Published in Business New Hampshire
If the fiscal cliff, so-called “sequestration,” and whip-saw control of the NH legislature isn’t enough to make your head spin as a business person, then hold on. The law governing New Hampshire limited liability companies has been completely rewritten. Unlike the other recent events though, this change is meant to give an LLC owner better understanding, control of and more certainty with respect to his business relationships. If you are a member (owner) of a New Hampshire limited liability company, you should familiarize yourself with the new law.
The new law, called the Revised New Hampshire Limited Liability Company Act, went into effect on January 1, 2013. It currently only applies to NH LLCs formed on or after that date, and will eventually apply to all NH LLCs on January 1, 2014. An existing NH LLC can elect into the new Act before 2014 with the permission of all the current members. There are a number of good reasons to make that election early which are discussed below.
By far, there are more LLCs currently existing under NH law than corporations. With more LLCs being formed than corporations for more than a decade, that trend makes it clear that LLCs are the entity of choice for most business owners. The new Act was designed to foster the business needs of this growing LLC segment by focusing on two main goals: (1) to make the law governing LLCs more user-friendly and (2) to make the Act more flexible so that New Hampshire business persons can tailor their business relationships as they see fit. In order to accomplish those goals, the old law required significant changes.
With respect to the first goal of making the law governing LLCs more user-friendly in the state of New Hampshire, the new Act clarified many of the prior law’s ambiguous provisions, minimized the “legalese” in the statute, better organized the structure of the Act, and was drafted with the intent of making the Act itself an “off-the-shelf” operating agreement. Although the old law was generally well understood, after about 15 years (the old law was last revised in 1997), some provisions needed further clarification, which included such as how to treat contributions to LLCs by members, the rights of members (or their representatives) who die or become incapacitated, and how an LLC disposes of known and unknown claims against it upon dissolution. The new Act was drafted with a more “plain English” approach, with input by some members of the business community, so that any person (not just lawyers) can read the Act and understand it. Moreover, the new Act is ordered in such a way that a reader can better locate the parts of the Act that apply to his particular subject of interest. It was the intent of these changes to make the new Act better understood by the business community and practitioners alike.
Probably the most critical component of making the new Act more user-friendly is the thoroughness of the new Act and its ability to serve as a default LLC operating agreement. Now, this is not to suggest that lawyers have become obsolete when it comes to organizing LLCs. If a person has questions about the application of the new Act or wants to deviate from the default rules, then involving a lawyer is the right thing to do. Unlike the old law, which may have presumed that the members of an LLC would memorialize their business terms in writing (which frequently does not happen), the new Act was drafted by taking into consideration most of the points that would normally be addressed in written agreements as determined by practitioners in this field (to the extent that it was felt they were universally applicable) and applying a default position. The default position was one the drafting committee for the new Act thought most often was used in business practice. With a majority of the generally applicable provisions addressed in the new Act, together with a default position, the new Act in effect functions as an “off-the-shelf” LLC operating agreement in many instances.
Even though the new Act can serve as a default LLC operating agreement, one of the biggest changes from the old law is the broadening of the flexibility of the new Act and how it (or parts of it) may or may not apply to an LLC. Some of the provisions that were mandatory under the old law have now been made permissive under the new Act, and some provisions that were unclear as to whether and how they applied to LLCs have been clarified (and in most instances, have been made permissive). An example of this are the fiduciary duties of members and managers of an LLC. These provisions state the duties of care and loyalty owed to and by such persons, and can sometimes form the basis for defining what is proper or improper conduct. Under the old law, these duties were likely mandatory but the particulars were ambiguous. In the new Act, the duties are clearly defined (as default rules) and may be changed or even eliminated (in other words, they are not mandatory). Furthermore, the “freedom of contract” principle is embedded in the new Act, as a policy provision, with broad and sweeping language that is intended to guide practitioners and courts to interpret the Act in such a way to provide for greater flexibility by business persons to better control their business relationships as they see fit in their particular circumstances.
In addition to the changes noted above, the new Act modified some important concepts from the old law. The biggest change was that operating agreements no longer need to be in writing. Therefore, oral agreements or course of dealings can be used to form the basis of a contractual obligation among members and managers. Accordingly, words or actions can override the default rules of the new Act. Other significant changes include determining allocations of member votes, parameters around member expulsions and certain clarifications regarding single member LLCs. As a specific example, under the old law, the default position was that member voting was allocated relative to capital contributions, but the new Act changed that allocation to equate to profit sharing. This was done to accommodate those instances, which are fairly common, in which someone doesn’t contribute cash or property but rather contributes services or expertise with an expectation of a profits interest (which would not have been recognized as a voting interest under the old law unless it was in writing).
As mentioned earlier, existing LLCs can opt-in to the new Act prior to 2014. In addition to all the reasons previously referenced in this article, the members of an existing LLC should consider being governed by the new Act prior to 2014 because of the clarified “pick your partner” rules and the strengthened charging order protections. Many people take the view that a member in an LLC is like a partner in a partnership (and not like a stockholder in a corporation). The new Act makes it clearer that your “partner’s” rights to participate in the management or vote cannot be transferred to another person as easily as his economic rights, essentially protecting the partnership principle. In the event that a member has his interest in the LLC taken by creditors or other third parties via court order/process, the new Act makes it clear that the only thing that person obtains, in most instances, are the economic rights and not the other rights typical of a “partner” (such as the rights to vote and obtain certain information). For these reasons and others, electing into the new Act early might be a good idea, but discussion with counsel beforehand may be warranted.
Although changing legal and economic landscapes are not new by any stretch, perhaps the new Act is one thing that may be looked upon as a welcome change by the business community.
John Bentas, Esq. is a corporate attorney with McLane, Graf, Raulerson & Middleton, Professional Association, and was a member of the NH Business and Industry Association’s committee that drafted the Revised New Hampshire Limited Company Act. He can be reached at [email protected] or at (603)628-1306.