Automatic Changes To New Jersey Limited Liability Companies Coming In March 2014

Seth Tipton is a corporate law associate with Florio Perrucci Steinhardt & Fader.

Mike Psathas is a corporate law and real estate associate with Florio Perrucci Steinhardt & Fader.

If you own a membership interest or are a manager in a New Jersey limited liability company (commonly referred to as an “LLC”), March 1, 2014 could be a significant date for you.  Beginning on that day, all New Jersey LLCs, regardless of when it was formed, will be governed by the Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-1 et seq. (the “Revised Act”), which was adopted on September 19, 2012 by the Governor of New Jersey.  The Revised Act carries several noteworthy changes that may significantly change the management and ownership dynamics of traditional LLCs in the state of New Jersey including in the following areas:             

  1. Operating Agreements – In addition to written operating agreements, the Revised Act permits both implied and oral operating agreements.  Under the former rules, operating agreements are required to be in writing.  This is a significant shift with potentially large consequences for those companies operating without a formal written agreement.  Therefore, members of LLCs without written operating agreements should give careful consideration as to whether an oral or implied operating agreement could be formed based upon the current practices and/or operation of the LLC and whether executing a written operating agreement prior to March 1, 2014 is preferable.  Operating agreements can vary in scope and sophistication depending upon the nature of the business and the management dynamics of the LLC.

  2. Distributions – The former LLC Act provides that financial distributions are pro rata if there is no operating agreement provision governing such distributions.  Thus, if an LLC is comprised of a 30% owner and a 70% owner, distributions are  divided pro rata in accordance with each member’s ownership share (i.e., 30% and 70%, respectively). Under the Revised Act, distributions are made per capita, meaning that the distributions are to be divided by the number of members.  For example, a 30% owner and a 70% owner each receive half of the distribution if no operating agreement provision provides for distributions in a different manner.  Therefore, it is important that operating agreements include clear guidance on distributions to members of the LLC.

  3. Termination/Restriction of Certain Fiduciary Obligations – The Revised Act limits the ability of members to restrict and/or terminate the fiduciary obligations or duties of members and managers in an operating agreement.  Duties may only be restricted or terminated where it is “not manifestly unreasonable” - an expression ripe for judicial interpretation.  Members should carefully consider what fiduciary obligations they wish to impose upon themselves based upon the business their LLC will conduct.

  4. Indemnification – The Revised Act requires LLCs to indemnify members and managers against certain liability unless the operating agreement specifically limits such duty.  This new requirement may create unanticipated potential liability for any LLC, and its members, if the operating agreement is not drafted in a way to avoid such liability.  Indemnification rights and duties should be discussed by all members prior to adopting an operating agreement. Importantly, certain types of insurances may be purchased by the LLC to help limit such potential exposure.

  5. Resignation of Member – The Revised Act no longer requires a member to receive the value of his or her equity interest upon resignation from the LLC.  Therefore, members should manage their expectations prior to entering into an LLC to determine his or her long term goals in the event he or she desires to dissociate from the LLC.

  6. Oppression – Currently, there is no statutory remedy for oppressed minority LLC members under the former rules.  However, the Revised Act permits oppressed minority LLC members to request a court order to dissolve the company or to appoint a provisional manager in the event of oppressive behavior.  This statutory remedy, at a minimum, places majority LLC members on notice that oppressive conduct may be prohibited and punished under the new rules.

  7. Duty of Loyalty – The Revised Act codifies the "duty of loyalty" owed by members to other members and the business entity itself.  This duty prohibits members from conducting certain transactions with the LLC and from competing with the LLC through other businesses or enterprises.   However, the Revised Act also permits disinterested members to authorize or ratify acts that would otherwise breach the duty of loyalty, provided that there is a full disclosure of all material facts.

As this list demonstrates, March 1, 2014 may bring significant changes to your LLC. Many of these automatic changes can be addressed in an amendment to an existing operating agreement or in a new operating agreement drafted in accordance with the Revised Act.  Therefore, any member or manager in a New Jersey LLC should strongly consider contacting legal counsel to review existing operating agreements for potential issues and/or to draft new or amended operating agreements.  It should be noted that the Revised Act is already effective for those New Jersey LLCs formed on or after March 18, 2013.

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