On Sept. 19, Gov. Chris Christie signed into law the Revised Uniform Limited Liability Company Act (RULLCA). This legislation repeals and replaces the New Jersey Limited Liability Company Act (NJLLCA) with a more modern and comprehensive scheme for regulating limited liability companies. The limited liability company (also known as the LLC) is a relatively new form of unincorporated business entity. LLCs were first introduced in this country when Wyoming adopted an LLC statute in 1977. It received little attention until 1988, when the Internal Revenue Service (IRS) promulgated Revenue Ruling 88-76. This stipulated that limited liability, by itself, would not disqualify an unincorporated entity from partnership tax treatment so long as it had, on the whole, more partnership attributes than corporate attributes. Thus it was possible, with careful planning, for a limited liability company to combine the limited liability of a corporation with the pass-through tax treatment of a partnership.
New Jersey became the 35th state to pass LLC legislation when it adopted NJLLCA, which became effective on Jan. 26, 1994. NJLLCA was modeled on the Delaware Limited Liability Company Act. However, whereas the Delaware statute has been extensively revised, amended and restated, the NJLLCA has undergone only modest revisions.
The popularity of LLCs began to explode in 1997, when the IRS eliminated the tax classification issues, created in large part by Revenue Ruling 88-76, which had plagued the LLC. Per “check the box” regulations that were enacted at that time, unincorporated business entities may choose to be taxed either as a corporation or as a partnership (special rules apply to entities with a single member). As a result, LLCs have become the business-entity form of choice for new businesses in New Jersey, and in recent years far more New Jersey LLCs have been formed than corporations and limited partnerships combined.
RULLCA was developed by the National Conference of Commissioners on Uniform State Laws (NCCUSL). It was the product of a three-year drafting effort with advisors from the American Bar Association present. It is a comprehensive, fully integrated “second generation” statute that is designed to take into account the best elements of “first generation” LLC statutes (such as NJLLCA).
RULLCA makes many alterations and innovations to NJLLCA. Here are some of the more significant changes:
1. Perpetual Duration. Our present statute, for historical reasons related to Revenue Ruling 88-76, provides that unless a certificate of formation stipulates that the LLC will have perpetual existence, it will have a limited life. This is rarely intended and often overlooked, especially as more and more LLCs are formed online by laypeople. RULLCA provides that LLCs will have perpetual duration, as is the case with corporations.
2. No Need for Written Operating Agreements. Although nearly all 50 states and the District of Columbia have enacted LLC statutes, less than a handful require that operating agreements be in writing, as NJLLCA does. This requirement causes significant problems, since anecdotal evidence suggests that most LLCs formed in this state do not have written operating agreements. RULLCA permits operating agreements to be oral, written or implied based on the way an LLC has operated. Thus, for instance, if the members of an LLC file their tax returns based on a certain allocation method, their agreement as to the allocation of the LLC’s profits and losses can be implied from these tax returns.
3. Profits, Losses and Distributions. Consistent with the Revised Uniform Partnership Act (RUPA), profits and losses under RULLCA are allocated per capita. This differs from NJLLCA, which provides for profits and losses to be allocated on the basis of the agreed value of the contributions made by the members.
4. Statements of Authority. Again, as is the case under RUPA, RULLCA allows a limited liability company to file statements of authority at the Division of Commercial Recording in the Department of the Treasury (and in the case of real estate, in the office where real estate records are maintained) authorizing certain people or entities to bind the LLC.
5. Payment to Resigning Member. NJLLCA provides that a resigning member is entitled to receive the fair value of his or her LLC interest as of the date of resignation. This is a harsh, abnormal provision. RULLCA changes this. Rather, upon resignation, the resigning member is dissociated as a member and has only the rights of an economic interest holder.
6. Remedies for Deadlock and Oppression. RULLCA, as promulgated by NCCUSL, included provisions dealing with deadlock and oppression of minority owners. New Jersey’s version of RULLCA has expanded on these provisions by incorporating some of the best elements of the New Jersey Business Corporation Act (BCA). The inclusion of these BCA provisions was deemed important because case law has suggested that the courts will not utilize the remedies explicated in the BCA in the case of LLCs without authorizing legislation. Article 7 of RULLCA provides remedies for oppressed minority owners. RULLCA also permits a member to seek a court order dissolving the company on the grounds that the managers or those members in control of the company have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member. RULLCA also permits a member to seek (or, in the exercise of its judicial discretion, a court to order in lieu of dissolution) a less drastic remedy, such as the appointment of a custodian.
7. Domestication and Conversion. RULLCA provides enhanced ease and flexibility for domesticating, merging and converting an entity other than a domestic limited liability company, if permitted by the law under which it was formed. Its comprehensive provisions offer streamlined methods for domestication (that is, allowing an LLC formed under the laws of another state to become a New Jersey LLC) and conversion (that is, allowing a corporation or other entity to become a limited liability company).
8. Merger and Consolidation. NJLLCA permits a domestic LLC to merge or consolidate with only a simple majority vote and does not provide for appraisal rights for non-consenting members. This is likely contrary to the expectations of many LLC investors. RULLCA eliminates those pitfalls, and contains provisions more consistent with business people’s expectations.
9. Indemnification of Members and Managers. NJLLCA provides for only permissive indemnification. Thus, a member or manager of an LLC is not entitled to be indemnified by the LLC except to the extent provided by the common law principles of agency law. NCCUSL included thoughtful indemnification provisions in its iteration of RULLCA. RULLCA, as adopted in New Jersey, expands on the RULLCA provisions, again by incorporating some of the best elements of the BCA in this regard.
10. Derivative Actions. New Jersey’s current LLC law treats derivative actions in a somewhat cursory manner. By contrast, RULLCA’s provisions are well organized and far more comprehensive. RULLCA permits an LLC to appoint a special litigation committee of independent and disinterested persons.
NCCUSL is the same organization that promulgated RUPA, which has been widely adopted by the states. As with RUPA, RULLCA contains a significant number of “default rules” that govern the relations among the members in situations that they have not addressed in their operating agreement. Per RULLCA, express provisions in the operating agreement of a limited liability company prevail over the great majority of statutory norms.
RULLCA will become effective 180 days after enactment, and will govern all LLCs formed after its effective date. On the first day of the 18th month following RULLCA’s enactment, it will apply to all New Jersey LLCs, whenever formed.
The passage of RULLCA has been strongly supported by the New Jersey State Bar Association (specifically its Business Law Section), which revised the uniform law with input from the Tax Law Section. Among the many organizations supporting this legislation were: The Commerce and Industry Association of New Jersey, New Jersey Chamber of Commerce, New Jersey Business Industry Association, The New Jersey Society of Certified Public Accountants and The Association for Corporate Growth. The New Jersey Law Revision Commission also issued a report in favor of RULLCA. In addition, this newspaper’s Editorial Board authored an editorial in its favor.
RULLCA has been adopted in Idaho, Iowa, Nebraska, Utah, Wyoming (the birthplace of limited liability companies), the District of Columbia and (two days after New Jersey) California. In 2012, legislation proposing RULLCA has been introduced in Kansas and Minnesota.■