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Revised Uniform Limited Liability Company Act
“A Deal May Not be a Deal”

By George J. Tyler, Esq. and Matthew J. Krantz, Esq.
Beginning on March 1, 2014, all limited liability companies (“LLC”) become subject to the Revised Uniform Limited Liability Company Act (“RULLCA”). RULLCA was adopted as law on September 19, 2012 to replace to original legislation authorizing the creation of LLCs in New Jersey, which became effective in 1994. New LLCs created after March 18, 2013 have been subject to RULLCA since formation. At the same time, existing LLCs had the option to become subject to RULLCA by amending their operating agreement. Existing LLCs that took no action when the law was first passed will automatically become subject to RULLCA as of March 1, 2014, and their operating agreements may well change.

ULLCA is the first full comprehensive revision of the laws governing LLCs in New Jersey since LLCs were first authorized by statute, and it attempts to combine the best areas of the existing law governing LLCs, as well as other business entities, with legal developments over the past two decades. As with the previous law governing LLCs, RULLCA establishes default terms for LLCs. A LLC may depart from most of the default terms by addressing the subject of the default term in its operating agreement. However, where the operating agreement does not address the subject of a statutory default term, the statutory term will apply. As discussed below, many of the default terms have changed with the adoption of RULLCA. Therefore, all LLCs should immediately have their operating agreements reviewed to ensure that previous agreements and understandings remain in effect. Business practices should also be evaluated to ensure consistency with the new law. In other words, by operation of law one may find an existing business arrangement has changed automatically and perhaps not to that person’s liking. If inconsistencies are identified, then the LLC must amend its operating agreement or its business practices to maintain compliance.

One significant change is that profits and losses under RULLCA will be distributed per capita, that is, in equal shares among members, if not otherwise stated in the operating agreement. This is true even if contributions to the LLC were not equal. Under the previous New Jersey Limited Liability Company Act (“NJLLCA”), profits and losses were allocated in accordance with the operating agreement, but if the operating agreement was silent, then the profits and losses were allocated based upon the agreed value of the contributions by the members.

In addition, under RULLCA, members that resign from the LLC will not be entitled to receive the fair share of the value of their interest at the time of resignation unless otherwise specified in an operating agreement. Instead, the resigning individual will be dissociated as a member and will retain only the rights of an economic interest holder.

Moreover, under RULLCA, members owe a duty of loyalty and duty of care to the LLC and other members. These duties prohibit the member from, among other things, competing with the LLC and require the member to account to the LLC for any profit derived from the member for appropriating an opportunity of the LLC. To the extent that such action is not “manifestly unreasonable,” RULLCA allows for these duties to be expanded and curtailed by the terms of an operating agreement.

Under the NJLLCA, a LLC may choose to indemnify its members or managers. However, the failure to address the issue in the operating agreement left members and managers unprotected except to the extent allowed by the Courts. RULLCA provides that all company agents, including members and managers, will be entitled to indemnification by the LLC unless such requirement is limited by the operating agreement.

Under RULLCA, LLCs will no longer have a limited life unless otherwise specified by the operating agreement. Instead, LLCs will have perpetual existence unless specified otherwise by the operating agreement. LLCs will also have the ability to file Statements of Authority with the Department of the Treasury in order to limit the ability of, or authorize, certain individuals or entities to bind the LLCs to third parties. Furthermore, RULLCA allows for operating agreements to be oral, written or implied based on the way the LLC has operated. Previously, operating agreements were required to be in writing.

In addition, RULLCA also includes provisions addressing deadlock amongst members and oppression of minority owners.

Given the extent of these changes and their impact on members and managers, LLCs that have not yet done so should immediately have their operating agreements evaluated and make amendments to ensure that previous agreements between the members have not been drastically altered by this new law.