By Lauren Burgon
Washington State’s new Limited Liability Company Act went into effect on January 1. While some of the changes are minor, there are changes that could have a significant impact on an LLC that has not updated its Operating Agreement, or hasn’t gotten around to implementing a written Operating Agreement in the first place.
LLC Agreements – Under the old Act, LLC agreements generally had to be in writing, but the new Act permits oral or implied agreements and amendments. While this gives businesses an opportunity to organize themselves informally, it also exposes them to the potential for unintended amendments. With a written LLC Agreement, the terms governing the LLC are clearly set forth and acknowledged by the Members, and can be readily understood and relied upon by the parties and the decision makers in dispute resolution proceedings. In contrast, with an oral agreement, any dispute on the terms of the agreement may pit the recollections of the Members against one another. We recommend that every LLC have a written LLC Agreement, and that each Agreement includes a provision requiring that all amendments be made in writing.
Voting Rights – The old Act provided that unless specified by the LLC Agreement, voting by members is by ownership percentage, which is determined by the amount of capital contributed by each member. Simply put, members contributing more capital automatically had more voting power. Under the new law, the default provision is that each member gets one vote, regardless of actual ownership percentage or relative capital contributions. In addition, in the absence of an LLC Agreement stating otherwise, there are a number of provisions in the new LLC Act that require a unanimous vote. It is crucial that LLCs review their LLC Agreement to ensure that voting power is specifically addressed, and LLCs without a written Agreement should consider this yet another good reason to prioritize putting in place a written agreement right away.
Board as Manager – Under the old law, an LLC board or committee could not be a designated LLC manager, but this is permitted under the new Act. This means that an LLC may now have a board of directors that as a group will constitute a single “manager,” and no single individual serving on the board will have the individual authority to act as manager of the LLC. Any LLC that prefers to use a board structure should include in its LLC agreement provisions to designate its board as a manager, to provide a procedure to elect the board, and to specify who has the authority to act on behalf of the board. These LLCs should also consider including rules regarding qualifications of directors, terms of directors, vacancies on the board, notices of board meetings, quorum requirements, and voting by the board.
Fiduciary Duties – The old law is silent on what, if any, duties an LLC’s managing members or managers owe to the LLC. The new law specifically addresses a manager’s or managing member’s fiduciary duties of loyalty and care to the LLC, and also includes provisions for an LLC agreement to modify, expand, restrict, or eliminate certain of those fiduciary duties. However, there are basic duties that may not be eliminated, including the implied duty of good faith and fair dealing, the duty to avoid intentional misconduct and knowing violations of law, and the duty not to make distributions in violation of the LLC agreement or which would render the LLC unable to pay its debts as they become due. Because these fiduciary duties may not be included in existing LLC Agreements, we recommend reviewing existing agreements to ensure that Managers’ and Managing Members’ fiduciary duties are clear, and that the Agreement does not seek to improperly eliminate statutory fiduciary duties.
Inspection of Records by Members – The old law required that LLCs maintain a short list of common records which members had limited rights to review, and members had no statutory right to review non-listed items, such as accounting records and tax returns. The revised Act provides LLC members with broader rights to access LLC records, so that members’ access to LLC records is now similar to the access enjoyed by Shareholders under Washington’s Business Corporation Act. LLC Agreements should be reviewed to determine if they need to be amended to come into compliance with the new Act and to adopt internal procedures for handling members’ records requests.
Expanded Liability for Improper Distributions – The old law provided that a member who receives a distribution from an insolvent LLC will be liable to the LLC for the amount of the distribution, but did not apply this liability to managers. Under the new Act, a manager or managing member can be personally liable for effectuating an improper distribution if he/she/it consented to such a distribution in violation of either the LLC Agreement or the law’s solvency requirement.
These are just some of the important changes to LLC law in Washington. Take a look at your own business and let us know if you have questions about changes you may need to make to comply with the new regulations.