Florida’s New Revised LLC Act

by | Aug 27, 2013

By: Barry E. Haimo, Esq.

August 27, 2013

Florida’s New Revised LLC (Limited Liability Company) Act


On May 3, 2013, Florida’s legislature unanimously passed the Florida Revised Limited Liability Company Act (the “Act”), which is codified in Chapter 605, Florida Statutes. The Act becomes effective Jan 1, 2014. Prior to that time, the predecessor act under Chapter 608, Florida Statutes, remains in effect.

First and foremost, it goes without saying that every limited liability company (“LLC”) should have an operating agreement. An operating agreement, like bylaws of a corporation, governs the rights and obligations of the partners. It’s a critical document. Most likely, your operating agreement up until this moment undoubtedly references Chapter 608, Florida Statutes. This means that likely every operating agreement needs to be amended to ensure it is referencing the correct statutes. Without an operating agreement, the state of Florida will make one for you with all the default provisions as embodied by Chapters 608 (until January 1, 2015) and then Chapter 605 (effective January 1, 2015). Proper business planning is necessary to ensure that your desired terms are in place.

The Act makes some important changes in the law that justify having your operating agreement reviewed.  Here are a few:

1. Expanded list of non-waivable provisions – the operating agreement is the governing document for an LLC. It covers operation, voting, control, powers, rights, transfers, dissolution, etc. Most of these provisions are covered by the statute by default, but are waivable in the operating agreement. The Act adds many new non-waivable provisions. Here are a few:

(i) any attempt to vary the right of a member to approve a merger, interest exchange or conversion in certain contexts; (ii) any attempt to relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional conduct or a knowing violation of law; (iii) any attempt to eliminate the duty of loyalty or care; (iv) any attempt to eliminate the obligation of good faith and fair dealing; (v) any attempt to vary the power of a member to dissociate from the LLC; (vi) any attempt to unreasonably restrict the right of a member to maintain a direct action against another member, manager or the LLC to enforce the member’s rights and otherwise protect the member’s interests; (vii) any attempt to unreasonably restrict the right of a member to maintain a derivative action; (viii) any attempt to provide indemnification to a member or manager for (1) conduct involving bad faith, willful or intentional misconduct or a knowing violation of law, (2) a transaction from which the member or manager derived an improper personal benefit or (3) a breach of fiduciary duties; (ix) any attempt to vary an LLC’s capacity to sue and be sued; (x) any attempt to vary the application of Florida law to the internal affairs of the LLC or the liability of a member or manager for debts, obligations or other liabilities of a Florida LLC; (xi) any attempt to vary the requirement, procedure or any other provisions of the New Florida Act pertaining to registered agents or the Florida Department of State (the “Department”); (xii) any attempt to vary the provision of the New Florida Act pertaining to signing and filing pursuant to judicial order; (xiii) any attempt to unreasonably restrict the duties of an LLC to maintain certain records or the right of members to access the LLC’s records, (xiv) any attempt to vary the grounds for dissolution specified in the New Florida Act; (xv) any attempt to vary the requirements to wind up the LLC’s business, activities and affairs as set forth in the New Florida Act; (xvi) any attempt to vary the provisions of the New Florida Act pertaining to special litigation committees; (xvii) any attempt to vary the required contents of a plan of merger, plan of interest exchange, plan of conversion or plan of domestication; and (xviii) except in certain specified circumstances, any attempt to restrict the rights under the New Florida Act of a person other than a member or manager.

2. Eliminating of the “Managing Member” concept – Generally LLCs are member-managed, manager-managed or managed by a managing member. The Act eliminates the latter because it was causing a lot of confusion. I personally only recommend manager-managed companies for a variety of reasons. One reason is that it makes the company more analogous to a corporation’s centralized management structure.

