Washington Passes New LLC Act

An entirely new statute governing limited liability companies became Washington law earlier this year.  Effective January 1, 2016, the new Act will govern new LLCs and all existing LLCs, except with respect to causes of action and rights accrued before then.  For the effort involved, the changes, as compared to the current LLC Act, appear to be fairly modest

According to the Partnership and LLC Committee of the Washington State Bar Association, which drafted the new Act, the one goal was to make it more “user-friendly”.  For example, unlike the current Act, it helpfully contains a single list of provisions that may not be overridden by an LLC operating agreement and a list of actions requiring unanimous member consent, though the latter may be modified by an operating agreement.

As for substantive changes, the new Act clarifies that an LLC may be managed by a board, similar to a corporate board.  The current Act is silent on this issue, though many existing LLCs are managed by a board.  Similarly, the committee’s summary indicates that LLC managers, including boards, will be subject to specified duties of care and loyalty under the new Act.  But the new Act permits operating agreements to modify such standards of conduct to be the minimum standards provided for under the current Act (e.g., to avoid intentional misconduct and violations of law).

The new Act also makes an LLC manager liable if a member distribution causes the LLC to become insolvent (or if the LLC is already insolvent) – and such liability may not be nullified by an operating agreement.  The current Act only makes the member receiving the distribution liable (if the member knows that the distribution causes insolvency).  The relevant provision in the new Act also provides new guidance on how and when insolvency would be determined.

It is also worth noting that the new Act expands the list of LLC records reviewable by its members to include meeting minutes, resolutions and accounting records.  And this access may not be limited by an operating agreement.

There are pitfalls, too.  Unlike the current Act, the new Act contemplates that an operating agreement may be an oral agreement, in which case the new Act’s default rules would govern.  One of those rules is that, unless the operating agreement provides otherwise, membership voting is one vote per member, irrespective of members’ percentage interest in the LLC.  Rarely is that the intention of the members.  So the ability to have an oral LLC operating agreement hardly makes it advisable.

At first blush, the new LLC Act appears to offer helpful refinements without dramatic changes.  But it is probably worthwhile for existing LLCs to review operating agreements for consistency with the new Act.

Postscript:  Along with the new Act, the legislature passed the “Hub Act”, which harmonizes statutes common to LLCs, partnerships, and corporations – for example, procedures for reserving entity names or filing organizational documents with the Secretary of State, and requirements for registered agents.  Accordingly, the statutes for all of these entities will be amended to refer to the Hub Act as to these procedures and requirements.  Presumably the Hub Act does not materially change the substance of the entity statutes, but that remains to be seen for sure.

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