Business Law 101 / Major Changes
By Albert Kelley
During the 2013 Legislative session, the Florida legislature passed a comprehensive law drastically changing limited liability companies. This was the largest law passed by the legislature, covering hundreds of pages, yet few people know about it. This article gives a brief summary of this law. For more information, contact a local business attorney who is familiar with the nuances of the new law.
Florida was the second state in the country to recognize LLCs back in 1982, but they weren’t commonly used until the first major revision in 1999. In Florida there are currently about 690,000 active LLCs. This new law is a complete rewrite of the LLC statutes. The old statutes (Section 608 of the Florida Statutes) will be repealed on January 1, 2015. The new law (Section 605) took effect on January 1, 2014 but there is a grace period of one year for LLCs that were formed before then.
Like its corporate counterpart, the new LLC law is a default law. This means that many parts of it may be overridden in the Operating Agreement. What may not be overridden are certain non-waivable provisions. In the old law there were only six non-waivable provisions; now there are 17.
While LLCs are still started by filling Articles of Organization, what you put in them is new. You must have at least one member to form the LLC. The title “Managing Member” no longer exists. While members may still be managers, if the title of managing member is used for one member, it will designate every member to also be a manager. The new law allows members and managers to maintain their anonymity, so long as one responsible person or entity is named. The default status is that the company is member managed. This means under the new law that all members can bind the LLC and all members have liability. If you want the company to be Manager Managed, you need to state that either in the Articles of Organization or the Operating Agreemen.
The Operating Agreement is still the primary document that controls the activities of the LLC; however, now the Operating Agreement does not have to be in writing. Should it? Definitely! If it is not in writing, it will be more subject to disputes. The courts can now look at course of dealing, evidence of agreements, even emails to establish the terms of the Operating Agreements if they are not written. This creates a potential problem as it allows the courts to determine that an Operating Agreement has meanings that were not intended. The law specifically states that a pre-formation agreement or a letter of intent is not an Operating Agreement. Emergency Operating Agreements have been extinguished. Also, the state has classified the duty of care, fair dealing, good faith and loyalty. These are now modifiable but nonwaivable.
Who can sign a lease for an LLC? If you have a member managed LLC, and you rely on the default provisions, every member can bind the LLC and thus any member can sign a lease. In a manager managed LLC, only the manager can bind the LLC. However, the LLC can designate a responsible party for executing transactions. This means that a landlord should get confirmation as to who can execute the lease or the lease may not be valid. How will landlords know if it is member managed or manager managed? They may not.
For distribution purposes, the statute requires that distributions be made based on the value of the initial contribution. This means if you have one member who contributes cash and the other contributes services, the court may determine that the member contributing services gets nothing. Again, you can change this in your documents, and you’d better.
Membership rights in an LLC have also changed. Previously all members had an economic interest in the LLC. Now we also have non-economic members. These members have voting rights or rights to inspect records, but no rights to receive distributions. This is designed to allow lenders to watch their security better by allowing them to have an ownership interest, without diluting the dividend base.
Once the LLC has been formed, there is still work to be done. Although LLCs are not subject to the rigorous requirements of corporations, the new law does add some maintenance issues. Under the new law, any document filed with the Department of State is filed under penalties of perjury and may be corrected at any time. There is an obligation on the members and managers to correct any information that is wrong or that changes. For example, if the company changes its address, they MUST file a correction. Failure to correct information can create liability as to third parties. The LLC is responsible for watching the Dept. of State records to know what has been filed so they can correct any errors. If a document has not yet taken effect, it may be withdrawn.
In 2010 the Supreme Court said that, at least to single member LLCs, the ownership interest could be foreclosed to satisfy a judgment. In 2011, the legislature addressed that, stating that as to multi-member LLCs, a charging order was the sole and exclusive remedy for judgment creditors. For single-member LLCs, foreclosure was still an option but only if the creditor could prove that a charging order would not satisfy the judgment within a reasonable time. This has been preserved in the new law.
What about distributions (also called dividends)? Distributions can only be made in cash, not in kind, unless your documents allow for that. If a distribution is to be made in kind, it must be a divisible asset. One thing that hasn’t changed is that an LLC cannot make distributions if it will make them insolvent. If an LLC makes an improper distribution, there can be personal liability on the part of any member or manager who authorized the distribution.
There is also a major change in how members leave an LLC. Leaving an LLC is now an absolute right. This was not the case before. If the departing party is a manager, they file a Statement of Resignation; if the departing party is a member, they file a Statement of Dissociation. Members can no longer sell their membership interest. Memberships have an economic transferable interest and a non-economic nontransferable interest. In other words, a member can transfer his rights to receive distributions, but not his right to vote.
Another major change is the termination of an LLC. Before, LLC’s were closed by filing Articles of Dissolution. Those still exists but are now revocable. However, we have a new document called a Statement of Termination which closes the LLC and is not revocable.
Service of process: if you are going to sue an LLC, how you get service is new. Where the registered agent used to be the last resort, it is now first. You first try to serve the registered agent. Only after that fails do you look to members or managers.
Under the old statute, Articles of Organization could specify what date they would be effective. This was not allowed for any other type of document. Now any document except the resignation of registered agent, or any correction of a document, can have an effective date. Resignations of registered agents are always effective 31 days after filling and corrections are always effective retroactive to the date of the document they are correcting. The one benefit of using an effective date is that any document with an effective date may be withdrawn at any time before the effective date. This was not the case with the old law.
As mentioned in the beginning, this is just an overview of the new law. Because of the new statutes, all LLCs must review their records and modify or rewrite their Operating Agreements accordingly. Failure to update your corporate book can lead to personal liability, failure of the LLC to be able to do business or, in the absolute worst case scenario, criminal sanctions for perjury.
Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University. This article is being offered as a public service and is not intended to provide specific legal advice. If you have any questions about legal issues, you should confer with a licensed Florida attorney.