By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Business and Corporation Law Firm
New Jersey adopted the Revised Uniform Limited Liability Act (NJRULLCA). Since March 1, 2014, NJRULLCA has governed all limited liability companies (LLC’s) in New Jersey, replacing the state’s original Limited Liability Company Act. This is a significant development in New Jersey business law because closely held businesses represent the predominant form of new business entities formed in this state. There is virtually no limit on what type of businesses may be formed as an LLC, including real estate, food services, healthcare, insurance, apparel, automobile, financial services, technology and entertainment, among many others.
The following is a summary of key changes made to the laws governing New Jersey limited liability companies.
The act permits an LLC to be formed for any lawful purpose, regardless of whether it is for profit or not. Thus, an LLC may be formed as a not-for-profit organization but remember if you’re looking to be recognized as a charitable organization you still need an IRS “501C” status.
The act does away with the previous requirement that operating agreements must be in writing and specifically authorizes oral or implied agreements. I would never recommend that the members form an agreement verbally, but it is possible that a New Jersey court would find that a course of dealing or similar evidence between members over a period of time affirms the existence of an oral agreement.
The new act provides that an LLC has perpetual duration meaning it goes on indefinitely. This changes the limited 30 year duration limit established under the old Act, absent a contrary provision in its certificate of formation.
An LLC is formed and becomes “legal” when a certificate of formation is filed in the Division of Revenue in the Department of the Treasury unless the certificate provides for a future date upon which the LLC will become effective provided the LLC has at least one member. An annual report must be filed with the state, otherwise the LLC will be transferred to an inactive list. While on the inactive list, an LLC’s name is unprotected and can be taken and used as the name of another LLC with different members. Thereafter, if the inactive LLC is reinstated to an active LLC, it may not able to use the name it had when it became inactive.
Statement of Authority
The act creates a new disclosure document called a “statement of authority” to be filed in the Division of Revenue. This filing provides public notice of the authority of one or more persons who may act on behalf of the LLC. The statement of authority can describe the scope of authority given to a member(s) and can direct a reader to either a designated person or office for more information.
The new act provides that an LLC is managed by its members equally unless the operating agreement provides for one or more managers to take that responsibility. The act provides that each member in a member-managed LLC has equal rights in management. Thus, a 10-percent member would have the same rights as a 90-percent member in the same LLC, unless the operating agreement provides otherwise.
Since a manager-managed LLC must, by definition, have an operating agreement, care should be taken in such an agreement to establish the scope of authority of the manager(s).
The act provides that members in a member-managed LLC and managers have equal duties of loyalty and care to each other. The member or manager must exercise those duties consistently with an obligation of good faith and fair dealing.
The act provides that, if not manifestly unreasonable, the operating agreement may alter the duty of care, but cannot exercise intentional misconduct or a knowing violation(s) of law, but may alter other fiduciary duties by describing those particular aspects of that duty that are being modified.
The new act requires indemnification and hold harmless rights of members, managers and others but allows the operating agreement to alter or eliminate such an obligation. If a member is denied protection against claims by other members, sues and is successful on the merits, then the LLC is obligated to reimburse the member his or her expenses, including counsel fees. The operating agreement may, of course, alter this rule to require the LLC to advance the expenses as they are incurred.
Release of Member Liability
The new act authorizes operating agreements to eliminate or limit a member’s or manager’s liability to the LLC or its members for money damages, except for: 1) a breach of the duty of loyalty, 2) a financial benefit received by the member or manager to which he or she is not entitled, 3) a wrongful distribution of money or other property to the member, 4) intentional infliction of harm on the LLC or a member, or 5) an intentional violation of criminal law.
The new act clarifies and expands the provisions relating to charging orders. A charging order in favor of a judgment creditor of a member of an LLC constitutes a lien on the judgment debtor’s interest in the LLC, and requires the LLC to pay over to the person holding the charging order any distributions from the LLC with respect to that interest.
To discuss your NJ LLC matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org/. Please ask us about our video conferencing consultations if you are unable to come to our office.