What is a LLC?
A LLC is a business entity that is essentially a hybrid entity considered to be structurally flexible since it may be taxed as a partnership or corporation depending on the number of owners (who are known as members) it has and what the members decide to do. All members of a LLC have limited liability for the debts and claims against the LLC. The main advantage of a LLC is that it is not burdened with the ownership restrictions imposed on a small business corporation such as a sub chapter S corporation. A LLC may have more than hundred members or as few as one. Corporations, partnerships, trusts, charitable organizations, pension plans, and Non Resident Aliens may hold ownership interests of a LLC. Typically, the allocation of profits and losses are proportionate to the membership interest. A LLC is usually operated by one or more of its managers. These managers handle the day-to-day activities of a LLC. The managers may be some of the members, all of the members or it may even be managed by a business entity or person that has no ownership interest in the business. A management agreement should govern the relationship of the non-member manager since such a non-member manager will not share in the profits and losses and will most likely be paid a salary or a commission as agreed upon in the management agreement.
What is an Operating Agreement?
An operating agreement for a LLC is basically a contract between the members or managers for how they will operate their business. Operating agreements should always be tailored specifically to your business. Using a downloaded form operating agreement does not reflect the custom nature of your business and the specific setup the members would like to establish and may create substantial legal issues for you in the future. An experienced business attorney should be retained to create a customized operating agreement for your LLC that suits your business’ needs and complies with the applicable laws that govern the business activities and management of LLCs.
What are some of the changes that will take effect with the new Florida LLC Act?
In general, the current Florida LLC statute provides rules that apply in the absence of an agreement among the members. It sets forth certain provisions that may not be waived by the parties in an operating agreement. The Revised LLC Act is largely based on the 2011 version of the Revised Uniform Limited Liability Company Act ("RULLCA") promulgated by the National Conference of Commissioners on the Uniform State Laws ("NCCUSL"), which means it is modernized and a more flexible statutory model bringing the current Florida LLC laws up to speed and more in line with the existing laws for Florida corporations. The Revised LLC Act also includes provisions that are desirable and cherry-picked from LLC acts of Delaware and other influential commercial states, ABA Revised Prototype LLC Act, the Revised Model Business Corporation Act, and Florida's partnership acts. The Revised LLC Act corrects some of the issues with the current Florida LLC laws and makes it easier and clearer; for example, by clearly providing that the electronic signatures are acceptable. It is important to note also that the Revised LLC Act provides that a person who becomes a member of a LLC is bound by and subject to the operating agreement even if they don’t sign it. It also expands the list of items that are non-waivable under Florida law and provides that an operating agreement may not allow for indemnification for specific wrongful or unauthorized conduct. Further, the Revised LLC Act allows for the filing of a statement of authority with the Florida Department of State. This is to create a safeguard for LLCs that want to limit the power of one or more members, managers, or other persons to bind the LLC. Provisions related to dissociation of members and dissolution of LLCs have also been modified in the Revised LLC Act. Further, it more importantly addresses the management structure of LLCs. The Revised LLC Act eliminates the use of the term "managing member," leaving LLCs to exist as either member-managed or manager-managed going forward. After the Revised LLC Act comes into effect, existing LLCs that were previously managed under a managing member will be deemed to be member-managed. A great benefit with the Revised LLC Act is that it also promotes foreign investment in Florida while cutting out a complex step for companies outside the United States to have to domesticate in Delaware first. The Revised LLC Act will allow a company based outside of the United States to domesticate as a Florida LLC while retaining its status as a foreign entity. Before this change, foreign entities that wanted to operate in Florida had to first domesticate in Delaware and then register their Delaware LLC in Florida as a foreign LLC. While this is not a complete list of changes provided in the Revised LLC Act, these are some of the important improvements that are yet to come once the Revised LLC Act will become effective.
When will the Revised LLC Act become effective?
The Revised LLC Act will become effective on an elective basis for existing Florida LLCs beginning July 1, 2014 and will be mandatory by January 1, 2015.
If you are currently a member or manager of a Florida LLC, or plan to organize or enter into a contract with a Florida LLC, the best course of action to make sure that the new statutory provisions of the Revised LLC Act do not adversely affect you in any unforeseen manner by having a proper and thorough operating agreement prepared by an experienced business attorney. It is also important to have your existing LLC’s operating agreement carefully reviewed to determine whether revisions are needed to avoid unexpected consequences in light of the Revised LLC Act. Since the right kind of business entity structure affects an asset protection strategy that you may wish to adopt, it is essential to understand how the Revised LLC Act will affect your business. The minimal investment now in properly structuring your business and amending the operating agreement or management agreement could save your business from legal pitfalls in the future after the Revised LLC Act becomes effective.
Disclaimer: This article is not intended to be legal advice. Legal advice depends on each and every person's particular circumstance. This article is for informational purposes only and must not be used for avoiding any penalties that may be imposed under the Internal Revenue Code. Arora Law Firm and Radhika Arora, Esq. specifically disclaim any responsibility for positions taken by readers in their individual cases or for any misunderstanding on the part of readers of this article or publication.
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