Emerging Trends in New LLC Acts

Contractors need to be aware the trend is to broaden the definition of what qualifies as an operating agreement, essentially loosening the restrictions on form while emphasizing the role the operating agreement plays within the LLC. Therefore, having a comprehensive and explicitly written operating agreement is now more important than ever before.

Contractors should review their written operating agreement and make sure it contains a provision that the operating agreement is the entire agreement among the members. It is also a good idea to include a provision that requires all modifications to the operating agreement to be in writing. This should help preclude oral or implied terms from being considered as a part of the operating agreement.

Fiduciary Duties

Many of the new LLC acts now contain explicit default fiduciary duties to govern internal management of the LLC when the operating agreement is silent on the issue.

Although every LLC act varies by state, these new acts by default require some combination of the contractual and agency concepts of duty of care, duty of loyalty, and obligation of good faith and fair dealings.

Many of the new acts, however, also permit modifications to these default fiduciary duties in the operating agreement.

For example, states like Delaware, North Carolina, and New Jersey allow an LLC operating agreement to waive certain fiduciary duties or limit the scope of such duties governing the members or managers. Generally, the modifications are subject to the same restrictions that are applied in agency and contract law. Members can modify, restrict or even eliminate fiduciary duties in the operating agreement so long as the modifications are not manifestly unreasonable or unconscionable.

Member Management Rights

Another emerging trend is to change the default management and member provisions governing LLCs. Many new LLC acts’ default provisions now provide that each member has equal management rights regardless of how much capital each member contributes. This is a significant shift from many of the old default provisions, which provided that each member’s management rights were determined by the amount of capital that member provided.

Members can change these default provisions by adopting a comprehensive operating agreement that clearly defines how management rights are determined in relation to capital contributions.

Management Structure

Although not as important of a trend as changes to management rights, many of the new LLC acts are moving away from requiring LLCs to publicly define certain management structures. Under many older LLC acts, an LLC’s formation document was required to indicate whether the LLC was manager-managed or member-managed. Some new acts, such as Alabama’s and North Carolina’s, no longer require the LLC formation document to indicate how the LLC is to be managed. Instead the management structure can be addressed in the operating agreement. This allows greater flexibility for members to determine the best management structure for their needs.

Mitigate Conflicts

Hopefully, the key takeaway from these emerging trends is obvious: It is now more important than ever before that contractors operating as an LLC adopt a comprehensive written operating agreement. Many of the new LLC acts provide members greater flexibility and control over the internal operations of the company by simplifying or broadening default provisions within the act. However, this increased flexibility also means that members will turn to the court system to determine members’ rights and responsibilities when oral or written terms are ambiguous. A comprehensive written operating agreement can go a long way to mitigating internal conflicts and the unintended consequences arising from these emerging trends in the new LLC acts.

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About T.J. Hooker

T.J. Hooker is an associate with Anderson Jones PLLC, Raleigh, N.C. He focuses primarily on construction law, business law, real-estate litigation and collections.

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