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By Dirk Bartram
September 10, 2015
The state legislature recently overhauled Washington’s Limited Liability Company Act (the “Act”). The new Act, which takes effect on January 1, 2016, will affect all limited liability companies formed under the laws of the State of Washington, whether formed before or after the effective date. LLCs have become the leading type of entity for new businesses, so the law will affect a lot of businesses. This article sets out some of the changes in the new Act. It is written to inform existing or prospective LLC members, managers and key personnel, as well as people who do business with LLCs.
Before talking about the new changes, some preliminary explanations will help. Under the current Act, the LLC members may, but are not required to, enter into an agreement among themselves concerning the LLC, known as an “LLC agreement.” The LLC agreement addresses issues like member voting, how to admit new members, whether and how a member may transfer his/her membership interests, how members share profits and losses, and other issues important to the members. If there is no LLC agreement, then the LLC is governed entirely by the current Act. For that reason, the current Act’s provisions are called “default rules,” because they apply in the absence of—or in default of—an LLC agreement.
If there is an LLC agreement, then in most cases its provisions will govern the LLC rather than any contrary provision in the current Act. However, there are certain default rules that may not be changed by the LLC Agreement. Those particular default rules were made “nonwaivable” by the legislature to protect the public or LLC members. They apply even if the LLC agreement purports to change them.
The new Act works within the same framework. That is, it has waivable and nonwaivable default rules, and the waivable default rules may be changed in an LLC agreement. However, you will see below that the new Act has made some important changes within that framework.
Under the current Act, the default rule is that the LLC members manage the business, and any LLC member may bind the LLC to legal obligations in the ordinary course of business within the scope of their authority. However, the LLC may be designated as manager-managed rather than member-managed. If that’s the case, then managers (who are selected by the members) rather than members manage the business, and only a manager may bind the LLC to such obligations within the scope of his or her authority.
The same is true under the new Act. However, under the current Act, the status of the LLC as member-managed or manager-managed is designated in the Certificate of Formation filed with the Secretary of State. Under the new Act, the designation must be made in the LLC agreement. If there is no LLC agreement or it is silent on the matter, the LLC will be deemed to be member-managed.
Take away for LLC members and managers: If you want your LLC to be manager-managed, make sure you have an LLC agreement that says so.
Take away for people dealing with LLCs: If you’re engaging in a major transaction with an LLC through its manager, make sure its LLC agreement sets out manager-management. Get a representation and warranty that the LLC agreement you’ve been provided remains in full force and effect. Verify that the manager with whom you are dealing has been duly appointed.
Under the current Act, if the members wish to alter the waivable default rules, they may do so in a written LLC agreement. However, under the new Act, the waivable default rules may be altered by either a written or oral LLC Agreement (except for one limited exception pertaining to a member’s rights to dissent from a merger).
To illustrate, under the current Act and new Act, the default rule is that no new member may be admitted to the LLC without the consent of all existing members. Under the current Act, this default rule can be changed only by a written LLC Agreement between the members. Under the New Act, the members can also orally agree to change this rule.
Take away for LLC members and managers: In spite of the new Act’s allowance for non-written agreements, we recommend that any LLC with more than one member have a written LLC agreement. Otherwise there is more potential for dispute, since any member could try to argue that a default rule in the new Act was modified by oral conversation or course of conduct. Moreover, the LLC agreement should contain a clause that says the agreement may only be amended by subsequent written agreement, so as to reduce the risk of inadvertent amendment in conversation or course of conduct.
These are just two of the important changes made by the new Act. We’ll present more in our October installment of Washington Bizlaw.
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