Effective January 1, 2014, Utah has a new limited liability company act, the Utah Revised Uniform Limited Liability Company Act (“New LLC Act”). The New LLC Act will eventually replace the previous limited liability company act, or Utah Revised Limited Liability Company Act (“Prior LLC Act”). For a two year period, between January 1, 2014 and January 1, 2016, companies formed prior to January 1, 2014 may opt in to governance under the New LLC Act but they are not required to do so.
The New LLC Act substantially changes the Prior LLC Act. Utah is one of the first states to adopt the New LLC Act in its current form, so it will take some time to work through some of the language and issues raised by the New LLC Act. Here are just a few examples of changes:
The New LLC Act recognizes oral or even implied operating agreements. This change could help resolve problems that occur when companies are formed but the members fail to sign a written operating agreement. It could also lead to disastrous results as disputing members of a limited liability company attempt to establish the terms of an oral agreement. Adding to the potential for disputes, the default governance rules which apply under the New LLC Act if not modified by the operating agreement are much less extensive and generally less detailed than those provided by the Prior LLC Act. A well-drafted operating agreement can avoid these disputes.
The New LLC Act imposes duties of loyalty and care on its managers and, in certain situations, its members. However, so long as the provisions of the operating agreement are not unconscionable or against public policy, an operating agreement may establish the standards by which the performance of these duties are to be measured, and in some cases alter or even eliminate some duties. The New LLC Act also makes the duty of good faith and fair dealing, which is implicit in all contracts entered into in Utah, explicitly applicable to the managers and members.
Under the Prior LLC Act, articles of organization could include limitations on the authority of managers of a company. If there were no limitations, third parties could rely on the authority of persons named as managers in the State’s records. Under the New LLC Act, companies are no longer required in the articles of organization, which is now a certificate of organization, to identify the members or managers that have authority to act on behalf of the company. This could limit the company’s ability to enter into contracts, which would hinder its business opportunities. Similarly, banks may not lend money to limited liability companies without having assurances of the authority of those signing the loan documents. Fortunately, however, under the New LLC Act, a company may now file a statement of authority identifying the authority, or limitations on the authority, of persons who may bind the company or enter into specific types of transactions, such as real estate transfers. Third parties engaging in transactions with the company may only rely on the filed statement of authority.
Distributions to members may not be made unless certain financial conditions exist, such as providing for payment of company debts after the distribution. Under the New LLC Act, however, a member or manager who consents to a wrongful distribution may be personally liable for the amount of the distribution that exceeds the amount that could have been made if the company had satisfied the financial conditions to making a distribution.
A member may make a loan to the company in addition to his capital contribution. Under the Prior LLC Act, the company could not pay a member loan on liquidation of the company unless all third party creditors were fully paid. The New LLC Act treats member loans the same as third party loans. Therefore, if a liquidating company cannot pay all of its creditors in full, the member-creditor can participate in available funds in the same manner as third party creditors of equal rank. If an existing company opts in to be governed by the New LLC Act, it appears that the New LLC Act would apply to existing loans from members. It remains to be seen how sympathetic the courts will be to third party creditors who claim that they had extended credit in reliance on the Prior LLC Act’s treatment of member loans.
While the New LLC Act may not immediately apply to a limited liability company, members and managers will not have much time to determine how the New LLC Act affects them. As indicated above, the New LLC Act will govern (a) all Utah limited liability companies formed on or after January 1, 2014, and (b) all Utah limited liability companies registered in the state of Utah as of January 1, 2016, regardless of when the company was formed. Additionally, members or managers of existing limited liability companies can make an early election to have their company immediately governed by the New LLC Act.