(Reprinted from The Scheinblog
.)By Mark Scheinblum
On June 14, 2013, Florida Governor Rick Scott signed the Florida Revised Limited Liability Company Act (the “New LLC Act”) into law. The New LLC Act is a complete rewrite of the existing LLC Act in Chapter 608 of the Florida Statutes, based in part on the Uniform Law Commission’s 2006 Revised Uniform Limited Liability Company Act, which has been adopted, in modified forms, by seven states and the District of Columbia, and is currently being adopted or studied by many other states. The New LLC Act goes into effect on January 1, 2014 for all LLCs formed on or after that date.
The New LLC Act will also impact all existing Florida LLCs. LLCs formed prior to January 1, 2014, can continue to operate under the existing LLC Act until January 1, 2015. On that date, however, the current LLC Act is repealed and the New LLC Act will apply to all Florida LLCs. Existing LLCs may also make an election to be governed by the New LLC Act prior to January 1, 2015. Members and managers of existing LLCs should use this transition period to review their existing LLC Operating Agreements and determine whether the changes made by the New LLC Act require any amendments in order to properly give effect to the intentions of the parties.Background
Since the introduction of the limited liability company in the 1980s, the LLC has become an essential part of the business landscape. The LLC provides flexible structuring, allowing for pass-through tax treatment (like a partnership) or, at the members’ election, corporate tax treatment, limited liability like that afforded to corporate shareholders, and the ability of members to structure the operations in almost any manner that best suits their needs.
Florida has a long but varied history with LLCs. Florida was at the forefront of the LLC movement, having adopted the nation’s second limited liability company statute in 1982, five years after Wyoming adopted the first LLC statute in the U.S. However, confusion over the IRS’s tax treatment of LLCs reigned for years, and no other state enacted LLC legislation until after 1988, the year the IRS issued a revenue ruling that Wyoming-style LLCs would be taxed as partnerships. Other states began enacting LLC statutes, and by 1996, most states had adopted their own LLC statutes.
Even then, however, LLC use in Florida lagged. Despite modifications in the Florida LLC statute in 1993, the application of Florida income tax to LLCs kept the use of LLCs on the sidelines.
When Florida’s corporate income tax was repealed for LLCs in 1998, Florida’s LLC statute was revised, and the new LLC act was adopted in 1999, with amendments to follow in 2002. That LLC Act, set forth in Chapter 608 of the Florida Statutes, has governed Florida limited liability companies until now. Today, LLCs are the entity of choice for business formed in Florida. There are over 700,000 LLCs currently organized in the state. In 2012, almost 170,000 new LLCs were formed in Florida, far eclipsing the number of corporations incorporated in the state.The New LLC Act
The New LLC Act modernizes the LLC law in Florida, making it more flexible while also retaining provisions from the existing LLC act that had become important to Florida LLC users, as well as incorporating provisions from other influential LLC and corporate statutes. Key provisions of the New LLC Act include the following:Electronic Signatures
. Electronic signatures are expressly permitted. Section 605.0102(62).Non-Waivable Provisions
. Like the existing LLC act, the New LLC Act is a “default” statute, meaning that in most cases, the members of an LLC can agree in their operating agreement to an alternative framework which supersedes specific provisions in the statute. This remains the case under the New LLC Act, but the new law does expand the list of non-waivable provisions that may not be waived, altered or otherwise overriden by the LLC’s operating agreement or other agreements among the members. These new non-waivable provisions which will be enforced regardless of the provisions of the operating agreement include, among other provisions, (a) the power of a member to dissociate from the LLC; (b) the right of a member to approve a merger, interest exchange or conversion in certain contexts; and (c) any restrictions on the rights under the New LLC Act of any person other than a manager or a member. Accordingly, it will be important to update existing operating agreements to address these non-waivable provisions. Section 605.0105(3).Binding Effect on Non-Signatories
. Any LLC member is bound by the Operating Agreement even if it is not signed by them. Section 605.0106(2).No Shelf LLCs
. An LLC must have at least one member upon formation. Section 605.0201(4).Dissociation by a Member
. Under the New LLC Act, a member will have the non-waivable right to dissociate from an LLC, but the dissociation does not trigger a buy-out right. Instead, the dissociated member only will have the rights of an un-admitted transferee (with certain exceptions). Note, however, that an operating agreement may provide for conditions for dissociation such that dissociation in violation thereof is “wrongful,” and the member so dissociating from the LLC may be held liable for damages resulting therefrom. Section 605.0216.Statements of Authority
. The new statute permits “Statements of Authority” which provide constructive notice of an individual’s authority, status or position within the LLC, which can be filed with the state and is good for five years, unless revoked (by a statement of denial). Section 605.0302.Creditor-Enforced Capital Contributions
. Creditors will now have the right to enforce capital contributions by members. Section 605.0403(4).Elimination of Manager-Members
. The existing act allowed for “manager-members,” a designation that was fraught with confusion. This has been eliminated in the New LLC Act, such that an LLC must be “manager-managed” or “member-managed.” (By default, all Florida LLCs are considered to by member-managed onless otherwise set forth in the articles of organization or operating agreement.) Section 605.0407.Non-Competition
. Under the New LLC Act, managers of manager-managed LLCs, and all members of member-managed LLCs, will be subject to a non-competition covenant. This is a waivable provision, and LLC managers and members will need to take due care to ensure it is properly addressed or waived in operating agreements. Section 605.04091(2)(c).Charging Orders
. A charging order is the sole remedy for creditors of a multi-member LLC; for single-member LLCs, a creditor must establish that a charging order is not a sufficient remedy in order to be able to foreclose on an interest. Section 605.0902.Transacting Business in Florida
. Owning income-producing property will expressly constitute transacting business in Florida, such that qualification to do business in Florida will be required.Appraisal Rights
. Appraisal rights - rights to have a fair price for an equity interest determined by a judicial proceeding, and to have the entity purchase the interests at such price - are expanded by providing additional events which would trigger an appraisal, but such rights may be waived or eliminated in an operating agreement so long as such waiver or elimination is approved by the affected member or group of members. Section 605.1006.Interest Exchanges
. Interest exchanges will be expressly permitted. Section 605.1031.Domestication
. Domestication of non-U.S. entities will now be permitted under the New LLC Act. Section 605.1051.Conclusion
Any new LLC should be formed in compliance with the New LLC Act. In addition, members of existing LLCs should consult with counsel in order to evaluate whether existing operating agreements should be revised in order to address the changes in the New LLC Act.