United States: Florida Legislature Unanimously Approves New Limited Liability Company Act

The Florida Legislature unanimously passed the new Florida Revised Limited Liability Company Act (the "New Act"), and Governor Rick Scott signed the bill into law on June 14, 2013. The New Act is codified as new Chapter 605 of the Florida Statutes and became effective on January 1, 2014. Limited liability companies (LLCs) formed or registered to do business in Florida on or after the effective date are subject to the New Act immediately. However, Florida LLCs existing prior to the effective date may continue to comply with Florida's current Limited Liability Company Act, Chapter 608 (the "Current Act"), or elect to comply with the New Act until January 1, 2015, at which time the Current Act is repealed and the New Act becomes mandatory for all Florida LLCs. In addition, all documents or records filed with the Department of State on or after January 1, 2014, will be required to comply with the filing requirements of the New Act.

The New Act is based for the most part on the Revised Uniform Limited Liability Company Act (the "RULLCA"), a form of which has been adopted by seven states and the District of Columbia. Currently, the RULLCA is being considered, or is in the process of being adopted, by numerous other states. The benefits of basing the New Act on the RULLCA include improved uniformity of treatment for LLCs across state lines and additional court decisions as precedent. The New Act also retains many provisions and concepts from the Current Act while incorporating language and concepts from other sources, including other Florida business entity statutes; the American Bar Association's Prototype LLC Act and Revised Model Business Corporation Act; and the business entity statutes of other states. The New Act is intended to make Florida a more attractive place to organize and operate an LLC.

New Act Versus Operating Agreement

Like the Current Act, the New Act is a "default statute," which means that it provides default rules that must be followed when there is no operating agreement, the operating agreement does not address a particular issue, or the operating agreement purports to modify or waive certain statutory rights and provisions that cannot be modified or waived under the New Act. Except with regard to those provisions that may not be modified by the operating agreement, under the New Act as under the Current Act, the members of a Florida LLC will continue to be permitted to enter into an operating agreement to establish different provisions than those provided by the statute to regulate the affairs of the LLC and govern the relationship among the members, managers and company.

Most sophisticated members of an LLC will have comprehensive operating agreements intended to address significant default rules that may be altered and the most common issues that arise among the members, managers and company. Unfortunately, even the most sophisticated investors will at times become members of an LLC before executing an operating agreement. Adding to the complexity is the fact that the operating agreement need not be in writing and may even be implied from a course of conduct, although reducing such agreements to writing is a best practice employed by most sophisticated members of an LLC. Even where an operating agreement is executed, it may not address every default rule or issue that arises among the members, managers and company. This occurs particularly when default rules are enacted after the operating agreement is executed. In these cases, the members may become bound by default provisions that may be very different from the terms contemplated. Compared with the Current Act, the New Act expands the list of matters that may not be altered or waived by the operating agreement from six to 17.

Elimination of the Managing Member Form of Management. Among the matters that members alter by the operating agreement is the type of management structure of the LLC. The Current Act allows a Florida LLC to be managed by its members, by one or more managers or by one or more "managing members." The last permitted type of management—management by one or more managing members—is the subject of confusion and disparate interpretations under existing law. This is particularly true with respect to the ramifications of having a managing member on the nature of the management structure of the LLC. Under the Current Act, management by a managing member is a form of a member-management; however, some mistakenly believe the managing member is a "manager" and attempt to treat the managing member as such for purposes of the operating agreement and the Current Act. Under the Current Act, the authority to bind the LLC in dealings with third parties does not rest solely with the managing member. To the contrary, every member of a member-managed Florida LLC has the authority to bind the LLC. In order to dispel the confusion and align Florida law with the law of many other states, the New Act eliminates the concept of the "managing member" as a separate management category. Therefore, any current Florida LLC articles of organization and/or operating agreement with a "managing member" will, by default, be deemed a member-managed LLC, which leads to management voting rights and fiduciary duties for all members, as well as all members having the authority to bind the LLC in dealings with third parties.

Additionally, to assist third parties in understanding the actual authority (or lack thereof) of a Florida LLC's members, managers, officers and agents, the New Act includes a new provision that allows an LLC to file a Statement of Authority with the Florida Department of State to set forth, and provide notice to third parties of, the authority (or restrictions on the authority) of persons who may act on behalf of the LLC. Such Statements of Authority must be re-filed every five years after the statement, or amendment, becomes effective. Third parties named in a filed Statement of Authority may also file a Statement of Denial, denying a grant of authority.

Other Notable Changes in the New Act

Several other changes in the New Act are likely to make it easier for companies to do business as Florida LLCs.

Dissociation. One of the most noteworthy of the new non-waivable provisions deals with the power of a member to withdraw or dissociate from the LLC. Under the Current Act, a member may not dissociate prior to dissolution and winding up of the LLC unless the articles of organization or the operating agreement provides otherwise. This can be particularly problematic when unforeseeable conflicts arise after the LLC is formed. Under the New Act, however, it is impermissible for an operating agreement to vary a member's power to dissociate from the LLC. According to the New Act, a member has the power to dissociate at any time. The operating agreement may, however, set forth circumstances under which dissociation would be wrongful and therefore constitute a breach of the operating agreement. The dissociated member may also be liable to the LLC and other members for damages caused by the wrongful dissociation.

