Default Rules for Existing NJ LLCs Set to Change in March 2014

business law

On March 1, 2014, the new Limited Liability Company (“LLC”) rules embodied in the Revised Uniform Limited Liability Company Act (the “Revised LLC Act”) will begin to apply to all LLCs in New Jersey, making significant changes to the default rules that govern NJ LLCs.  The Revised LLC Act was signed by Governor Chris Christie on September 19, 2012, replacing the Limited Liability Company Act (the “LLC Act”),  and the Revised LLC Act’s rules already apply to LLCs created in the State on or after March 18, 2013. LLC owners and members, especially those that have been operating without a written operating agreement, should be aware of the following changes:

1) Method of Changing Operating Agreement – Both the LLC Act and Revised LLC Act provide a default set of rules to govern an LLC that has not created its own operating agreement.  The LLC Act required that an LLC must have an operating agreement in writing to override those default rules.  The Revised LLC Act will let the default rules be overwritten by a written operating agreement, an oral operating agreement, or even an implied operating agreement established by the LLCs course of behavior during its existence. Under the Revised LLC Act, LLCs without a written operating agreement can expect to see far more litigation between disagreeing members as they try to prove their preferred oral or implied operating agreement in court.

2) Management and Distributions – Under the Revised LLC Act, the default rule is that each member has equal rights in the management and conduct of the LLC, regardless of the member’s capital contribution to the LLC. In fact, it is possible to become a member, and thus share in the management of the LLC, without making any contribution at all. Disagreements among members as to normal business matters will be decided by a simple majority of members.  Actions that are “outside the ordinary course of the company”, including the amendment of an operating agreement, will require the consent of all members. Distributions will also be on a per capita basis – each member will receive an equal share of any distribution.

This default rule may be particularly damaging to LLCs that wish to take advantage of women- or minority-owned/controlled business programs. In the absence of an operating agreement that says otherwise, ownership and management will be calculated based on the number and mix of members and not on the size of the members’ contributions to an LLC.

3) Resignation of a Member – The LLC Act entitled a resigning member of an LLC to the “fair value of his limited liability company interest as of the date of resignation.” The Revised LLC Act transforms such a resigning member into a disassociated member that no longer has any voting rights but maintains the member’s share in any future distributions. The disassociation does not trigger a distribution – the disassociated member must wait until the LLC decides to make a distribution, or winds down, to receive anything.

4) Fiduciary duties – The Revised LLC Act codifies the fiduciary duties of loyalty and care owed by the members of an LLC, as well as the obligation of good faith and fair dealing. The fiduciary duties of the members can be altered by an operating agreement if such alteration is “not manifestly unreasonable”.

5) Indemnification – Indemnification of members is optional under the LLC Act. The Revised LLC Act makes such indemnification mandatory by default. As with most of the Revised LLC Act default rules, the indemnification rules may be supplanted with an operating agreement that alters or eliminates the indemnification requirement.

6) Oppressed Members – The Revised LLC Act allows a member to seek a court order dissolving the LLC on the grounds that the members in control of the LLC have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member.  As an alternative remedy to dissolution, the court may also appoint a custodian to manage the LLCs affairs.

These upcoming changes to the default rules that govern LLCs in New Jersey make it more critical than ever for LLCs to devise their own operating agreements.  If you would like to discuss how the upcoming LLC rules match up with how you want your LLC to operate, give us a call at the Law Office of Lynda L. Hinkle for a free half hour consultation, 856-227-7888, or email [email protected]. We have locations in Camden, Burlington, and Gloucester counties, and are happy to discuss your legal options.

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