The Legislature has recently made important changes to the laws governing New Jersey limited liability companies, which were effective March 1, 2014. The new revisions make drastic changes to the way New Jersey law treats limited liability companies. The law still allows the owners of a limited liability company to change the way they want their business to be run if they do not want it run in accordance with the law’s acts default provisions. However, when the LLC operating agreement is silent, the new Revised Uniform Limited Liability Company Act will govern.
Because these changes drastically alter the way LLCs are operated, profits are distributed, and decisions are made, it is essential to have your operating agreement reviewed by an experienced business attorney knowledgeable in the new Revised Uniform Limited Liability Company Act. Our attorneys are experienced in these areas and we have formed and crafted operating agreements to run hundreds limited liability companies. Please call us to have your LLC’s operating agreement reviewed by one of our business attorneys.
The following are some of the important changes.
Distributions. Under the old law, members of an LLC received distributions or profits and losses according to their ownership interest. Therefore, if two owners own the company 75 percent and 25 percent, they would receive profits and distributions of 75 and 25 percent, respectively. The new LLC law, however, requires that profits and losses be shared equally. Thus in that same company, rather than splitting the losses 75 and 25, each member would received half the profits, despite their unequal shares. Of course, this can be changed in the operating agreement, which can provide that distributions be made in proportion to ownership percentages, or based on any other reasonable formula.
Fiduciary Duties. The new LLC law creates an express fiduciary duty of loyalty for all members. Members cannot compete with their limited liability company or engage in self dealing. Thus, leasing property to the LLC or lending it money can be construed as self dealing. But again, this can be changed in the operating agreement.
Duty of Good Faith and Fair Dealing. Courts had long implied that members of an LLC with a operating agreement had to act in good faith and deal with their fellow members. However, it was not expressly laid out in the law. The new Revised Uniform Limited Liability Company Act makes it unquestionably clear that this duty applies to the dealings between members. Operating agreements cannot eliminate this duty, but can define it.
Voting. Under the old Limited Liability Company Act, ordinary matters were voted on majority vote based according to equity interest. Therefore, in our two member LLC, the member with the 75 percent ownership interest would have 75 percent of the vote. Under the new LLC law, however, each of the two members would have a 50 percent vote, despite their unequal ownership interests.
Matters beyond the ordinary course of business, which might include a merger of the business or a sale of all its assets, were decided by a majority share of the percentage interests. Therefore, under our 75/25 example, the 75 percent owner could determine all extraordinary measures. The new law, however, states that these matters must be decided by a unanimous vote by all the members.
Again, these rules can be changed altered in the operating agreement.
Minority Owner Oppression. New Jersey’s corporate law has long prohibited majority owners from “oppressing” minority owners. The old LLC law does not contain this provision, and courts were somewhat murky on whether it applied to LLCs. The new law, however, expressly protects members from oppression by other members.
Indemnification. Under the old law indemnification was discretionary. Under the new law, indemnification for managers, members and employees is mandatory under certain circumstances. Again, the LLC’s operating agreement can change this if the members so desire.
Information. The old law identified specific categories of information which every member was entitled to. The new law provides that members are entitled to all documents and information. The LLC operating agreement can alter this, but may not reasonably restrict the members’ right to information and documents.
Authority to Bind. The new LLC law changes the authority of members to bind an LLC. Essentially, this authority will now be controlled by the type of management structure. In a manager – managed LLC, only the managers have the authority to decide on matters in the ordinary course of business and bind the company. Extraordinary matters, of course, are still to be decided based on votes by all the members. In a member – managed LLC, the members decide all matters since the LLC does not have any managers. This makes it important for the LLC to identify at least the management of the LLC.
Operating Agreement Changes – Manifestly Unreasonable Standard. The new law, as explained above, does allow the members to adopt an operating agreement which changes many of the statutory requirements. However, these changes cannot be “manifestly unreasonable.”
Resignation of Members. Under the old limited liability company law, when a manager resigned, she was entitled to have the value of her interest purchased by the LLC at fair market value. Under the new Revised Uniform Limited Liability Company Act, a resigning or withdrawing member remains a member, albeit a disassociated member, who still has the right to distributions and profit, but no longer has any right to manage the LLC or vote. Likewise, a resigning or withdrawing member does not have the right to demand a buyout of her interest. However, the operating agreement can provide for a buyout of the resigning or withdrawing members’ interest.
Conversion/Domestication. The Revised Uniform Limited Liability Company Act streamlines the process to convert a New Jersey corporation, partnership, etc., to a limited liability company. It also makes it easier for out of state LLCs to become domesticated in New Jersey (i.e., to become New Jersey limited liability companies).
Oral and Implied Operating Agreements. Under the new law, oral or implied limited liability company operating agreements are recognized. However, because they are oral or implied, determining or proving the terms will be difficult, to say the least. When the term is not addressed it will revert to the default provisions of the Revised Uniform Limited Liability Company Act.
Duration. The new Revised Uniform Limited Liability Company Act provides that LLCs have perpetual duration, unless its certificate of formation states otherwise. The old law had a default 30 year provision. If your company’s certification of formation prior to the new law specified a 30 year duration, it should be changed.
The Takeaway. These changes are drastic. Many companies have operating agreements that were written under the prior law and have not been reviewed for years. It is therefore essential to have your company’s operating agreement reviewed by an experienced attorney knowledgeable in New Jersey’s limited liability company laws. Failure to do so could result in unexpected consequences, and very unpleasant surprises.
Contact Us. Our business attorneys are available to review the operating agreements for your limited liability company to ensure that they reflect your intentions, and that the results are not changed by the New Jersey Revised Uniform Limited Liability Company Act.
Please call us at 973-890-0004 or email us to schedule a consultation.