Tag Archives: limited liability company

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

By Bruce Ackerman, Esq.
backerman@pashmanstein.com

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.  RULLCA controls all LLC’s formed on or after March 18, 2013, and all LLC’s regardless of when formed as of March 19, 2014.  This final part of three parts explaining elements of RULLCA will address the following areas which have changed in the new Act — distributions, resignation and withdrawal, and the rights of members to information.

As to distributions, the old LLC law provides that, unless the operating agreement provides otherwise, distributions are to be made based on “the agreed value … of the contributions made by each member.”  Again highlighting the importance of the operating agreement, RULLCA provides that distributions prior to dissolution or winding up are to be “in equal shares among members and dissociated members.”  That is contrary to the ordinary agreement by members, which would provide for distributions by their percentage of ownership.  The parties must have their operating agreement set forth the terms of their agreement as to distributions.

As to resignation of a member and the right to any payment or “distribution” upon such withdrawal, the old LLC law provides for six months’ notice to withdraw and the payment of any distribution provided under the operating agreement or, if not provided, then payment of fair value for the interest held, less all applicable discounts.  In contrast, under RULLCA, a member may withdraw at any time, and there is no entitlement to any distribution upon withdrawal.  Of course, the members themselves may agree otherwise and set forth that entitlement within their operating agreement.

Finally, under the old LLC law in New Jersey, each member is entitled to receive information on the business and financial condition of the company, tax returns, member addresses, the operating agreement itself, and the value of cash and other assets held by the LLC.  The manager may maintain the information in confidence for such time as reasonably believed necessary to maintain trade secrets or other information the disclosure of which is believed not in the best interests of the LLC or required by a third party to keep confidential.

In contrast, RULLCA sets forth a procedure and time in which to secure LLC documents.  In general, RULLCA provides that the LLC shall furnish to each member any information concerning the company‘s activities, financial and other wise, that is material to the member pursuant to its operating agreement and, on demand, any other information.  Each member has that duty to provide information as well.  However, in a manager managed LLC, this information shall be provided by the manager if sought by the member for a “a purpose material to the member’s interest as a member,” and the member must make a written demand “describing with reasonable particularity the information sought and the purpose for seeking the information.”  The law provides a ten day period for the LLC to respond and inform the member when and where the LLC will provide the information and, if declined, the reasons why the information will not be provided.

As shown, a careful review of your current operating agreement should be made and appropriate changes and supplements to address those areas under RULLCA that leave to the members in their operating agreement to clarify and change what RULLCA provides.  With the March deadline looming for the RULLCA to apply to all LLC’s in New Jersey, it is important to make that review and update soon.

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

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