The New LLC Act Will Eventually Apply to All Limited Liability Companies – Part One

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

The new law affecting every limited liability company (“LLC”) in New Jersey, dubbed the Revised Uniform Limited Liability Company Act (“RULLCA”), took effect September 19, 2012.  The prior law, generally known as the LLC Act, was largely unchanged since 1994.  This new Act is a major revision and brings changes to many aspects of forming and operating LLC’s in New Jersey.  This Part One will highlight a few of the first portions of the new Act, namely who the law affects and when, and the impact of the LLC Operating Agreement upon the members and managers.

The new Act, RULLCA, says that it applies to all LLC’s formed on or after March 18, 2013.  It will also apply to “all LLC’s”, regardless of the date of formation, eighteen months after its adoption on September 19, 2013.  Therefore, the critical date for all LLC managers and members in existing LLC’s is March 19, 2014.  At that time, all LLC’s in New Jersey will be governed by the new RULLCA.

Under the old law, the LLC’s “operating agreement” was defined as being a written agreement among the members as to how to conduct its business.  In contrast, the new law defines it as being an agreement that is “oral, in a record, implied, or in any combination thereof.”  This is a significant change, which now allows any writings, conversations, emails, verbal or other historical permissions or business practices to become, in effect, the operating agreement for the LLC.

Significantly, RULLCA now governs various parts of the operating agreement and even imposes rights and obligations where not otherwise specifically written by its members.  As an example, RULLCA provides that where the LLC operating agreement does not cover the listed items (relationship between members and the company, rights and duties for the manager, the company’s activities, and amending the agreement), RULLCA will control those items.  RULLCA also prohibits certain items from being altered, except within specified limits, such as changing a member’s duty of loyalty to the LLC, or the duty of good faith and fair dealing, or the vaguely stated “unreasonably restrict the duties and rights stated in section 40 [Right of Members, Managers, and Dissociated Members to Information]” or the right of a member to maintain a direct or a derivative action.

The initial provisions in RULLCA address the need to have LLC members that may operate other competitive businesses or deal with competitors.  Section 11(d) now permits the LLC operating agreement to specifically restrict or even eliminate the duty of loyalty of the members to the LLC and change the indemnification of the members and/or managers.

Just to make it less predictable, a catchall provision leaves it up to the court to decide whether the restriction or elimination of the duty of loyalty is “manifestly unreasonable”.

Lastly, RULLCA provides that any person that becomes a member of the LLC automatically agrees to the LLC operating agreement.  Look for Part Two to address the relationships between members and managers with the LLC and with each other.

Link to Part Two

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