Now that I have piqued your attention with my sky-is-falling attitude in my previous entry (link here) let’s get into the specific ways the new(ish) LLC law might affect your existing or new business.
Oftentimes, clients come to me with an existing operating agreement that they found on the internet. Here’s a big problem with that strategy: you have no idea where that agreement came from, who wrote it, and now thanks to the RULLCA, the most important issue is WHEN the document was written.
Did it take into account the new LLC laws? Remember, the ghostwriter of that Operating Agreement didn’t have an ethical obligation to update his/her/their LLC Operating Agreements to reflect the changes in the law that went into effect on January 1, 2014. This is crucial because your LLC can be thirty years old with an Operating Agreement written on papyrus…and the
Operating Agreements #1
Old Law: Operating Agreements must be written or oral.
New Law: Operating Agreements may also be “implied.” Implied isn’t defined so the significance is that an “implied” way of doing things could potentially override the default provisions in the new LLC law.
Operating Agreements #2
Old Law: Unstated
New Law: If a record filed with the Secretary of State (e.g. Articles or a Statement of Information) conflicts with the Operating Agreement, the operating agreement controls.
Old Law: An LLC is assumed to be member-managed absent a contrary provision in the Operating Agreement.
New Law: Unless both the Articles of Organization AND the Operating Agreement state that the LLC is manager-managed, the default rule is that the LLC is member-managed. Make sure that both documents see eye to eye on this!
Old Law: Unstated
New Law: Absent a contrary provision in the Operating Agreement, undertaking matters “outside the ordinary course of the LLC” require the approval of all of the members. This means that if the action isn’t clearly stated in the LLC’s Operating Agreement, then a manager could contest the action, claiming it was “outside the ordinary course of business.” An Operating Agreement should define what it is meant by “outside the ordinary course”, because otherwise it has the potential to produce disputes between managers and members.
Old Law: No specific mention of the fiduciary duties owed by members and/or managers to each other, or to the LLC except that they’re the same as a partner’s duty in a general partnership. The new law goes much further.
New Law: The new law states that the duty of loyalty is limited as follows:
- to account to and hold as trustee for the LLC any property or benefit, including the appropriation of a company opportunity,
- to refrain from dealing with the LLC as or on behalf of a party having an interest adverse to the LLC, and,
- to refrain from competing with the LLC.
The new law also doesn’t allow this duty of loyalty to be eliminated, but it does allow you to identify specific activities that do not violate the duty of loyalty, as long as they are reasonable.
This change might be the most significant from the old law. Before, members of an LLC could compete with the LLC and their fellow members. Now, things have changed and a member cannot compete directly with the LLC without violating his or her duty of loyalty. If you were competing with the LLC before,
There are several more crucial changes to the LLC, involving indemnification, tax allocations, capital contributions, and disassociation. I’ll go over those issues in a future entry.
As always, good luck and if you have any questions feel free to give me a call at 844-695-1487 to schedule a consultation to review your LLC’s Operating Agreement or provide general business law advice.
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