Interest Exchange. Unlike the Current Act, the New Act provides for the concept of an "interest exchange" as a means of an LLC acquiring another entity. In an interest exchange, the acquiring entity exchanges equity interests or other consideration, including debt or cash, for all of the equity interests of the acquired entity. This results in the acquired entity being wholly owned by the acquiring entity, but continuing to exist as a separate and distinct entity. An interest exchange also allows for an acquiring company to use as consideration the assets or securities of a parent company or other related entity of the acquiring entity. In this regard, an interest exchange is similar to a "share exchange" in the corporate context.

Domestication. The New Act will allow non-U.S. entities to "domesticate" as LLCs in Florida. A domestication allows any type of foreign entity to retain its status and existence in the jurisdiction in which it currently exists while it simultaneously exists as a Florida LLC, a result which should promote foreign investment in Florida. Much like the process of approving a merger under Florida law, the New Act requires a plan of domestication and approval of domestication, and it allows for amendment or abandonment of the plan prior to becoming effective. The domestication becomes effective upon the passage and filing of the articles of domestication.

Transferrable Interest. The New Act permits the transfer of a member's "transferrable interest," which is limited to the right to receive distributions and does not include any voting or managerial rights. This is consistent with "mere assignee" treatment of an "assignee" under the Current Act. Under the New Act, the transferor retains its managerial rights, including the right to vote, unless and until the transferee is admitted as a member or the transferor dissociates. Moreover, any voting rights retained by the transferor may be trumped by the terms of the operating agreement.

Non-Economic Members. The New Act will permit Florida LLCs to have non-economic members (members that have the right to vote, but have neither an obligation to contribute, nor a right to receive distributions of, capital). The ability to have non-economic members may facilitate certain transactions (specifically debt financing transactions) as some third parties find it advantageous to appoint non-economic members to the LLC to protect against voluntary bankruptcy filings or for similar actions that require approval by the members.

Service of Process. One noteworthy change in the litigation context relates to proper service of process on an LLC. Under the Current Act, service of process on an LLC is effected in the same manner as service upon a partnership. This approach has been problematic, especially in light of the significant differences between manager-managed and member-managed LLCs. The New Act addresses this concern by employing a "waterfall" approach, starting with the registered agent, which is consistent with service of process on a corporation rather than a partnership.

What the New Act Does Not Change

Although the New Act is different from the Current Act, some notable provisions remain unchanged.

Charging Orders. The New Act maintains the provision added to the Current Act adopted in 2011 as a result of the Florida Supreme Court's decision in Olmstead v. Federal Trade Commission. That provision allows judgment creditors of the sole member of a single-member Florida LLC, under certain circumstances, to foreclose on the sole member's LLC interest, but specifically limits the remedy of a judgment creditor of a member of a multiple-member Florida LLC to a charging order. Therefore, consideration should be given to forming single-member LLCs in Delaware (or another state that limits a judgment creditor's remedy to a charging order for both multiple-member and single-member LLCs). A Florida LLC remains a prudent choice for a multiple-member LLC.

Fiduciary Duties. Both the Current Act and the New Act prohibit the complete elimination of fiduciary duties (as is permitted by the laws of Delaware and other states). The fiduciary duties in Florida are limited to the duty of care (the standard of care that is imposed on those managing an LLC) and the duty of loyalty (the duties of those managing an LLC to refrain from competing with, or taking for themselves opportunities from, the LLC, and to keep from self-dealing or having conflicts of interest). As under the Current Act, fiduciary duties may be modified but not in a "manifestly unreasonable" manner, and whether a modification of fiduciary duties is "manifestly unreasonable" is a determination made by a court without the assistance of a jury. The duty of care under the New Act, which is largely consistent with the Current Act, adopts the standard set forth in the RULLCA. There, the RULLCA replaces the "ordinary care/business judgment rule" standard with a less burdensome "duty to refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or knowing violations of law."

Series LLCs. The New Act did not approve the organization of a series LLC—which is an LLC that has multiple series, where each series may own distinct assets, may incur separate liabilities, is insulated from liabilities of the other series and may have different managers and members. In order to accomplish this under the Current Act and the New Act, one would need to form and maintain a separate LLC to hold each asset or operate each business. However, because Florida law does not provide for the organization of a series LLC, there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC. The advantages of a series LLC are that a series LLC may be able to combine administrative functions, pay a single set of annual state fees and prepare one income-tax return each year. The drafting committee of the New Act believes that significant legal and tax issues must still be addressed before series LLCs are approved for organization in Florida.

Practical Application

A review and understanding of the New Act and the matters that may and may not be waived will be a key factor in analyzing its effect on existing and newly formed Florida LLCs and their members and managers. Some new provisions may be a trap for the unwary. For example, the New Act adds more transactions to the list of transactions that trigger appraisal rights. Accordingly, members and managers of Florida LLCs should be aware of and understand these new appraisal triggers, as they may not be desired and may be waived. However, if not properly addressed in the operating agreement, such new appraisal triggers will apply.

The operating agreement of a Florida LLC should be comprehensive and set forth the agreements of the parties as to all material matters to potentially avoid unintended statutory default rules from overriding the parties' expectations. Current members or managers of existing Florida LLCs may desire to have the LLC's operating agreement carefully reviewed and revised, and those planning to form an LLC in Florida should have the LLC's operating agreement drafted with care, in light of the New Act to potentially avert unexpected consequences.

If you have any questions about the New Act, please contact Lida Rodriguez-Taseff, Driscoll R. Ugarte, David A. Kahn, Nicole L. Levy, any of the attorneys in our Corporate Practice Group or the attorney in the firm with whom you are regularly in contact.

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. The Duane Morris Institute provides training workshops for HR professionals, in-house counsel, benefits administrators and senior managers.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions