New Jersey’s Revised Uniform Limited Liability Company Act — What all owners of New Jersey LLCs Need to Know
What is the New Jersey’s Revised Uniform Limited Liability Company Act?
The Revised Uniform Limited Liability Company Act (“RULLCA”) replaces and expands New Jersey’s Uniform Limited Liability Company Act (“NJ ULLCA”) which was originally put in place to govern limited liability companies in January of 1994. RULLCA was officially enacted on March 18, 2013, and, at least for the next 11 months, applies only to LLCs formed after that date. After March 1, 2014, the RULLCA will apply to all LLCs regardless of the date of formation.
How will the RULLCA affect your LLC?
The following is a brief summary of the most significant changes to the statute that may affect your LLC:
1. Fiduciary Duties
Under the outgoing NJ ULLCA, LLC members owe fiduciary duties to other members. (These are generally the duty of loyalty and the duty of care.) The duty of loyalty often involves avoiding conflicts of interest, however, the members could waive the fiduciary duty in the operating agreement. This framework allows many people to participate in multiple businesses outside an LLC even when those other activities might conflict with the LLC’s business.
RULLCA no longer permits the members to agree to waive certain rights, including fiduciary and other rights that they owe to each other, like the duty of good faith and fair dealing. While this may not have significant impact on the operation of a company in the ordinary course, in disputes between members involving activities outside of the company, this can have a dramatic effect and provides an aggrieved member with significantly improved rights.
Under the RULLCA, the default rule on distributions is that all profit available for distribution will be made to the members on a ‘per capita” distribution, meaning equal shares for each member, unless otherwise agreed to in the operating agreement. This change means that any LLCs that do not have an operating agreement and that have been distributing profit other than on an “equal share” basis, will be required to do so.
Under the NJ ULLCA, upon disassociation a member, absent a contrary provision in the operating agreement, is entitled to be paid the fair value of his or her interest in the company, which can be a financial stress on a business that might prefer to deploy its capital for growth. Under the RUCLLA, a “resigning” member is no longer automatically entitled to receive fair value; instead that person becomes dissociated as a member and assumes the rights of economic interest holder. This change means that the member loses the right to participate in the governance of the company (as well as the potential liability associated with the operation of the company), but retains the rights to receive distributions of profit and of the company’s assets upon liquidation or dissolution. Absent a provision in the operating agreement that requires the sale of the member’s interest upon disassociation, a member will neither be entitled to be bought out nor will the company have the right (or obligation) to do so (note that this can have the effect of enabling a member to cease participating in the business while continuing to profit from it, an outcome typically not desired by the remaining members).
4. Deadlock and Oppression
Under the NJ ULLCA, there are very few rights afforded to a minority member that is oppressed by the majority or, similarly, to resolve a deadlock between members. As such, this issue is typically addressed in the operating agreement to ensure that the members have remedies in the event of oppression or deadlock. The RULLCA provides express remedies for oppressed minority members: the right to seek the dissolution of the LLC or the appointment of a custodian. These remedies give the oppressed minority substantial leverage to obtain a buyout or other relief relating to the operation of the company that it previously did not expressly have under the NJ ULLCA.
While it is good practice to have your LLC operating agreement reviewed every few years to ensure that it is consistent with the intentions and practices of the members, the changes effectuated by the RULLCA make it critical that every company’s operating agreement be updated to make sure that it consistent with the revisions to the law.