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All LLC’s should review the new LLC Act

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Bruce Ackerman is a partner at the law firm of Pashman Stein, and the head of its Corporate practice.
Bruce Ackerman is a partner at the law firm of Pashman Stein, and the head of its Corporate practice. - (Bruce Ackerman)

There is a new law affecting every limited liability company (LLC) in New Jersey, dubbed the Revised Uniform Limited Liability Company Act (RULLCA). It now governs all LLC’s, old and new.

The prior law, 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.  The following will highlight a few important areas of RULLCA that every LLC owner should notice and then review whether his or her own operating agreement adequately covers these issues as intended.

Under the old law, the LLC’s “operating agreement” was defined as being a written agreement among the members.  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 that now allows any writings, conversations, emails, verbal or other historical permissions or business practices to become, in effect, the operating agreement for the LLC.  Hence, it is even more essential now to have a thorough written operating agreement among all members.

Whenever the operating agreement does not provide for an item, RULLCA will control.  As an example, the agreement will determine the management (whether member-managed, or by managers) and the operation (whether by a corporate type of board of directors and officers, or by the managers).  It will be member managed by default under RULLCA.

Second, the authority of the members and managers will be decided by agency law, rather than by their status alone.  A filed certificate of authority may limit those members or managers that have authority to act for the LLC.

Third, RULLCA modifies the application of fiduciary duties due the members and addresses the potential need to have LLC members that may operate competitive business activities.  Now, the LLC operating agreement may specifically limit or even eliminate the duty of loyalty of the members (either generally or for specific other purposes) and may change the indemnification of members and/or managers. A duty of ordinary care and the business judgment rule apply under RULLCA.

Fourth, as to distributions, RULLCA provides the circumstances where an LLC can and cannot make a distribution, unless the operating agreement sets forth the terms of their agreement as to distributions.  Again, RULLCA highlights the importance of having a thorough operating agreement.

Fifth, a transferee may have a right to distributions, but may or may not be a member unless the operating agreement allows.  After a member leaves the LLC, the other members may alter the operating agreement under RULLCA, even affecting that person’s rights without the person participating.

Sixth, RULLCA provides the mechanism whereby a member may apply for a Court order dissolving the LLC, or for other equitable relief, based upon conduct that is oppressive and is likely to harm that member.

As shown, it is imperative that all LLC owners take a careful review of RULLCA and their current operating agreements.  Consideration should be given to appropriate changes and supplements to address the areas under RULLCA that leave to the operating agreement to clarify and change the terms that RULLCA would otherwise impose upon you.

Bruce Ackerman is a partner at the law firm of Pashman Stein, and the head of its Corporate practice.

Ackerman focuses his practice on the formation, purchase, sale and restructuring of businesses and professional practices, stock and asset sale transactions, mergers, corporate agreements and business succession planning. He also represents publicly traded, multisite and closely-held businesses, providing those businesses with general corporate and litigation counsel. Ackerman can be reached at backerman@pashmanstein.com.

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