, the history of commercial law is that governments accommodate the development of business. Here the Arizona legislature has done the opposite and it’s hard to see why.