A Legal Update for Business Owners. Effective July 1, 2008 for new LLC business entities, and current LLC entities have two years to put new law into effect.
The Idaho Legislature passed a new law governing limited liability companies, also known as LLCs. The new law takes effect July 1, 2008 for new LLCs, and two years later for existing LLCs.
The new law significantly changes many rules applicable to LLCs and will require almost all operating agreements to be amended within the next two years. Here are some changes that you should be aware of:
- Operating agreements may be amended or created by course of dealing. The act recognizes that operating agreements may be oral in full or in part, and may be amended or created by course of dealing. If you are operating an LLC different from the written operating agreement, your written operating agreement may no longer control.
- Operating agreements can no longer alter all provisions of the LLC law. The old law allowed the operating agreement to vary the provisions of the law. The new law contains significant restrictions on the ability of the operating agreement to change the provisions of the law. One of the key areas of concern is in management rights. The old law made management liable only for gross negligence. The new law imposes fiduciary or trust standards on management and allows only limited modification of the new and much more stringent duties.
- Member authority must be created. The old law recognized each member or manger as an agent with authority to act for the company. The new law specifically states no member has any agency by reason of the statues. Authority must be created in an operating agreement or other document. In most cases it will be necessary to file a new document, a statement of authority, with the Secretary of State’s office. Most banks and title companies will start requiring a certified copy of the most recently filed statement of authority.
Although the new law ignores capital accounts, they are central to any LLC. The heart of an LLC is its capital structure. The new law assumes there is no capital and provides no guidelines for establishing and maintaining capital and provides no guidelines for establishing and maintaining capital accounts. In the absence of contrary provision in the operating agreement, a person who contributes $1.00 has the same voting, distribution and liquidation rights as the person who contributes $1 million. Since the law assumes capital is irrelevant, it is essential that every LLC adopt and follow an operating agreement that recognizes the importance of capital accounts in allocating rights. Capital accounts - should control member rights rather than percentages.
- Some provisions of the law violate the Idaho Constitution. The new law allows for a membership to be based on a promissory note or services to be performed in the future. In our opinion, those provisions violate the Idaho Constitution.
- Members have the right to sue directly. In the business world, shareholder suits involving management issues have been required to be filed as derivative actions. That means a shareholder had to sue in the name of the corporation and for the benefit of the corporation. The new LLC law gives LLC members the right to sue directly in all instances and limits the ability to have the operating agreement requires such claims to be brought derivatively.
As a result of the new law, the LLC is much less business friendly to businesses. New operating agreements will be required and more paper work will be mandatory to establish and define authority. Management risks will be increased with a greater likelihood of member lawsuits. It is important for every LLC to review its operating agreement and the very operations that define the corporation to determine what steps can be taken to reduce the increased exposure created by the new law.
