By:  Rick Jackson

On January 1, 2014, Chapter 57D of the North Carolina General Statutes goes into effect (“New LLC Statute”) and Chapter 57C is repealed (“Old LLC Statute”).  The New LLC Statute will apply to all LLC’s, even those formed before January 1, 2014.

So is it time to make an appointment with your attorney to review your operating agreement?  Perhaps, but not for the reasons you may think. 

As three of the most significant changes to the Old LLC Statute, the New LLC Statute (1) introduces and emphasizes the concept of “company officials” as an alternative to managers, (2) introduces and emphasizes the concept of “economic interest owner” as distinguished from members, and (3) provides that the New LLC Statute (other than seven enumerated exceptions) may be “supplemented, varied, disclaimed, or nullified” by the operating agreement.

1.  New Definition:  “Company Officials”

The New LLC Statute provides that “company officials”, such as directors and officers, can be used by LLCs as the decision makers for the LLC in lieu of managers.  But the use of directors and officers in an LLC is not new to the New LLC Statute.  The New LLC Statute simply places greater emphasis than the Old LLC Statute on its use as a possible alternative to managers.

The ability to use directors and officers in lieu of managers underscores just how flexible the governance of LLCs can be.  In determining the appropriate decision-making structure of your LLC, it is important to consider whether the use of directors and officers in lieu of managers is, in practice, more efficient (or burdensome) in carrying out your day-to-day management.  Even more important is determining the decision-making authority of the members of your LLC in relation to that of its managers (if manager-managed) or directors and officers, as the case may be.  For example, are there major decisions that should require member approval instead of manager approval?

2.  New Definition: “Economic Interest Owner”

Similar to the definition of “company officials”, the definition of “economic interest owner” is new to the New LLC Statute, but the concept is not.    Under the Old LLC Statute, this concept was referred to as an “assignee”.  Like an assignee, an “economic interest owner” only has the economic rights of a member but not the non-economic rights, such as management rights, derivative action rights, and rights to information.  In contrast, a “member” has both economic and non-economic rights in the LLC.

The concept of “economic interest owner” is most relevant in the context of the buy-sell provisions of your operating agreement.  In general, involuntary events may cause a transfer of a member’s interest in the LLC (e.g. the death of member).  Your operating agreement hopefully provides an efficient way to address these situations, often referred to as buy-sell events.  As a related matter, your operating agreement in general should provide that any recipient of the transferred membership interest is merely an economic interest owner, not a member of the LLC (unless admitted pursuant to the member substitution or permitted transferee provisions of the operating agreement).

3.  Use of Operating Agreement to nullify New LLC Statute 

The phrase “except as otherwise provided in . . . a written operating agreement, . . .” was used throughout the Old LLC Statute.  This meant that the section of Old LLC Statute that this ubiquitous phrase preceded would apply to your LLC, unless your operating agreement contained express language to prevent or otherwise modify its application to your LLC.  In lieu of the repeated use of this phrase, the New LLC Statute more-succinctly and comprehensively provides that the New LLC Statute (other than seven enumerated exceptions) may be “supplemented, varied, disclaimed, or nullified” by the operating agreement.  Here again, this is not a concept that is new to the New LLC Statute.

More importantly, you need to understand those instances in which you do not want the New LLC Statute to apply to your LLC and draft your operating agreement accordingly.  For example, you generally want the bankruptcy of an individual member to automatically trigger that member’s withdrawal from the LLC but there are instances in which you may not want this to automatically happen.  Your operating agreement needs to account for these situations.

In summary, you do not need to make an appointment with your attorney to review your operating agreement solely based on the New LLC Statute, but if you have not addressed the issues described above with your attorney to assure that your operating agreement properly fits your business, now is the time to do so.   

Please contact me if I can assist you in any way with your North Carolina LLC  (rjackson@mwbavl.com; 828-254-8800).

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Rick Jackson is an Attorney with the law firm of McGuire, Wood & Bissette, P.A.   He works primarily with small to mid-size businesses: technology and manufacturing companies; property owners, developers, and homeowner associations; medical and dental practices and hospitals; restaurants and breweries; agricultural and natural product businesses; and nonprofits.  http://tinyurl.com/myoclkw

 

 

 

This entry was posted on Friday, November 22nd, 2013 at 3:42 pm and is filed under Limited Liability Companies, Property Owner Associations, Small Business.