Significant Changes to the North Carolina Limited Liability Act

by Sands Anderson PC
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On January 1, 2014, the North Carolina Limited Liability Act was significantly overhauled.  Existing Chapter 57C was repealed and 57D was passed in its place.  Many of the substantive changes are highlighted below.

  1. One of the most notable changes is in the way owners of a company could override the provisions in the Limited Liability Company (LLC) Act. Previously, any change from the Act had to be adopted in writing.  Now the parties can change the default rules set forth in the Act by verbal agreements, writings that are not formal contracts but express the owners’ thinking on certain issues or agreements implied by the conduct of the parties.  While this change can introduce some unintended contracts, it can also prevent a party from being stuck with the default rule in the LLC Act where the parties clearly intended to change the result. There is also concern about negotiated but never finalized or signed written Operating Agreements.  Will those be deemed the agreement of the parties?  That could get messy if one member relies on it and others don’t think it’s an agreement. The best practice remains signing an Operating Agreement.
  2. The new Act clarifies and expands the differences between a “member” who has economic and management rights, and an “economic interest owner” who only has economic rights (ie, the right to receive distributions, but not the right to vote or otherwise participate in the management of the company).
  3. Under the new Act, the company can designate a wide variety of “company officials” to manage the company.  The old Act permitted officers, but arguably required at least one manager.
  4. The owners of an LLC now are permitted to eliminate the duties of loyalty and care required by its managers (or company officials).  If this is done, Managers/company officials are still obliged to act in good faith, fair dealing and not enter into unconscionable terms of contract.
  5. LLCs no longer are required to have an expiration date.Certain remedies upon disputes among owners have been changed.  The parties can agree to certain penalties that would not be supported by contract law, such as what happens if a member fails to contribute capital.  A member can be prohibited by the operating agreement from bringing a derivative action to enforce the company’s rights against other members.  Finally, the operating agreement can prohibit a member from bringing an action to dissolve the company if it provides an alternative remedy.
  6. Finally, the progressive LLLC or L3C langugage was deleted.  Low-Profit Limited Liability Companies were enabled by 57C, which was repealed, and listed both for-profit and social enterprise purposes in their Articles.  Drafters of 57D explain that the LLC statue is flexible enough to allow this without special statutory language.

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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