Limited Liability Company Act Transforms Principles of LLCs
A new set of laws governing New Jersey limited liability companies will become effective in March. The changes are profound. The Limited Liability Company Act fundamentally changes a number of bedrock principles about the manner in which limited liability companies are organized and managed.
Limited Liability Company Becomes Entity Type of Choice for New Businesses
This is one of the most significant pieces of business legislation in a number of years. Beginning in 2013, the default rules a New Jersey limited liability company are going to be much more like partnerships and the rules for starting and running a limited liability company are going to change drastically. Every New Jersey limited liability company will be affected by the changes in the law and the principals of these businesses should begin to consider how they will address the revisions.
The reason why the changes are so sweeping is that the legislature scrapped the existing Limited Liability Company Act that was modeled largely on the LLC law of Delaware in favor of the Revised Uniform Limited Liability Company Act (RULLCA), a model statute prepared by Uniform Law Commission. The ULC (formally the National Conference of Commissioners on Uniform State Laws) develops model statutes for use by individual states with the idea of promoting uniformity. So far, only seven states and the District of Columbia have adopted the uniform law.
Most significantly, for our purposes, the RULLCA is very different from the Delaware model. Because of the breadth of the changes, we will not be able to cover them all in one article. We will have to analyze the changes over the next few months. The law takes effect in March 2013 for newly formed LLCs and in March 2014 for existing LLCs. A rundown of the more fundamental changes, however, includes the following:
- Oral Operating Agreement. The new statute permits operating agreements be formed by oral agreements or conduct. The current statute provides that an operating agreement is not required, but if there is one, it must be in writing. The current statute has provided for rigid certainty. If the operating agreement was not in writing, it didn’t exist. The new statute will essentially substitute a course of behavior or oral agreements for the writing. Failure to address this new reality is likely to be problematic.
- New Remedies. One of the motivations for amending the Limited Liability Company Act was the limited statutory remedies that existed for unfair or oppressive conduct by majority members. A number of commentators had suggested that the legislature should adopt provisions akin to the statutory remedies available for oppressed shareholders of corporations. The new statute contains a provision that permits a forced sale of an interest in the event of oppressive behavior. But the statute goes a bit further authority the court to compel sales of interests when necessary in the interests of equity.
- Revised Duties Among Members. Limited liability companies are creatures of contract, generally meaning that the members were free to create any arrangement that they liked and to structure the rights and obligations of the members as they saw fit. There was some debate about whether any fiduciary duties were intended by the statute. The new law expressly delineates the duties owed among the members and restricts the ability of the LLC to limit those duties by contract.
- Distributions. The default rule for distributions is per capita under the new law, as opposed to distributions based on the amount of capital contributed under the present law.
The Uniform Limited Liability Company Act has not been widely accepted. Of the major “commercial states,” it has now been adopted only in California, Illinois and New Jersey. For businesses operating as LLCs, it a new world with new rules.
We welcome your questions and comments.