ARE YOU AWARE OF THE CHANGE IN LAW FOR NEW JERSEY LIMITED LIABILITY COMPANIES?
Limited liability companies have become the most popular entity type for new jersey business owners because of the S-Corp-like tax pass-through ability, without having to conform to the time-consuming formalities of a corporation. Recently, New Jersey repealed the Limited Liability Company Act (LLCA), and became one of several states to adopt the Revised Uniform Limited Liability Company Act (RULLCA) effective for all New Jersey LLCs. Although there are substantial similarities among the two statutes, there are some significant changes in the RULLCA.
One rule that remains intact is that mere conflict between members is not enough for a court to expel a member from the LLC. The RULLCA implemented an analogous provision that requires the court to evaluate the member’s conduct in relation to the LLC to determine whether the LLC can still be managed according to the terms of the operating agreement or the RULLCA’s default provisions. This is a case by case analysis. The court will consider multiple factors to determine if expulsion is appropriate.
If it is more than a conflict between members, and instead a situation where a member is being oppressed, the RULLCA has implemented a cause of action for the oppressed members. A cause of action may arise when controlling members are involved in illegal conduct, fraudulent conduct, or unfair conduct that frustrates the minority member’s reasonable expectations. The RULLCA describes the equitable remedies available to oppressed members, which includes a custodian being appointed, a provisional manager being appointed, ordering the sale of interests, or dissolving the company.
To avoid member oppression, the RULLCA has included the fiduciary duty of loyalty, unlike the LLCA where no specific duty of loyalty was imposed upon the members or managers. The duty of loyalty includes an obligation of members/managers not to take company business opportunities for themselves or their other business entities. Under the RULLCA, managers in manager-managed LLCs, and members in member-managed LLCs owe a duty of loyalty. Members in manager-managed LLCs do not owe any duty of loyalty. However, the fiduciary duties may be altered or eliminated and are subject to any such reasonable provision within the operating agreement.
There are other significant changes in the RULLCA. For example, the RULLCA also abolishes the lifespan of LLCs and makes them perpetual. RULLCA also broadens the form of the operating agreement to include oral, written, or implied operating agreements. Not only is the operating agreement’s form broadened, but it is not required. Without the operating agreement, the LLC will run by the default provisions in the RULLCA.
These new changes make it all that more important to have an operating agreement in writing to obtain the results desired for the LLC. Specifically, a written operating agreement gives members peace of mind that the company will be governed according to the terms of the operating agreement, and there will be less room for dispute between members. Without a written operating agreement, the LLC would have to rely on oral agreements or on the default provisions of the RULLCA.