By Whitny L. Norton
Recently, the Washington State Legislature enacted legislation that overhauls the existing Washington Limited Liability Act (“Act”). Beginning on January 1, 2016, changes to the Act go into effect. The following represent some of the more significant changes to the Act.
Oral LLC Agreements
While the best practice is to have a written LLC agreement, an LLC agreement no longer needs to be in writing. It may be “oral, implied, in a record, or in any combination.” Therefore, like partnerships in Washington, a limited liability agreement may arise by implication. Keep in mind that while LLC’s may be entered into orally, the entity must still file a certificate of formation with the Washington Secretary of State.
LLC agreements structure and regulate the relationship between the LLC and its members subject only to the LLC Act. An LLC agreement may limit a member or manager’s duties to the LLC (including fiduciary duties) so long as the modifications or limitations are not inconsistent with the law and do not eliminate or limit:
(a) The duty of a member or manager to avoid intentional misconduct and knowing violations of law, or violations of RCW 25.15.231; or
(b) The implied contractual duty of good faith and fair dealing.
Washington LLCs and corporations may convert into other entity types in Washington or other states. Thus, entities formed as corporations prior to Washington’s enactment of the original LLC Act in 1994, may convert into an LLC by following the statutory process.
If a member of a converting/merging LLC will have personal liability with respect to the surviving entity, then the member must sign a separate written consent to become subject to such liability.
Manager-managed or Member-managed
LLCs no longer have to designate whether it will be manager-managed or member-managed in its certificate of formation. The LLC agreement will determine whether the LLC is manager-managed or member-managed. If the LLC agreement is not express, the LLC will be considered manager-managed if the LLC agreement vests management of the LLC in one or more managers, otherwise the LLC will be considered member-managed.
Consistent with the deletion of the manager-managed/member-managed distinction in the certificate of formation, the new Act does away with the statement of a managing member’s apparent authority for matters in the ordinary course. Common law agency rules will apply to third parties dealing with LLCs.
Board as Manager
The new Act allows a manager to be “a person, or a board, committee or other group of persons” named or designated by an LLC agreement as a manager of the LLC. If the manager is a board, the fiduciary standards of conduct apply to each person on the board. Furthermore, if an LLC’s manager is a board or other group of persons, the members of that board or group will not have authority, individually, to act on behalf of the LLC by virtue of their membership in the group or on the board.
Standards of Conduct
The new Act specifically defines the manager’s or managing member’s fiduciary duties of loyalty and care.
The new Act’s default voting rule for actions requiring member approval, requires a majority of the members – per capita voting. The Act mandates that some actions require unanimous member approval. For example, unanimous approval is required to amend the limited liability company agreement; authorize withdrawal of a member; sell, lease, exchange, or otherwise dispose of all, or substantially all, of the LLC’s property, other than in the ordinary course of the LLC’s business; or undertake any act outside the ordinary course of the LLC’s activities.
Like the Business Corporation Act, the new Act creates a right for members to access certain LLC records. The member seeking the records must provide a written demand setting forth a purpose reasonably related to the member’s interest in the LLC and the records requested must be directly related to the member’s purpose. The LLC may impose reasonable restrictions on the member’s use of the information.
Allocations of Profit and Loss
The new Act provides a default rule for distributions, based on the agreed value of contributions, but provides no default rule for allocating profits and losses.
If you have any legal issues or disputes regarding your entity or questions regarding the changes to the Washington Limited Liability Act contact the knowledgeable and experienced attorneys at Piskel Yahne Kovarik, PLLC, at (509) 321-5930.