A Google Search is not the same thing as a Law Degree - Changes in LLC Law


Many potential clients are taken aback by what lawyers (at least the good ones) charge to draft Operating Agreements for business entities. Of those that do face sticker-shock, many decide to print out a form they find on google thinking they have solved their problem.

You pay a lawyer because our job is to make sure all of your documents are drafted in accordance with any new changes made to the law. The forms you find doing google searches are often not up-to-date, and you can find yourself in a heap of a mess with the IRS, the State and your business partners if your documents are not drafted properly.

As an example, during the 2015 legislative session, the Florida legislature adopted amendments to Chapter 605 of the Florida Statutes. Chapter 605 is the Florida Revised Limited Liability Company Act (Florida Revised LLC Act).

Highlights of SOME OF THE CHANGES (not all) made to the Florida Revised LLC Act during the 2015 legislative session are as follows:

17 UNENFORCEABLE PROVISIONS

Certain provisions in an existing LLC operating agreement may be unenforceable. Whereas the Old Act contained only six non-waivable provisions for LLC operating agreements, the New LLC Act contains 17 such provisions. Operating Agreements may not:

1. Vary a limited liability company’s capacity to sue and be sued in its own name;

2. Vary the applicable law that governs LLCs;

3. Vary the procedure pertaining to registered agents or the Department of State;

4. Vary the requirements related to signing and filing a record pursuant to a court order;

5. Eliminate the duty of loyalty or the duty of care;

6. Eliminate the obligation of good faith and fair dealing;

7. Relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law;

8. Unreasonably restrict the duties and rights to records required by the Act;

9. Vary the power of a person to dissociate;

10. Vary the grounds for dissolution;

11. Vary the requirement to wind up the company;

12. Unreasonably restrict the right of a member to maintain an action against another member or manager;

13. Prevent the formation of a special litigation committee upon a court order;

14. Vary the right of a member to approve a merger, interest exchange, or conversion;

15. Vary the required contents of a plan of merger, a plan of interest exchange, a plan of conversion, or a plan of domestication;

16. Except in certain narrow circumstances, restrict the rights under this chapter of a person other than a member or manager; and

17. Provide for indemnification for a member or manager when he or she commits:

  • Conduct involving bad faith, intentional misconduct, or a knowing violation of law;

  • A transaction from which the member or manager derived an improper personal benefit;

  • An improper distribution of funds; or

  • A breach of the duty of loyalty or the duty of care.

MANAGING MEMBER TERM ELIMINATED

For LLCs formed after January 1, 2015, the term “managing member” will not be recognized by the Department of State in filings or annual reports. Although an LLC will still be able to be manager-managed, the mere use of the term “managing member” in the LLC’s governing documents will not make the LLC manager-managed. Absent other evidence or indication of intent to be manager-managed, any member is clothed with the authority to bind the LLC (unless that member’s authority has been limited as explained below). As a corollary, all members could be liable for certain actions taken by the LLC, such as the authorization of improper distributions.

ADMISSION OF MEMBERS

Now, unless otherwise provided in the Articles of Organization or the Operating Agreement, a person may become a member of an LLC only with the unanimous consent of all the members. The New Act also allows a person to become a non-economic member without a transferrable interest or any obligation to contribute capital. This is a significant change which facilitates so-called special purpose LLCs, and allows for participation and governance by members with no economic interest whatsoever in the LLC. Members and managers of Florida LLCs should review their operating agreements to determine whether they wish to make changes in light of the changes to the default rules made in the amendment and in the Florida Revised LLC Act as adopted in 2013.

VOTING RULES MODIFIED

For manager-managed LLCs, except as otherwise provided in the operating agreement, a majority-in-interest of the members must approve any action outside of the ordinary course of the LLC's activities and affairs, including an organic transaction (such as a merger or conversion). However, the unanimous vote of the members is required to amend the Articles of Organization or the Operating Agreement.

DISSOCIATION OF MEMBERS

A member may now dissociate at any time, rightfully or wrongfully, by withdrawing by "express will." This is a change from the Old Act, where unless authorized in the articles of organization or operating agreement, a member could not dissociate at all prior to dissolution or winding up.

The New Act also introduces the concept of a "wrongful dissociation," which is one in violation of the operating agreement or dissociation, through express will or otherwise, prior to winding up. A limited liability company may have the right to damages against a member who wrongfully dissociates.

Dissociation by expulsion can occur under one of two circumstances under the New Act. First, the Operating Agreement can prescribe a method by which a member may be expelled. Upon expulsion under the Operating Agreement the member is dissociated. Absent a method for expulsion in the Operating Agreement, the members may unanimously agree to expel a member. However, expulsion by unanimous consent is only available if the LLC cannot lawfully carry on its activities with the expelled member, the expelled member has transferred its entire transferable interest in the LLC (other than under a security agreement or a charging order that has not been foreclosed), or the expelled member is a corporation or other entity that has dissolved. Under the Old Act, the transfer of the member’s entire interest would automatically terminate the transferor’s status as a member, but under the New Act, the transfer of the member’s entire interest will not automatically terminate the transferor’s status as a member unless the transferor’s expulsion is unanimously approved. As such, the Operating Agreement should provide for automatic dissociation to avoid the need for approval by all of the members under such circumstances.

A dissociated member under the New Act holds its transferable interest as a transferee only. Thus, the dissociated member has no right to participate in management, nor has any management obligations to the LLC. A member’s dissociation does not discharge any debt that the dissociated member owes to the LLC or any other member of the LLC. Additionally, the New Act eliminates the existing prohibition on a dissociated member receiving distributions from the LLC.

The default events causing dissolution are upon the occurrence of an event described in the operating agreement, upon the consent of all members, upon the passage of 90 days without a member, upon the entry of a decree of judicial dissolution, or upon the filing of a statement of administrative dissolution by the Department.

Other changes to the LLC Act involve:

Judicial Dissolution

Appraisal Rights

Enhanced Protection Against Creditors

Transaction Changes

Types of Filings Expanded

Winding Up

Duty of Loyalty

Statutory Non-Compete

Conflict of Interest Transactions

Transferable Interest

We will guide you through these changes if you have a current Operating Agreement in place. We will also take these changes into consideration when we draft agreements for new entities. It might seem overwhelming, but this is why you consult with an attorney instead of simply performing a google search.

Contact us at Elan.Kaney@KaneyLaw.com or Lester.Kaney@KaneyLaw.com to learn more.

#limitedliabilitycompany #operatingagreement

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