In 2012, the Legislature passed the Revised Uniform Limited Liability Company Act, N.J.S.A. 42:2C-1, et seq. (RULLCA). It became applicable to all LLCs in the state in 2014. Modeled on the national Revised Uniform Limited Liability Company Act, it made several significant changes to existing New Jersey law on LLCs. New Jersey limited liability company members should know what their rights and responsibilities are under RULLCA.
Many of the provisions in the RULLCA are “default” provisions. That is, they take effect if the operating agreement does not address a particular issue.
As a result, it is a good idea for the members who are forming an LLC to consult with experienced New Jersey limited liability company attorneys when they are putting their LLC together.
Who Can Operate an LLC in New Jersey?
Under RULLCA, members can create an LLC for any lawful purpose. Therefore, even non-profit companies may form an LLC.
Also, an LLC may be of perpetual duration.
Members can file a statement of authority with the Division of Revenue in the Department of the Treasury. This is public notice of the person(s) who may act on behalf of the LLC.
The operating agreement need not be in writing. It can be oral or implied. However, if a dispute arises among the members, it may be more difficult for a member to produce convincing evidence to support their arguments than if the agreement had been written. Such evidence could be a course of conduct by one or more members that supports a member’s arguments
An LLC can be member-managed or manager-managed. Absent an operating agreement, the LLC will be member-managed.
Also, absent an operating agreement to the contrary, management decisions are made on a “per capita” basis-one member, one vote. The respective capital shares or member contributions to the LLC are irrelevant.
Similarly, absent an agreement to the contrary, the LLC pays distributions equally to all members. However, RULLCA is silent on the allocation of profits and losses among the members. Therefore, the operating agreement should address this issue.
A manager-managed LLC must have an operating agreement (otherwise, RULLCA will treat it as a member-managed LLC). There should be rules regarding selecting/removing the manager, the manger’s powers and compensation, etc.
Without an operating agreement, any act of a member outside the ordinary activities of the LLC requires the unanimous consent of the members.
Even in a manager-managed LLC, certain major events require the unanimous consent of the members if the operating agreement is silent on the particular issue. For instance, the members would have to approve the sale of a substantial portion or all the assets of the LLC.
The operating agreement may state that an amendment to the agreement requires the approval of a third party who is not a party to the agreement or the satisfaction of a stated condition.
New Jersey limited liability company members in a member-member LLC and the members and managers in a manager-member LLC owe a duty of loyalty and good care to the other members and the LLC.
Unless the operating agreement permits it, members and mangers cannot compete with the LLC or act as a third party to the LLC. Moreover, members/managers cannot lend money or lease property to the LLC.
There is also a savings provision in RULLCA. The members in a member-managed LLC and the members and mangers in a manger-managed LLC can ratify the prohibited act, assuming there is full disclosure.
Indemnity and Exculpation
RULLCA states LLCs must indemnify and hold harmless its managers, members and others acting on behalf of the LLC. However, the law also allows the LLC to limit that obligation-or simply not have it.
Similarly, RULLCA permits an LLC to preclude members’ and managers’ liability to the LLC for money damages. However, an exculpation provision in an operating agreement cannot be used in several situations. Those situations include a breach of fiduciary duty by member, a criminal act or the receipt of as benefit by a member/manager to which they were not entitled.
RULLCA’s provisions on oppression of a member are like the oppression sections of the New Jersey Business Corporation Act. Under RULLCA, a court has broad powers to dissolve an LLC, appoint a custodian or order the sale of members’ interests if it finds unlawful conduct by members and/or managers. In addition, the court may take those actions if it decides controlling members or managers acted oppressively towards other members.
Lastly, the court may award attorneys’ fees and costs to the prevailing member if it finds the controlling members/managers acted in bad faith.
Withdrawal By a Member
Prior to RULLCA, a member could withdraw from the LLC. The LLC would pay him the fair value of his interest. Now, there is no requirement that the LLC or its members buy the interest of a withdrawing member.
Rather, the member continues to own the interest. However, the withdrawing member can no longer take part in the management of the LLC.
Of course, the operating agreement could provide otherwise.
A creditor of a member can get a charging order against the member’s interest in the LLC. The charging order acts as a lien on the member’s interest. As such, the LLC pays to the creditor any distributions the LLC would make to the member-debtor but for the charging order.
Originally, RULLCA permitted a creditor to foreclose on the lien if the distributions would not satisfy the lien within a reasonable time. However, that portion of the of the law was amended. Now the creditor only has a charge order against the member-debtor’s interest in the LLC.
Experienced New Jersey Limited Liability Company Lawyers
Persons who are considering forming an LLC, or existing members and managers of LLCs, should consult experienced New Jersey limited liability company attorneys. As can be seen from above, there are many default provisions of RULLCA that will apply to situations not covered in an operating agreement. The limited liability company attorneys at Schiller, Pittenger & Galvin, P.C., can help you form an LLC and draft an operating agreement to cover expected events, as well as unexpected mishaps, that may occur. Contact the limited liability company attorneys at Schiller, Pittenger & Galvin, P.C., at their Scotch Plains office at 908-490-0444 or here.