Sep17

Members Beware…. The New LLC Laws

Man sitting at a computer looking at LLC graphics in blue

Florida’s new limited liability company (“LLC”) act goes into effect for LLC’s created on or after January 1, 2014, but will apply to all LLC’s as of January 1, 2015 because the old LLC act will expire at that time. The biggest changes apply to what can and cannot be in an LLC’s Operating Agreement as well as what happens by default under the statute if the Operating Agreement does not provide otherwise. If your Operating Agreement contains any of these provisions described below, it could be rendered unenforceable depriving you of some of the protections you expected from other members or in how your LLC functions.

For example, Operating Agreements that provide for extreme protections for its members, such as eliminating the duty of loyalty or acting in due care, will not be enforceable. Further, an Operating Agreement cannot prevent a member from dissociating from the LLC, although it can dictate the manner of dissociating. Therefore, you cannot prevent a member from leaving the LLC in order to compete against it, but you can provide the process for leaving and prevent the member from “cashing out” his membership interest.

Another change is a clarification of how LLC’s are managed. The prior statute indicated that an LLC is either “Manager-managed” or “Member-managed.” This led to some Member-managed LLC’s indicating that they had a “Managing Member.” Although the current LLC statute includes references to a “Managing Member,” the new statute clarifies that such a position does not exist. If an LLC is Member-managed then the members collectively manage it. If it is Manager managed, then a Manager or Managers manage the LLC. The Manager may also be a member, but does not have to be. In light of this, any LLC’s with a “Managing Member” should update their Operating Agreement to clarify who has the power to bind the company and enter into agreement, a Manager or the Members.

Finally, the new LLC act reaffirms a recent change to the current LLC statute that states the exclusive remedy of a judgment creditor of an LLC member is a charging order against that member’s LLC interests unless that member is the sole member of the LLC. In the case of single-member LLC’s, if a judgment creditor demonstrates to the court that distributions under a charging order will not satisfy the judgment within a reasonable time, then the court may order that the single-member’s interest in the LLC be foreclosed and sold, effectively giving the creditor access to the LLC’s underlying assets.

The changes in the new LLC act and issues arising out of these new laws will likely cause problems for unaware, uninformed LLC members. To avoid unforeseen consequences of the new LLC act, persons owning LLC’s should have their Operating Agreements reviewed by an attorney to make sure there will be no surprises come 2015.