Major Changes Coming for Utah Limited Liability Companies on January 1, 2016

 Significant changes are looming that could impact the legal operation of your Utah LLC.  The impact will depend in part upon on whether your existing LLC operating agreement addresses the default provisions in the new law.  When the Utah Revised Uniform Limited Liability Company Act (“New Act”) was enacted, it was initially only applicable to LLCs established on or after January 1, 2014, or to pre-existing Utah LLCs that elected to apply its provisions.  Now the New Act applies to all pre-existing Utah LLCs as of January 1, 2016.  The New Act contains several default rules that, unless otherwise altered by an operating agreement, will apply to your LLC.  These should be discussed with your attorney before the end of the year.

Listed below are several of the default rules (but not an exhaustive list) for your company to evaluate and consider, including matters relating to LLC duration and formation, establishment of an oral operating agreement, rules for voting and distributions, member-creditor protection, fiduciary duties of loyalty, care and good faith, accuracy of public record, rights of members and managers, and statutory apparent authority. 

·       LLCs may now exist for a perpetual duration with the filing of a Certificate of Organization.  Existing LLCs will need to file an amendment to its Articles of Organization along with the Certificate of Organization.  Under the New Act, company managers are now permitted to remain unnamed in the Certificate of Organization.

·       The legal recognition of an operating agreement may now be established orally or based on the conduct or habits of the members and managers of the company.  As such, members must be aware of implied agreements based on casual conversations or actions, and limit agreements and amendments to those expressed in writing.

·       The default rule for voting states that each member now receives one vote without regard to member’s LLC interest or capital contributions unless the operating agreement specifies otherwise.  Similarly, non-liquidating distributions also default to a per capita arrangement if not addressed in the operating agreement.

·       Upon liquidation, member-creditors are no longer subordinate to non-member creditors but will be on equal standing with third-party lenders.  However, if the language of the operating agreement favors third-party creditors, this provision will supersede the default rules of the New Act and may be required by your third-party lender.

·       The fiduciary duties of members and managers has moved beyond the limitation of “gross negligence” “willful misconduct” or a breach of a higher standard of care that was set forth in the LLC’s operating agreement.  The New Act has expanded these obligations to include the duty of loyalty, duty of care, and the contractual obligation of good faith and fair dealing.  These obligations can present pitfalls.  For example, the duty of loyalty could be interpreted as imposing a non-competition obligation on members or managers.  The new rules allow for the operating agreement to specify and tailor the standards to agree with the LLCs business purpose as long as these additional statutory duties are not eliminated.

·       LLCs are now liable for inaccurate information in the public record.  The company may also be held responsible for damages incurred by persons who suffer loss as a result of relying on the information provided by the documents on record.

·       By statute LLCs are responsible under the duty of candor to provide information to all its members or managers concerning matters of consent or approval when presented to the company.  The LLC must supply all material facts and substance, such as financial statements used in mergers or other business combination transactions, to all members.

·       To provide LLCs with greater flexibility the New Act eliminates the requirement of statutory apparent authority by position (i.e. Manager Managed vs. Member Managed). The management authority is now determined by the operating agreement or by a Statement of Authority that is recorded with the County Recorder.

In closing, the default rules of the New Act will come into effect and impact all LLCs as of January 1, 2016.  Particularly for LLCs formed prior to 2014, evaluate how closely these rules fall in line with the company’s goals and determine whether the enacted changes will result in any potential unintended consequences for your members.  We suggest that you contact your attorney to review your existing operating agreement for areas for amendment or to create a written operating agreement if one is not currently in place.  As an accounting firm we are unable to provide such legal advice.