New Jersey Adopts Law to Bring Significant Changes to New Jersey LLCs

—Overview—

On September 19, 2012, the New Jersey Revised Uniform Limited Liability Company Act was enacted which made significant changes to the law governing New Jersey limited liability companies (“LLCs”).

—Background—

On September 19, 2012, Governor Chris Christie signed into law the New Jersey Revised Uniform Limited Liability Company Act (the “Act”), representing the first major overhaul of the New Jersey law governing limited liability companies (“LLCs”). The Act embodies New Jersey’s adoption of the Revised Uniform Limited Liability Company Act proposed by the National Conference of Commissioners on Uniform State Laws in 2006.

Since its enactment in 1993, the New Jersey LLC law has undergone several amendments to keep pace with developing business trends. The Act is the Legislature’s effort to harmonize the various aspects of the current law, while providing for greater flexibility in the LLC business model.

—Significant Changes—

• Some of the most significant revisions to the current New Jersey LLC law to be implemented by the Act are as follows:  Perpetual Duration: Under the current law, an LLC has a lifespan of 30 years unless otherwise provided in the certificate of formation. The Act eliminates the limited lifespan of an LLC and grants an LLC a perpetual duration, similar to a corporation.
• Purpose: Whereas the current law does not mention non-profit activities, the Act now allows an LLC to be formed for any purpose permitted by law, whether for profit or non-profit, similar to a corporation.
• Operating Agreement Form: Under the current law, in the absence of a written operating agreement or if the operating agreement does not address a matter, the provisions of the statute apply by default. This general concept is continued by the Act. However, the Act provides that an operating agreement may be oral, written, implied or any combination thereof. As such, even in the absence of a written agreement, the provisions of the Act will not necessarily govern; rather, the oral and/or implied agreement of the parties as to the LLC’s operations will trump the Act’s provisions.

Flexible Management Structure: The Act allows the LLC’s management structure to be set forth in the operating agreement, and specifically discusses management by one or more managers (who may or may not be members) and management by the members. However, the Act provides greater flexibility than the current law, specifically providing for alternative management structures, such as a board of directors and officers, similar to the management structure of a corporation.

• Fiduciary Duties: The Act allows the operating agreement to alter the fiduciary duty of care, if not “manifestly unreasonable” (except that it cannot authorize intentional misconduct or knowing violations of the law), and to alter any other fiduciary duty, including eliminating particular aspects of that fiduciary duty. The current law does not contemplate altering or eliminating a fiduciary duty.
• Indemnification: While the current law provides that indemnification of a member or manager is permissible, the Act makes such indemnification mandatory, unless otherwise altered or eliminated by the operating agreement.
• Operating Agreement Amendments: A new concept under the Act allows an operating agreement to provide that an amendment to it requires the satisfaction of a condition or the approval of a person not a party to the operating agreement. This new provision may be important in financing arrangements, enabling the lender to condition the transaction on having the ability to approve (or reject) any modifications to the borrower’s operating agreement.
• Statement of Authority: Another new concept under the Act permits an LLC to file a Statement of Authority with the State, giving one or more persons the authority to enter into transactions for or on behalf of the LLC or to execute a transfer of real property held in the LLC’s name. This concept may also be important in financing transactions.
• Member Withdrawal: To clarify the current statute, the Act provides rules governing the withdrawal of a member and the effect of such withdrawal. The Act provides that a disassociated member has the rights of an economic interest holder, but is no longer entitled to receive the fair value of his/her LLC interest as of the date of withdrawal. However, the Act also provides that withdrawal does not discharge the person from any debt, obligation or other liability to the company or the other members that was incurred while the disassociated member was a member of the LLC.
• Minority Members: While the current law permits a court to dissolve an LLC upon a member or manager’s application to the court for dissolution, the Act expands these provisions, providing minority members with rights similar to those rights afforded to minority shareholders of a corporation. The Act provides judicial recourse for minority members who disagree with the management of the LLC: the new law allows a minority member to seek a court order to dissolve the LLC on the grounds that the LLC’s management has acted in a manner that is illegal or fraudulent, or that is oppressive or harmful to the member. Short of dissolution, upon a member’s application for judicial intervention, the Act also allows a court to appoint a custodian, or one or more provisional managers, to manage the LLC if it appears to the court that an appointment is in the best interests of the LLC and its members.
• Conversion/Domestication: The Act provides greater flexibility and ease for converting another type of entity into an LLC (for example, converting a partnership into an LLC), and for allowing an LLC formed in another state to become a New Jersey LLC.

—Effective date of LLC Act—

The Act took effect March 18, 2013 and governed all LLCs formed after that date. For all LLCs formed prior to March 18, 2013, the effective date was March 1, 2014.

It will be important for individuals seeking to form a new entity in New Jersey (as well as business owners who have previously formed an LLC) to consult with corporate counsel and discuss the ways in which the Act may affect their new or existing LLCs.

—For More Information—

If you need additional information, please contact Chrissy Buteas cbuteas@njbia.org or 609-858-9510.

Prepared by Chiesa Shahinian & Giantomasi PC. For more information regarding the New Jersey Revised Uniform Limited Liability Company Act and how it will affect New Jersey LLCs, please contact: Laurence M. Smith at lsmith@csglaw.com or 973-530-2021 or Junie Hahn jhahn@csglaw.com or 973-530-2069.

This information should not be construed as constituting specific legal advice. It is intended to provide general information about this subject and general compliance strategies. For specific legal advice, NJBIA strongly recommends members consult with their attorney.