New Jersey’s New LLC Law

Since the entity known as a Limited Liability Company, or “LLC” came along in New Jersey in 1993, it has quickly become one of the most common business forms. LLCs are popular largely because of their flexibility, limited liability, and tax advantages.

For example, as long as they meet the requisite qualifications, an LLC may elect to be taxed as a sole proprietor, partnership, C corporation, or S corporation, which means it may avoid the double taxation of a C corp wherein both the owners and the company are taxed. Also, although an LLC is not incorporated, in many instances, LLC owners – called “members” – are protected from personal liability for the company’s debts the way a corporation is.

New Jersey’s Limited Liability Company Act was enacted in 1993, and while it has been revised in 1996 and 2006, revisions have been minor until recently. On September 21, 2012, Governor Christie signed the Revised Uniform Limited Liability Company Act which is scheduled to go into effect for new LLCs on March 20, 2013. (For existing LLC’s it will become effective in March of 2014.)

The new law will include several revisions and additions, including the following:

Duration: Under the prior law, an LLC has a default duration period of thirty years unless the members designate otherwise on the certificate of formation. Under the new law, an LLC will have an unlimited or perpetual duration period unless otherwise indicated on the certificate, which is more like a corporation which is also considered to have perpetual existence.

Not-for-Profit: The new law allows LLCs to be formed for any lawful purpose regardless of whether they are for profit or not-for-profit or formed to own non-income-producing property.

Fiduciary Duties: A fiduciary is someone who is in a position of trust and confidence. A fiduciary therefore has certain duties to the person or entity of which she is serving, such as the duties of care and loyalty that must be evoked in advising and protecting the beneficiary in the relationship. The revised Act allows the LLC’s operating agreement to alter the duty of care, within reason. (The operating agreement cannot authorize intentional misconduct or knowing violations of the law.)

Indemnification: Although the past law allowed LLCs to indemnify members, the new Act requires indemnification by default, unless the operating agreement indicates otherwise.

The new Act also allows the agreement to eliminate or limit a member’s liability to the LLC or its members except for instances in which the member breached the duty of loyalty, received a financial benefit she was not entitled to, made a wrongful distribution of money or property, intentionally inflicted harm, or intentionally committed a crime.

Amendment to Operating Agreement: Operating Agreement may state that any amendment to the agreement requires the approval of someone who is not a party to the agreement or upon the satisfaction of some condition (such as with financing arrangements).

Statement of Authority: An LLC may file a Statement of Authority with (in most instances) the Division of Revenue in the Department of the Treasury to designate one or more individuals who may act on the LLC’s behalf.

Charging Order: The new Act extends and clarifies the concept of charging order. A charging order may be created when a creditor of the LLC obtains a judgment against a member of the LLC. The creditor can obtain a charging order from the court, constituting a lien against the member-debtor’s transferable interest. Thus the LLC would have to pay any distribution that would be paid to the member, directly to the creditor instead until the debt was repaid. If the debt cannot be paid within a reasonable period of time, the creditor can have the court foreclose the lien and order the sale of the transferable interest. The purchaser would acquire the transferable interest (distributions) but would not become a member of the LLC.

Deadlocks and Minority Members: The new Act adopts some provisions of the New Jersey Business Corporation Act regarding the involuntary dissolution of the company when the members are deadlocked and cannot come to a decision to proceed in the operation of the company, or there is a minority shareholder problem. A minority shareholder is an owner who may be disadvantaged by the way the company is being operated and who owns such a small percentage of the company that she is unable to change the operations of the company.

The new law, reflecting caselaw decisions in New Jersey, allows the Court to enter an order dissolving an LLC if its conduct is unlawful or it is not reasonably practical to carry on the LLC’s activities. Like the Business Corporation Act, the Court will have broad power to dissolve the LLC, appoint a receiver, or order the sale of membership interests if the LLC is acting in a manner that is oppressive or directly harmful to another member who requests the remedy.

Operating Agreement: The Agreement may be oral, written, or even implied based on the way the LLC has operated.

Resigning Member: Under the new law, an owner who resigns is no longer required to receive a fair share value of their ownership interest in the LLC. Upon resigning, the member only has rights as an economic interest holder. This means that the member no longer has any right to participate in the LLC’s management, her fiduciary duties end (for all matters arising after the dissociation), and her transferable interests as a member is now only owned as a transferee.

Distributions: In the new law, unless otherwise agreed, the default rule is that distributions are made on a per capita basis.

Foreign LLC: In the new law, before transacting any business in New Jersey, a foreign LLC (formed in a state other than New Jersey) must first obtain a Certificate of Authority from New Jersey.

Management: The new Act sets forth that an LLC will, by default, be a member-managed (or owner-managed) LLC. However, an LLC may set forth an alternate management structure in its operating agreement, such as by designating it to be a “manager-managed” LLC. In fact, the operating agreement could even set forth a corporate-like structure for its management with directors and officers.

The attorneys at McLaughlin & Nardi, LLC are experienced in forming all types of business entities and creating operating agreements for business entities such as LLCs. To learn more about what we can do to help, please visit our website, e-mail us or contact one of our lawyers at (973) 890-0004.