by William R. Thomas (Winter 2018)
Effective July 1, 2017, the Illinois legislature has made numerous and wide-sweeping amendments to the Illinois Limited Liability Company Act (the “Act”). The changes to the Act should be of particular interest to businesses that are currently operating as LLCs or for entrepreneurs considering the formation of an LLC. Highlights of several important changes are as follows:
Default to Member Management
The Act now expressly provides that an LLC will be member-managed unless the operating agreement specifically provides for the alternative, namely, manager-management.
Valid Oral Operating Agreement
The Act eliminates the requirement of having a written operating agreement by expanding the definition of an operating agreement to include any agreement “whether or not referred to as an operating agreement and whether, oral, in a record, implied or in any combination thereof….” The Act also expressly exempts an operating agreement from the writing requirements provided in the Illinois Statute of Frauds.
Eliminating Fiduciary Duties
Through an operating agreement, the Act will allow LLC members to eliminate and/or waive the fiduciary duties owed by the members of the LLC, except for the duty of care, provided that this elimination and waiver are clearly and unambiguously stated in the operating agreement. This new amendment allows members to alter the duty of care with the exception of intentional misconduct or knowing violations of the law. The amendment also allows members to identify within the operating agreement certain types or categories of activities that do not constitute a violation of the member’s fiduciary duty (see section 15-3 and 15-5(c)). It is believed that this change provides protection from claims that would generally arise in disputes between LLC members. Based upon the requirement of an express disclaimer in the operating agreement, Ottosen Britz recommends that any existing operating agreements currently in effect be modified to specifically reference the elimination of fiduciary duties or to be contemplated in any future operating agreements.
Elimination of Assumed Agency Status
Prior to the amendment, the Act stated that a member was automatically an agent of its LLC, and therefore, the actions of the members on behalf of the LLC were considered to be acts of the LLC. The new amendment found at section 13-5 now expressly states that a member is not an agent of the LLC solely by being a member of the LLC. Further, the amendment has added a provision that allows the LLC to file a “Statement of Authority” with the Secretary of State’s Office, which will either state the authority or the limitation of any member, manager, or person of the LLC to transfer real estate on behalf of the LLC or enter into any other transaction that would bind the LLC. A real-life example would allow this Statement of Authority to be recorded in the county in which the LLC-owned real estate is situated. By recording this document, constructive notice is provided on behalf of the LLC as to who has the authority to act on behalf of the LLC. Additionally, the amendment allows for the creation of a “Statement of Denial” where any manager or member listed in a Statement of Authority can deny any grant of authority limitation made on that member’s or manager’s authority.
Elimination of Buyout of Dissociated Member’s Interest
Prior to the amendment, the remaining members of an LLC were required to purchase the membership interest held by a member who is dissociating from the LLC. The amendment has completely removed this requirement and has further added that the membership interest held by a dissociated member is to be treated the same as a transferee of a member (see section 35-55). Ottosen Britz counsels that a well-drafted operating agreement should always create a mechanism for the process to buyout a member’s interest upon dissociation. If your operating agreement does not address this issue you should consider a modification to address this scenario.
Right to Information
The Act still requires the LLC to maintain the same information as before the amendment, however, the Act no longer requires the LLC to automatically give this information to a dissociated member unless that member submits a written demand to the LLC stating the records requested and the purpose. That request can be denied by the LLC if the purpose is improper but does pose new time limits on the LLC’s response to the dissociated member’s request.
Alternatives to Dissolution
Even though the amendment does not eliminate the potential of dissolution of the LLC in the Act, the amendment allows the members to petition the court to allow the LLC to resolve issues causing the dissolution in a different method, including the purchase of a separating member’s interest.
The amendment expands the ability of a non-LLC to convert to an LLC. Prior to the amendment, only a partnership or a limited partnership could convert to an LLC. Now entities such as general partnerships, limited partnerships, business trusts, or corporations can be converted into an LLC. The amendment also permits a foreign LLC to become an LLC through the filings of Articles of Domestication with the Secretary of State’s Office.
Enforcement of the Operating Agreement
The amendment now creates an automatic binding of the LLC to an operating agreement executed by its members regardless of whether the LLC assented to the operating agreement. This amendment assumes any individual who becomes a member of an LLC accepts the current operating agreement of the LLC.
Statement of Termination Filing
The amendment did not modify the member’s obligation and duty to wind down the LLC’s affairs. However, the amendment now calls for the filing of a “Statement of Termination” with the Secretary of State once the LLC has completed the wind down process. This Statement of Termination replaces the current document, entitled “Articles of Dissolution.”
Upon an LLC’s administrative dissolution, which may occur as a result of a failure to file an annual report, the name of the LLC cannot be claimed by any other entity for a period of three years after the dissolution. If the LLC is reinstated within that three-year period, it can reuse its name unless it seeks a change of name during the reinstatement process.
Authorized Signatures for State Filing
The Secretary of State will now accept documents for filing signed by any person authorized by the LLC, not limited just to a member or manager, provided that the name and title of the person signing are typed or printed on the necessary form. The Secretary of State will also now accept digital signatures.
The identification and list of amendments to the Act above are not exhaustive. However, these examples of the changes to the Act serve as examples of how LLCs in Illinois are becoming more closely linked to the model of limited liability company laws drafted by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”). The limited liability company laws drafted by the NCCUSL have been adopted by 15 states and the District of Columbia. To effectively utilize the changes to the best of your LLC’s ability, Ottosen Britz recommends contacting our office for further counsel.