In late 2012 New Jersey enacted the Revised Uniform Limited Liability Company Act which replaced the old laws governing Limited Liability Companies (“LLCs”).  The law applied to all LLCs formed on or after March 18, 2013 and as of March 1, 2014 will apply to all LLCs regardless of their formation date.

Why am I covering this topic at all?

Many of my clients form LLCs.  Most taxpayers that form these entities may not realize that some of the new provisions could adversely affect them or at a minimum not reflect the intentions of the members.

Which new provisions are issues?

The biggest pitfalls occur in the areas of profit and loss allocations and management. Under the prior law members of an LLC shared profits and losses in the ratios of their capital contributions (unless otherwise stated in an operating agreement). For example member A contributes $80 and member B contributes $20 to the LLC.  Under the old law profits and losses would be allocated 80/20 between the two members.  Under the new law profits and losses would now be allocated 50/50.

Management provisions under the old law were very similar to the profit and loss allocations.  Again using our example above, the old law would provide member A an 80% vote and B a 20% vote.  The new law allocates the votes 50/50 between the two members.

There are a number of new provisions that were also added regarding resignation of a member, fiduciary duty and remedies for deadlock and oppression of a member.

Is there anything you can do about these new provisions?

Fortunately the provisions regarding profit and loss allocations, management, resignation of a member and fiduciary duties are default statutory provisions that apply only if the LLC does not have an operating agreement.  While I realize that many individuals open LLCs without the services of an attorney, it is more important than ever to seek the aide of an attorney to draft an operating agreement that structures the LLC in a way that reflects the members’ intentions.

The new law does allow for operating agreements that are oral as well as those that are written.  I would strongly urge members have their operating agreement reduced to writing.

Conclusion

If you find that you are going to be opening an LLC with more than one member I believe that is important to seek the professional advice of an attorney.  In addition to the topics discussed above, operating agreements may cover many other areas of concern such as what happens if capital is needed and one member does not have it, interest rates that can be charged on loans from a member or specific provisions on possible buyouts of members.  The added expense on the business will be inconsequential in comparison to the legal costs that could arise if you intended your LLC to have any provisions that differ from the New Jersey default provisions.