At the start of 2016, laws for Washington limited liability companies (“LLC”s) went through some major changes. While there were numerous revisions to the law that we enacted, these are the top three changes to the default rules I want you to be aware of if you are currently a member / owner of an LLC, considering forming an LLC as your business structure, or someone who does business with an LLC. All parts of this new act have pros and cons, so you’ll want to know how each may affect you.
No More Written Agreements Required
With the new Limited Liability Company Act, LLCs no longer must be expressed in the form of a written agreement. The benefit of this is not having to draft and write an LLC agreement. It gives your LLC flexibility on how you and any partners want it to be managed. But, be aware of any unintended consequences of this provision of the act. If you were to verbally say to your partner(s) that you’ll always consult them before deciding on an LLC matter, but you’re the majority owner, it could be argued that they have just as much say as you do in ANY decision. Or, while the members may agree on a matter now, if there is a disagreement later on, it could lead to a “he said / she said” situation should the members go to court to resolve the issue.
Voting Structure Changes
The next important provision is one that changes the voting structure of LLCs. Now, by default, voting is done on a one vote per member basis. This can be changed with a written LLC agreement, but if you start an LLC today and don’t express your wishes to vote based on equity, it will be based on the one member-one vote structure. So, if one person puts in 99% of the capital and another puts in the remaining 1%, without specifying otherwise, voting on any matter will need the approval of both members. This could lead to hamstringing the LLC in operating effectively.
Member-Managed vs. Manager- Managed
This last provision I’ll feature is concerning the management of your LLC. Previously, whether the LLC was member-managed or manager-managed was determined by its certificate of formation. Now, under the new Act, this is determined by the LLC agreement. Now the LLC can adapt as it needs to in terms of how it is managed without filing this information with the Secretary of State.
Why is this important? With member-managed LLCs, unless otherwise limited under the LLC’s operating agreement, any member of the LLC can act on its behalf when dealing with outside parties. With a manager-managed LLC, again subject to the terms of the LLC Agreement, only the manager elected by the members has the authority to bind the LLC into any contracts with outside third parties. However, without having the management structure listed with the Secretary of State, third parties must specifically ask who may act for the LLC. Otherwise, a contract may be voidable due to lack of actual authority.
A Brief Comment on Other Changes
There are other provisions that are covered under this act such as dealing with fiduciary duties owed by managers, providing LLC members with access to LLC records and information, classes of members with no voting rights, how Not-for-profit entities can now be formed as LLCs, and allowing an LLC to be managed by a board.
With anything involving setting up, changing, or managing your LLC, it is always best to have all your agreements in writing and looked over by your business and tax planning team, especially in the LLC world, where you go into business with partners you’re close with and have existing relationships outside of the business. If terms and rules aren’t expressly written and agreed upon, these battles can turn ugly quickly. Know your structure and rules, work well together, and enjoy your successful business.