Limited liability companies have become a preferred form of entity for new ventures of all kinds. In fact, in some states, the total filings for new LLC’s now exceed the filings for new corporations. Because of this trend, every manufacturing business owner should be aware of the new LLC laws that are growing in acceptance across the country and how this new law may affect you and the LLC’s that you form for manufacturing and other related ventures.
The National Conference of Commissioners on Uniform State Laws issued its newly-recommended form of the LLC Act, called the Revised Uniform Limited Liability Company Act (“RULLCA”) in 2006. Since then, so far 9 states and the District of Columbia have enacted the new LLC law (including CA, FL, ID, IA, MN, NE, NJ, UT and WY), and the law is currently pending adoption in South Carolina.
Every manufacturing business owner should be aware of the new law and how it may affect your manufacturing business LLC’s, both old and new, in these jurisdictions (and others as adoption continues). These laws also affect the companies with which these owners do business.
Although RULLCA is a complete overhaul of the former LLC laws in those states where adopted, here are some of the highlights that you should look out for in the States where you operate manufacturing businesses.
- It is essential to have a thorough Operating Agreement for each LLC. Whenever the operating agreement does not provide for an item, RULLCA will control. As an example, the agreement will determine the type of management structure (whether member-managed, or if managed by one or more managers) and the operational management (whether by a corporate type of board of directors and officers, or by the managers themselves having control). If not dictated otherwise by an operating agreement, the LLC will be member managed by default under RULLCA. Also, under the new law, if you do not have an operating agreement, the statute will allow oral and other agreements, including electronic records like emails, to become the LLC’s operating agreement. Having a written operating agreement is, therefore, even more valuable to avoid having these arguments.
- The authority of the members and managers will be decided by agency law, rather than by just the status that someone works for the LLC. Under the new law, the LLC can file a certificate of authority with the State and notify the public that the LLC is limiting to specified individuals the authority to bind the LLC. This is most important for any sales or other executives that might otherwise bind the company.
- RULLCA modifies the application of fiduciary duties due the LLC and accepts that many companies need members and managers that may operate competitive business activities, again a key element where you develop multiple businesses. Ordinarily, each member in a member-managed LLC would owe a duty of loyalty to the LLC and have to bring all business opportunities to the LLC. Now, the operating agreement may restrict or even eliminate that duty of loyalty of those members (either generally or for specific other purposes, such as where some members have other competing or overlapping businesses). Similarly, the members can vote to accept that a member or manager engages in a competitive business activity. A duty of ordinary care applies and, in some states, the business judgment rule applies under RULLCA.
- As to distributions of LLC revenues, RULLCA provides the circumstances where an LLC can and cannot make a distribution, unless the operating agreement sets forth other terms. Most importantly, under RULLCA, if the operating agreement does not provide otherwise, distributions are to be equal amongst the members, not according to percentage ownership or capital contributions.
- A transferee (someone who takes over a membership interest either by a voluntary transfer or as a creditor) may have a right to the member distributions, but may or may not become a member of the LLC and participate unless the operating agreement allows. A new member is bound to the operating agreement, whether signing it or not. Finally, after a member leaves the LLC, the other members may alter the operating agreement under RULLCA, even affecting that transferee’s rights without the transferee participating in the change to the agreement.
- RULLCA provides the mechanism whereby a member may apply for a Court order dissolving the LLC, or for other equitable relief, based upon conduct that is claimed to be oppressive and is likely to harm that member.
As shown, a careful review of your State law and your current manufacturing business operating agreements should be made where RULLCA applies. Consideration should be given to appropriate changes to address the areas of RULLCA that leave to the LLC operating agreement to clarify and change what RULLCA would otherwise impose upon you.
Mr. Bruce Ackerman is a partner at the law firm of Pashman Stein and the Chair of its Corporate Law Practice. He can be reached at 201-488-8200 or at email@example.com.