New Act Will Apply to All Limited Liability Companies – Part Two

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

Link to Part One

New Jersey’s new law affecting every limited liability company (“LLC”) is the Revised Uniform Limited Liability Company Act (“RULLCA”), which took effect September 19, 2012.  This Part Two will address several major changes in the new Act, which controls all LLC’s formed on or after March 18, 2013, and all LLC’s regardless of when formed as of March 19, 2014.

Under the earlier law, the member’s rights to manage were “in proportion to the then current percentage or other interest of members in the profits of the LLC,” with the decision of the members owning more than 50% controlling.  In contrast, RULLCA provides that the members have “equal rights in the management and conduct of the company’s activities” and that a difference among the members in the ordinary course is decided by “a majority of the members” (not by majority percentage of ownership).  However, an act outside the ordinary course of the LLC’s activities can only be taken with the consent of all members.  Naturally, there is no definition of what is “ordinary course.”  The operating agreement can address decision making as well as the definition of “ordinary course,” to avoid or lessen later disputes, again highlighting the greater importance of addressing all issues in an integrated document defining the members’ rights.

As to the effect of the operating agreement, in the old LLC Act, the effect of the agreement upon a member was left to having a provision in the agreement that provides either that the member signs the operating agreement or another agreement showing the intent to become a member, or, failing such signature, if the member meets the conditions to become a member as provided in the operating agreement.  In contrast, under RULLCA, “[a] person that becomes a member of a limited liability company is deemed to assent to the operating agreement.”  Again, RULLCA emphasizes the importance of a properly fashioned operating agreement.

In New Jersey’s earlier LLC law, each member was, in effect, an agent of the LLC having the authority to bind the company.  In contrast, under RULLCA a member is specifically not an agent of the LLC just by being a member.  Instead, the law of agency applies, such as actual and apparent authority.  Finally, the LLC has the option to file with the State a certificate of authority designating individuals that can act and bind the LLC as well as the limitations on acting for the LLC.

The final subject for this Part II is the allocation of profits and losses.  Under the former LLC Act, either the operating agreement dictated the allocation of profits and losses, or the law took over and dictated that they would be divided by “the agreed value … of the contributions made by each member.”  However, under RULLCA, there is no provision to allocate profits and losses among the members.  Therefore, the operating agreement must address the issue.

In Part Three of this discussion, we will address the treatment of members under the old and new law in regard to the treatment of members as to each other, the payment of distributions and how members withdraw from an LLC or are removed as members.

Link to Part Three

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