Limited liability companies (“LLCs”) have become a common choice of entity in Oregon in the 20-plus years since adoption of the Oregon Limited Liability Company Act (“Act”).
LLCs are formed by filing Articles of Organization (“Articles”) with the Oregon Secretary of State. One of the advantages of LLCs is substantial flexibility in determining economic and management arrangements between and among members. Typically, those arrangements are found in an Operating Agreement (“OA”) by which all members (owners) of the LLC are bound.
OAs can be complex and lengthy, addressing not only basic economic issues such as allocations of profits/losses and distributions of cash, but also common business issues such as management and control; transfers of ownership interests; dissolution and termination of the entity; and dispute resolution, among other things.
Given the potential complexity and expense of creating a comprehensive OA, some organizers of LLCs are tempted to forgo a written agreement. However, in the absence of provisions in an OA or in the Articles, the Act provides for statutory default provisions that will apply to some key management and economic issues. Those default provisions could come as a surprise to organizers, and, more importantly, not reflect the intentions of the parties.
For example, DID YOU KNOW that the following non-exhaustive list of default provisions will apply in the absence of provisions in the OA or in the Articles addressing these matters?
(1) In a member-managed LLC, each member will have equal rights in management and conduct of the LLC’s business, regardless of relative levels of ownership (i.e., one member/one vote)
(2) Amendment of the Articles or the OA will require unanimous consent of all members
(3) The following will require approval of a majority of members (one member/one vote):
(a) interim distributions (basically, any distribution except upon liquidation)
(b) admission of a new member
(c) sale, lease, or other disposition of substantially all of the LLC’s assets
(d) incurring debt other than in the ordinary course of business
(e) change in the nature of the LLC’s business
(f) additional matters specified in ORS 63.130(4)
(4) Profits and losses will be allocated among all members equally, without regard for relative levels of ownership
(5) Distributions of cash or other assets prior to dissolution and winding up will be made to all members in proportion to their rights to share in profits (i.e., equally, if profit allocation is not addressed in the OA or in the Articles)
(6) The LLC will be able to expel a member only by obtaining a judicial determination that the member has been guilty of wrongful conduct that adversely and materially affects the business or affairs of the company
What is the takeaway from this information?
The default provisions in the Act are not inherently wrong or bad. However, experience says that the default treatment of these issues is rarely the treatment organizers would choose or expect. Organizers of an LLC should consult a professional to prepare appropriate Articles and an OA to ensure that important management and economic matters are not left to the default provisions of the Act. Those provisions are not likely to reflect the typical expectations of members in an LLC.