New Florida Revised Limited Liability Company Act to Take Effect: Part II – Members and Managers of the new LLC
Part II – Members and Managers of the new LLC.
Governor Rick Scott signed the Florida Revised Limited Liability Act (the “New LLC Act”) on June 14, 2013. Effective January 1, 2014, the New LLC Act governs LLCs in Florida and applies to all LLCs formed in the State of Florida on or after January 1, 2014. This year will be a transition year in which LLCs that were formed prior to January 1, 2014 may continue to operate under the already existing Florida Limited Liability Company Act. This means that every LLC in Florida will be affected by the New Year.
This is the second part of a series of articles that will address the changes made by the New LLC Act. This part two will discuss the rights and default rules governing members of an LLC and the management structure of the organization. As in part one of this series, the features of the revised New LLC Act discussed below are “default” provisions, most of which can be overridden or supplemented by the terms of the operating agreement of the LLC. We note any provision that cannot be altered by the operating agreement.
The New LLC Act recognizes two types of management structure: (1) “Member Managed”, where each member of the LLC has management and decision-making authority, and (2) “Manager Managed”, where one or more managers are granted decision making authority by the LLC. The managers under a Manager Managed LLC can either be natural persons or artificial entities such as a corporation or an LLC (so, yes, an LLC can be a manager of another LLC). Also, the managers do not have to be a member of the LLC.
If you operate a Florida LLC, you should consider some of the following:
- How are new managers of your Manager-managed LLC selected and how are current managers removed from their duties?
- What are the default voting rights of members and managers?
- What rights do members and managers have in dealing with reimbursement, indemnification, advancement, and insurance?
- How can I be proactive to ensure that my LLC is organized in a manner in which I have selected and understand?
Selection and Terms of Managers in a Manager-managed LLC
As in existing law, the New LLC Act provides that managers may be chosen by the consent of the member or members holding more than 50 percent of the then-current percentage or other interest in the profits of the LLC. However, there have been some changes to the default provisions of how a manager can be removed. A manager continues to have the power to act as a manager until a successor is chosen; the manager resigns, is removed, or dies; or, if the manager is an entity, until it terminates. A manager may be removed at any time without notice or cause by consent of the members holding more than 50 percent of the then-current percentage or other interest in the profits of the LLC. A manager remains liable for any debt, obligation, or other liability to the LLC or members that the manager incurred while a manager. If a member who is also a manager loses his or her membership status, whether voluntarily or involuntarily, that member automatically is removed as a manager. . Because of the changes in the New LLC Act, these specific rules and protections governing member-managers may not have been addressed in operating agreements drafted under the old Act.
Voting Rights of Members and Managers
MEMBER-MANAGED LLC. Each member has the right to vote on a company’s activities with their votes being proportionate to that member’s then-current percentage of interest in the LLC. The New LLC Act requires that the vote or consent of a majority-in-interest (Majority of all member votes, not just votes present for a quorum) is required to undertake an act, whether within or outside the ordinary course of the company’s activities or affairs. In a change from the old Act, the articles and operating agreement may be amended only with a unanimous vote or consent of the members. The admission of a new member, expulsion of an existing member, and dissolution of the LLC also require unanimous vote or consent of the members.
MANAGER-MANAGED LLC. Each manager has equal rights in the management and conduct of the company’s ordinary course of activities and affairs. A majority vote of managers will usually suffice. However, if action is taken without a meeting, a written consent signed by all managers is required. An act not in the ordinary course of the company’s activities and affairs requires the vote or consent of a majority of the managers, as well as a majority in interest of the members. The New LLC Act also contains separate voting provisions relating to mergers, conversions, and interest exchanges, as well as the procedures for submitting the transaction to members for approval
Reimbursement, Indemnification, Advancements and Insurance
Under the New LLC Act an LLC “may” provide for the reimbursement, indemnification, advancement of defense expenses, and insurance for members and managers. This is a carry-over of existing Florida law which imposes these obligations on the LLC by default. Thus, if not specifically addressed in an LLC’s articles of incorporation, then default Florida rules may apply.
Indemnification rights are not available for transactions in which the member or manager (a) failed to comply with fiduciary duties owed to the LLC; (b) violated the law; (c) engaged in a transaction in which the member or manager received an improper benefit; or (b) received improper distributions. The New LLC Act addresses a list of wrongful conduct so as to preclude indemnification for any breach of statutory standards of conduct or the knowing violation of any law (not just criminal law). This is an important change from existing law. The prohibition of indemnification for such wrongful conduct cannot be changed by the operating agreement (non-waivable), nor can the operating agreement limit a person’s liability to the LLC if his or her wrongful conduct causes damages.
An LLC may provide for the advancement of reasonable expenses if the person agrees to repay the advancement if it is subsequently determined that the person is not entitled to indemnification.
An LLC may purchase and maintain insurance on behalf of a member or manager against liability incurred in their capacities, or arising from their status, even for wrongful conduct of the kind described above for which indemnification would not otherwise be permitted. This is not part of existing law and is new to the New LLC Act.
What can I do now?
Now is the perfect time to address how the New Florida LLC Act can affect your LLC’s operating agreement. Here at Kira Doyle Law, we represent individuals and business owners, and assist with the formation and modification of Florida LLCs. If you are a member, especially a managing member, or a manager of an existing Florida LLC, contact Kira Doyle Law to set up an appointment to discuss the effects of the New Florida LLC Act on you and your organization. If you are contemplating forming a new Florida LLC , it would be wise to discuss the implications of the New Florida LLC Act with an experienced attorney before drafting the LLC’s governing documents.