The Illinois Limited Liability Company Act (Act) recently underwent a significant overhaul. Although Public Act 99-0637 does not take effect until July 1, 2017, the magnitude of the changes warrant an early review and both well-established LLCs and those still being conceived should take time to contemplate the impact of the revisions. Here are 10 of the most substantial changes.
1. Oral and implied operating agreements are now recognized.
Previously, oral and implied operating agreements were not explicitly recognized by the Act. The best practice is still to have a written operating agreement. This revision may not always protect members, since courts may not always find that an oral operating agreement exists, but it gives those who have failed to draft an operating agreement an alternative avenue for asserting their rights.
2. LLCs are now member-managed unless the operating agreement specifies otherwise.
Both member-managed and manager-managed LLCs are still recognized, but unless the operating agreement expressly provides that an LLC is manager-managed, or that the management of the company is vested in its managers, the default is to treat the LLC as member-managed.
3. The Act clarifies the procedures when a member wants to inspect and copy records.
Under the Act, a company shall furnish information concerning the company’s activities, financial condition, or other circumstances of the company’s business necessary to properly exercise a member’s rights under the operating agreement or the Act upon member demand. If the company knows, however, that the member already knows the information, the company does not need to honor the demand. Under the Act, when a written demand is made, the company shall provide the information within 10 days after receiving it. If the company cannot comply with the deadline, it must provide a description of the information the company will provide and state the time and location in which it will be provided. If the demand is denied, the company must do so in writing. The company may still charge the person reasonable costs of copying. The Act also clarifies that a member or dissociated member can exercise these rights. Whenever a dispute arises concerning the reasonableness of a restriction or designation, the company bears the burden of proving reasonableness. A transferee is not entitled to inspect records.
4. A member is no longer an agent of the LLC solely by reason of being a member.
This new requirement does not prevent or restrict a member from acting as the LLC’s agent, but limits the impact. Previously, each member was an agent of the LLC for purposes of the company’s business. Additionally, an LLC may deliver to the Secretary of State a statement of authority which identifies the member or manager of the company authorized to execute instruments transferring real property or other transactions on behalf of the company.
5. Except for the duty of care, fiduciary duties can be eliminated and altered.
The operating agreement may now eliminate or reduce a member’s fiduciary duties. Previously, the LLC Act did not allow the operating agreement to eliminate or reduce a member’s fiduciary duties. That provision has been removed, allowing a member’s fiduciary duties to be eliminated or reduced. The operating agreement may not, however, eliminate or reduce the obligation of good faith and fair dealing and it may not restrict or eliminate the duty of care. The operating agreement can establish the standards by which a member’s duties or rights are to be measured. The elimination of any other fiduciary duties must be clear and unambiguous within the operating agreement. The operating agreement may not authorize intentional misconduct or a knowing violation of the law. The operating agreement may identify specific types or categories of activities that do not violate any fiduciary duty and may specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified after full disclosure of all material facts.
6. The operating agreement may provide for remedies and consequences for a member’s failure to make contributions.
The Act now allows an operating agreement to specify the consequences for a member’s failure to make required contributions. Those consequences include, without limitation: the loss of voting rights, the loss of the right to participate in the management or operating of the LLC, liquidated damages, the reduction or dilution of a member’s proportionate interest, the subordination of the member’s rights to receive distributions, a forced sale of the member’s interest, the adjustment of the interest rates for non-defaulting members, and the fixing of the value of a defaulting member’s interest by an appraisal or other formula.
7. A creditor’s charging order now constitutes a lien on distributional interests and transfer of distributional interests.
A charging order by a creditor now constitutes a lien on the judgment debtor’s distributional interest and requires the LLC to pay over the debtor’s distributional interest to the creditor. No other rights, however, are granted to the creditor. Consequently, the Act also provides that the transfer of a distributional interest alone does not require dissolution.
8. Dissolution is not always necessary.
The Act now specifically provides that a court may order a buyout of an applicant’s membership interest when the applicant has petitioned for relief due to alleged illegal, oppressive, or fraudulent conduct by the LLC’s managers or controlling members. Additionally, even if there are no members, an LLC may now continue to exist, so long as the legal representative of the last remaining member files an agreement to continue the LLC within one year after the event that caused the dissociation of the last member. In that instance, the legal representative is admitted as a member and the company will not be dissolved until a future event of dissolution occurs.
9. Dissociation does not relieve or discharge a member’s obligations.
Under the Act, a person’s dissociation alone does not discharge the person from any debt, obligation, or other liability owed to the company which the member incurred while a member.
10. The Act now provides a detailed procedure for converting and domesticating an LLC.
The Act now provides the procedures for conversion and domestication. When a company is converted, it changes its structure either from a non-LLC to an LLC or vice versa. Domestication on the other hand occurs when an LLC established under another state’s law becomes an LLC under Ilinois’ laws and vice versa. In general, conversion and domestication are permitted so long as the applicable statutes permit such action and not prohibited by the laws of the U.S., Illinois, or other governing states.
Preparing and amending operating agreements is a very complex process and can result in unintended consequences if not done properly. The new ability to have an oral and implied operating agreement complicates this situation. It is important to consult with counsel to assure that your rights are protected and that your operating agreement functions in the manner desired.