If the fiscal cliff, sequestration, and flip-flopping allegiances of the NH Legislature each election isn't enough to make your head spin, then hold on to your hat. The law governing NH limited liability companies (LLCs) has been completely rewritten, but unlike the other recent events, this change is meant to make the lives of NH LLC owners easier. So if you are a member or owner of a NH limited liability company, take time to familiarize yourself with the new law.
Amendments to the LLC Act went into effect on Jan. 1. It currently only applies to NH LLCs formed on or after that date, and will eventually apply to all NH LLCs as of Jan. 1, 2014. An existing NH LLC can elect into the new Act before 2014 with the permission of all the current members-and there are a number of good reasons to do so.
By far, there are more LLCs under NH law than corporations. With more LLCs being formed than corporations for more than a decade, LLCs are clearly the entity of choice for most business owners. The new Act was designed to foster the business needs of this growing LLC segment by focusing on two main goals:
- Making the law governing LLCs more user-friendly;
- Making the Act more flexible so that NH business people can tailor their business relationships as they see fit.
Becoming User-Friendly
Where the previous law was sometimes ambiguous and filled with legalese, the new law clarifies former ambiguities, is better structured and was designed to be an off-the-shelf operating agreement.
Although the old law was generally well understood, after about 15 years (the old Act was last revised in 1997), some provisions needed further clarification. Those include provisions concerning how to treat contributions to LLCs by members, the rights of members (or their representatives) who die or become incapacitated, and how an LLC disposes of known and unknown claims against it upon dissolution.
The new Act was drafted with a more plain English approach, with input from members of the business community, so that any person (not just lawyers) can read the Act and understand it. Moreover, the new Act is ordered in such a way that a reader can better locate the parts of the Act that apply to his or her particular subject of interest. It was the intent of these changes to make the new Act better understood by the business community and practitioners alike.
Probably the most critical component of making the new Act more user-friendly is its ability to serve as a default LLC operating agreement. Now, this is not to suggest that lawyers have become obsolete when it comes to organizing LLCs. But unlike the old law, which may have presumed that the members of an LLC would memorialize their business terms in writing (which frequently does not happen), the new Act does not make that assumption. It was drafted taking into consideration most of the points that would normally be addressed in written agreements, as determined by practitioners in this field (to the extent that it was felt they were universally applicable), and applying a default position. The default position makes the new Act an off-the-shelf LLC operating agreement in many instances.
Business Flexibility
Even though the new Act can serve as a default LLC operating agreement, one of the biggest changes from the old law is the increased flexibility of the new Act and how it (or parts of it) may or may not apply to an LLC. Some of the provisions that were mandatory under the old law have now been made permissive under the new Act, and some provisions that were unclear as to whether and how they applied to LLCs have been clarified (and in most instances, have been made permissive).
An example of this is the fiduciary duties of members and managers of an LLC. These provisions state the duties of care and loyalty owed to and by such persons, and can sometimes form the basis for defining what is proper or improper conduct. Under the old law, these duties were likely mandatory, but the particulars were ambiguous. In the new Act, the duties are clearly defined (as default rules) and may be changed or even eliminated (in other words, they are not mandatory). Furthermore, the freedom of contract principle is embedded in the new Act and provides for broad flexibility by business persons to control their business relationships as they see fit.
In addition to the changes noted above, the new Act modified some important concepts from the old law. The biggest change is that operating agreements no longer need to be in writing. Therefore, oral agreements or the conduct of the business can be used to form the basis of a contractual obligation among members and managers. Accordingly, words or actions can override the default rules of the
new Act.
Another significant change includes determining allocations of member votes. Under the old law, the default position was that member voting was allocated relative to capital contributions, but the new Act changed that allocation to profit sharing. This was done to accommodate those instances, which are fairly common, in which someone doesn't contribute cash or property, but rather contributes services or expertise with an expectation of a profits interest (which would not have been recognized as a voting interest under the old law unless it was in writing).
Opting In
As mentioned earlier, existing LLCs can opt in to the new Act prior to 2014, and members of an existing LLC should consider doing so because of the clarified pick your partner rules. In the event that a member has his interest in the LLC taken by creditors or other third parties by a court order/process, the new Act makes it clear that the only thing that person obtains, in most instances, is the economic rights and not the other rights typical of a partner (such as the rights to vote and obtain certain information). For these reasons and others, electing into the new Act early might be a good idea, but discussion with counsel beforehand may be warranted.
Although changes in legal and economic landscapes are not new by any stretch, perhaps the new Act is one thing that may be looked upon as a welcome change by the business community.
John Bentas, Esq. is a corporate attorney with McLane, Graf, Raulerson & Middleton, Professional Association in Manchester, and was a member of the NH Business and Industry Association's committee that drafted the Revised NH Limited Company Act. He can be reached at john.bentas@mclane.com or at 603-628-1306.