New LLC Act: Proper Planning Prevents Pitfalls

admin

Rachel Kornreich

Governor Rick Scott signed Senate Bill 1300 into law on June 14, 2013, revising Florida’s law governing limited liability companies (“LLCs”).  LLCs created before January 1, 2014 will have until January 1, 2015 to amend their operating agreements to comply with the new law and may elect to have the new laws apply earlier. However, LLCs formed on or after January 1, 2014 will be governed by the revised LLC laws upon formation.

The revised LLC statutes will remain primarily default statutes, i.e. those provisions will govern only if an LLC’s operating agreement does not provide otherwise. Accordingly, most of the provisions of the statutes may be overridden by the terms of the LLC’s operating agreement.  However, as with the previous statutes, not all of the provisions may be waived under the LLC’s operating agreement. The new law increases the number of these non-waivable provisions, so a careful look at your operating agreement for compliance is recommended.

One of the changes that may greatly impact many LLCs is a change to the management structure. There are two types of management systems for LLCs: manager managed and member managed. If you wish to be manager managed, you must actively elect such management in your operating agreement. The default under the statute remains member managed. Florida used to have a concept called “managing member,” which was a member elected from among the existing members to manage the member managed LLC. The new statute eliminates this concept of managing member. All LLCs managed by managing members will now be considered member managed, requiring the affirmative vote/consent of a majority-in-interest of the members for most actions. Some actions specified in the statute require a different percentage of consent. For instance, the unanimous vote of the members is needed to amend a member-managed operating agreement or articles of organization.

This management revision can be illustrated with an example. Suppose you have an LLC with three members, one brother and two sisters, each owning one-third of the LLC. The brother was designated the managing member and was able to act on behalf of the LLC and bind it for certain matters. However, with the elimination of the managing member, the LLC will now be considered member managed and all members will have the authority to act on behalf of the LLC.  At such time, any act of the LLC will require a vote of two of the three sibling members regardless of whether such act was in or out of the ordinary course of the LLC’s business. However, under the new statute, even though an act must be approved by a majority in interest, if an act is not approved, a single member will still have “apparent authority” to bind the member managed LLC based on the perception of an outside third party. In our example, suppose only one of the three members votes affirmatively to approve an action. The action does not pass with enough votes to be approved, as the vote of at least two members would have been needed to approve. However, if that one member decides to perform the action, without any actual authority, the member’s action will still bind the LLC if the third party did not know that the action was not approved. The LLC may have a cause against its rogue member individually; however, the third party would be able to prevail against the LLC.

To avoid the potential problems described in this example, the new statute allows you to file a “statement of authority” designating the limits of each member’s authority. This could limit the members authority to bind a member managed LLC. Such a statement serves to provide constructive notice to outsiders as to who may bind the LLC. We recommend filing such a statement so as to minimize the risk that one member may bind the LLC with his apparent authority. If you are on the other side of the equation and regularly transact with LLCs as a course of your business, remember to check for such statements of authority before entering into an agreement with a member acting on behalf of a LLC.

Although the law has eliminated the managing member, a similar structure may still be accomplished by designating your LLC as manager managed in your operating agreement and appointing a member as the manager. You do not need to have an outside manager to be manager managed; your manager may be one of your members. It is important to remember that a “managing member” will not default to a “manager” under the new statute because the underlying LLC is still considered to be member managed, unless otherwise specifically designated. Therefore, a proactive step must be taken to convert your managing member into a manager.

The Florida Department of State, Division of Corporations (the “Division”) keeps recorded information for corporations, limited liability companies, limited partnerships, general partnerships, trademarks, fictitious name registrations and liens. Lenders will often check with the Division before approving financing to ensure that the proper person is signing on behalf of the entity. It is important that the Division has the correct information on record. In addition to examining your LLCs operating agreement, we recommend that the records on file with the Division be examined as well, most importantly to eliminate the designation of managing member.

LLC records filed with the Division may also now be amended at any time, without the prior restraints found in the former statute regarding amendments. However, LLC members should once again be wary of apparent authority. If records filed with the division are outdated and appear to grant authority to certain persons who no longer have authority to act, the third party might prevail against the LLC because the amendment would not retroactively apply against any person who relied on a record prior to the date of the change. Therefore it is important that amendments are made as soon as applicable, so as to reduce any apparent authority.

In addition to the changes discussed, there are several differences in the LLC statutes that should be considered, including disassociation rights, service of process, and derivative actions. In light of the new statute, we recommend that all existing LLC operating agreements, articles of incorporation, and records on file with the Division should be reviewed for compliance and any new LLC formed should be done so to comply with the new law.  Although it might seem like a long time until you have to take any action, we know how quickly time can fly and encourage you to think about reviewing your documents now.