3. The Power to Dissociate as a Member – under the current act, a member is prohibited from dissociating, or withdrawing or resigning) from the company prior to dissolution (termination of the entity). This is a big change in the new Act, which allows dissociation. In fact, as mentioned above, the new Act prohibits waiving this new right. In the event a member desires to dissociate, he or she is treated differently. In a member-managed company, his or her fiduciary duty of loyalty is terminated. The dissociated member loses his or her right to participate in management but retains his or her right to receive distributions of profits. It is important to note that the operating agreement can provide for “wrongful dissociation”. Thus, even though it’s permitted by law, the agreement may deem it “wrong” resulting in damages and liability to the dissociating member.

4. Member and Manager liability for inaccurately filed information – In pursuit of transparency, the new Act imposes liability on the manager or managing member for inaccuracies in reporting information with the Florida Department of State, Division of Corporations. That means that your Articles of Organization need to be accurate or you can face liability.

5. New statement of authority concept – Consistent with number 4, the new Act permits filing of a Statement of Authority with the state, which serves as notice of authority or lack thereof, which is binding on the company. Third parties may rely on this statement ability so it’s important that they are properly monitored and maintained.

6. Additional appraisal rights – The new Act provides members with six additional events that trigger appraisal rights. Appraisal rights are rights afforded by statute to members.  They grant such members the right to receive a fair price for their interest in an LLC which will be determined by initiating judicial proceedings, which is binding on the purchasing or acquiring company. Under the current law, members are entitled to appraisal rights in the event of a merger or conversion if such members possessed the right to vote. The new Act grants the following additional events that trigger appraisal rights:

(i) consummation of a membership interest exchange where the member possessed the right to vote on the exchange (unless the member’s interest is not subject to the exchange); (ii) consummation of a sale of substantially all of the assets of the LLC where the member possessed the right to vote on the sale (unless the sale is pursuant to court order or the sale is for cash pursuant to a plan under which all or substantially all of the net proceeds of the sale will be distributed to interest holders within one year of the date of the sale); (iii) amendment of the LLC’s governing documents to reduce the interest of a particular member to a fraction of an interest if the LLC will be obligated to or will have the right to repurchase the fractional interest so created; (iv) amendment of the LLC’s governing documents to alter or abolish the voting or other rights of a particular member in a manner that is adverse to the member’s interest (except as such rights may be affected by voting or other rights of new interests then being authorized); (v) amendment of the LLC’s governing documents the effect of which is to adversely affect the interest of a particular member by altering or abolishing the member’s appraisal rights; or (vi) other event expressly authorized by the LLC’s governing documents. An LLC will be able to modify, restrict or eliminate the appraisal rights of a member or group of members so long as such modification, restriction or elimination is set forth in the LLC’s governing documents as approved by the affected member or group of members.

7. New Fairness Standards Evidentiary Burdens in Connection with Conflict of Interest Transactions – As mentioned above, duty of loyalty represents a non-waivable provision in the statute. Under the current law, a member is not permitted to engage in a transaction that would create a conflict of interest with the company. However, such is permitted if its adequately disclosed to the disinterested members or managers and they consent or the transaction is fair and reasonable to the company at the time of consent.  These are called safe harbors. The new Act expands on the fair and reasonable safe harbor. Under the new Act, a transaction is fair to the LLC if the transaction, as a whole, is beneficial to the LLC and its members, taking into appropriate account whether it is fair in terms of the member’s or manager’s dealings with the LLC in connection with the transaction and comparable to what might have been obtainable in an arm’s length transaction. Of great importance is that the new Act clarifies who has the burden of proving unfairness, and that rests on whether there was disclosure of the conflict of interest to the managing members or managers. If the transaction creating a potential conflict of interest was disclosed, the burden of proving unfairness lies on the party challenging the transaction. Otherwise, the burden of proving fairness lies on the party defending the transaction. The bottom line here is that you want to disclose transactions that may present a conflict o interest with the company.

I hope this basic introduction to the new Act makes it clear that you need an operating agreement, and if you have one it should definitely be reviewed by a business attorney immediately.

Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose
Email: barry@haimolaw.com
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