For many years the limited liability company (“LLC”) has been the entity of choice for entrepreneurs and small businesses. However, in the intermountain region the Wyoming and Nevada LLCs have been widely regarded as being more business friendly and having better asset protection characteristics than the Utah LLC. With the enactment of the Utah Revised Uniform Limited Liability Company Act1 (the “Act”), which went into effect on January 1, 2014, members of Utah LLCs now have access to similar protections and opportunities which were previously unavailable in Utah.
Utah LLCs formed after January 1, 2014 must follow the Act while preexisting Utah LLCs are given until January 1, 2016 to become compliant. However, because of the opportunities that exist under the Act most existing LLCs will want to opt-in to the new Act much sooner than 2016. This article identifies several of the most significant changes of which business owners should be aware.
Under the Act some of the most obvious changes apply to duration and formation. Under the Act Utah LLCs can now exist with no specific termination deadline,2 and formation of a LLC is now done by filing a Certificate of Organization.3 Existing LLCs will want to file an amendment to its Articles of Organization with a new Certificate of Organization. One benefit now available is that the identity of company managers is no longer required to be disclosed in the Certificate of Organization. Like members, managers of a LLC can now remain anonymous.
A major change under the Act is that LLC operating agreements can now be established orally or based on the conduct or habits of the members and mangers of the company.4 At first blush this may seem like a cost saving opportunity for the LLC. However, the practical effect is sure to cause headaches for the unwary. In the absence of a formal operating agreement, the actions of the members and managers of a LLC, including casual conversations regarding operations, can be construed to be the actual policy of the company and therefore bind the members to actions or results that were never intended. A history of company members not enforcing traditional business management principles can be construed as an implied agreement by the members allowing relaxed duties of management. With such an operating agreement, if a manager engages in practices that are detrimental to the company, but which go unchecked by the members over of period of time, despite a negative outcome to the company by the managers’ bad acts, the manager may have no liability (and subsequently the members will have no recourse) for the bad acts of the manager. Therefore the importance of a well thought out and properly drafted operating agreement is even greater than before. Similarly problematic will be the inclusion of new members. In the absence of a formal operating agreement (or ascension by a new member to an existing operating agreement) new members to a LLC will be construed as having adopted the existing oral, implied or written operating agreement without having signed or orally accepted the specific terms. If a company has less than a complete operating agreement now is the time to get one.
Under the new Act a “statement of authority” or “certificate of incumbency” can be filed, thereby providing documented evidence of authority to act on behalf of and bind a company with regard to transactions and transfers of real property.5 This can be useful to better define which manager or member(s) has the specific authority over certain duties or types of transactions.
Members of LLCs will be happy to learn that they now have the ability to be on equal footing with all other non-member creditors.6 Unfortunately, most existing operating agreements mimic the prior statute language, thereby listing the members as subordinate creditors to the company. Therefore it is recommended that companies amend existing operating agreements to provide members this benefit.
Under the Act manager fiduciary duties can be itemized and in some cases can even be limited. In the absence of such a limitation or itemization of fiduciary duties the whole panoply of fiduciary duties will apply.7 For closely held companies, the ability to limit fiduciary duties will be attractive to managing members. Of similar importance to LLC members is the improvement in the Act of the “charging order: as the exclusive remedy available to judgment creditors of LLC members.8 With this improvement, LLC members now have greater asset protection because their creditors have less ability to force the company to take certain actions or to make distributions contrary to the interests of the members.
Other beneficial changes under the Act involve provisions related to mergers, interest exchanges and conversions, and the improved ability to dissociate or even expel troublesome members.9 It is recommended that existing companies opt-in to the new statute with a new Certificate of Organization as soon as possible. A totally amended and restated operating agreement should likewise be adopted with an affirmative declaration to adopt the new Act, as well as to address the changes in the Act in a manner most favorable to the members. Such an agreement will better protect members from an implied agreement based on casual actions or conversations.
Taking the time to prepare a comprehensive operating agreement will not only allow a LLC to take advantage of the Act, but will help the members to address other relevant issues, such as enacting a comprehensive business succession plan, proper tax structure, accurately maintained capital accounts, whether the company should continue to operate as a LLC, and of course what impact the Affordable Care Act (“Obamacare”), with its 3.8% net investment income tax, will have on the company and its members. By taking advantage of the Act and addressing all relevant issues a company will be well prepared to succeed for years to come.
Contact Greg Steed if you have any questions.
1 Utah Code Annotated § 48-3a-101 et seq. 2 Utah Code Annotated § 48-3a-104. 3 Utah Code Annotated § 48-3a-201. 4 Utah Code Annotated § 48-3a-102(16), 113. 5 Utah Code Annotated § 48-3a-302. 6 Utah Code Annotated § 48-3a-404(4). 7 Utah Code Annotated § 48-3a-112(4)(a)-(c). 8 Utah Code Annotated § 48-3a-503. 9 Utah Code Annotated § 48-3a-601.