North Carolina’s New LLC Statute: Do We Need to Revise Our Operating Agreement?

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North Carolina updated its Limited Liability Act effective January 1, 2014. One of the benefits of the limited liability company has been its flexibility. It is a creature of contract, allowing much more flexibility than the centralized corporation. The revised Act highlights this flexibility. The most notable changes that may encourage your company to review its operating agreement are summarized below:

  1. Signed Operating Agreements are No Longer Required. The revised act specifically provides that the company’s operating agreement will control the rights and duties of the owners, except for certain specific items in the Act. In addition, operating agreements can not only be a formal, written and signed Operating Agreement (as used to be required), but the Articles of Organization, other written understandings of the owners as to their rights and duties, and verbal agreements. If you never had an operating agreement, you might have one now and not realize it. It may be hard to prove what the agreements were, and we continue to recommend the owners deliberately enter into an operating agreement that contains buy-sell agreements and deadlock provisions. This is more important now than ever.
  2. Management can be in “Company Officials” instead of Members or Managers. LLCs have always been able to name officers to use the more-common designations of President, Secretary and Treasurer instead of Manager for those running the company, but the new act provides that “company officials” can be the decision makers of the company. In addition, per the revised Act, the operating agreement can modify long-standing requirements that managers be loyal to the company and exercise due care in making decisions. Previously, the Articles of Organization had to specify whether members managed the company or whether elected managers managed the company. These provisions are not now publicly filed, which allows the company to change management structures more efficiently and easily. If you want to change your terminology or definitions of management responsibilities, this would be a good time to revise your operating agreement.
  3. LLCs can be of Perpetual Duration. LLCs were required to have limited durations — there had to be an expiration date in the Articles of Organization. That is no longer required, and there may be good reasons for reviewing existing company Articles and Operating Agreement to delete the expiration date. It is especially recommended to review the tax distribution upon dissolution provisions of older LLCs. There is a new 3.8% federal net investment income tax, and it is important to make sure tax provisions are drafted to incorporate this new tax upon dissolution.
  4. Third Parties Can Rely on Public Filings.  Now that LLCs don’t have to designate who manages the company — its members or elected managers — third parties are entitled to rely on what the Company says about its management structure in its annual report and other public filings with the Secretary of State. This is true even when the public filings conflict with the (private) operating agreement. In addition, in a dispute between owners and managers, the revised Act makes clear that the terms of the Articles of Organization will be treated as part of the operating agreement, and provisions of agency and contract law will govern these conflicts. It is more important than ever to keep these public filings current and accurate.

Topics:  Choice of Entity, Limited Liability Companies, LLC, Operating Agreements

Published In: Business Organization Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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