RULLCA Pros & Cons

The table below is based on the Uniform Law Commission’s article called “Why States Should Adopt RULLCA.”  The ULC attempts to justify the adoption of RULLCA with the following statements:

“Limited liability companies (LLCs) are a relatively new form of unincorporated business organization providing corporate-style limited liability to its owners; LLCs began to be widely used after Revenue Ruling 88-76 upheld their taxation as partnerships.  Every state has enacted some sort of LLC legislation and LLC filings approach and in many states outnumber the number of new corporate filings on an annual basis.  The existing state LLC statutes, however, are far from uniform and many have been amended on a patchwork basis and have not kept up with the LLC cases and other legal developments.

The Uniform Law Commission (ULC) promulgated the original Uniform Limited Liability Company Act (ULLCA) in 1995 and amended it in 1996 to take into account the then newly adopted federal tax “check-the-box” regulations.  It, like most existing state LLC statutes, can be classified as a “first generation” statute.  The 2006 Revised Uniform Limited Liability Company Act (Re-ULLCA) is a comprehensive, fully integrated “second generation” LLC statute that takes into account the best elements of the “first generation” LLC statutes and two decades of legal developments in the field.  Here are some of the more significant changes and innovations in Re-ULLCA:”

The text in the left and center columns contains ULC’s small list of reasons why states should adopt RULLCA.  The text in the right column is Arizona LLC attorney Richard Keyt’s comments on each of the ULC’s reasons.  Richard Keyt is the creator of this website and a business attorney who formed his first LLC in October of 1992 and has formed 3,600+ Arizona LLCs.

LLC IssueUniform Law CommissionArizona LLC Attorney Richard Keyt
LLC IssueUniform Law CommissionArizona LLC Attorney Richard Keyt

The operating agreement.

In Re-ULLCA, the operating agreement, rather than the certificate of organization, determines whether an LLC is member-managed or manager-managed. Re-ULLCA also makes it clear that the operating agreement is binding on the LLC even in the case of a single member LLC and even if the LLC has taken no formal action to adopt the operating agreement.

This change is not in the public interest. Currently Arizona LLC law requires that the Articles of Organization state if the company is member managed or manager managed and if manager managed the names and address of every manager must be listed in the AOO. This information is readily available to anybody in a matter of seconds by searching for the LLC on the Arizona Corporation Commission's website. This is important because if a third party intends to enter into a contract with an Arizona LLC that party can determine which type of management applies to the LLC and also who has the legal power to cause the LLC to enter into the contract

RULLCA will keep this valuable information out of the public record and create uncertainty on the party of third parties because they will no longer no for certain who can cause an Arizona LLC to enter into a contract.

LLCs may engage in any lawful purpose

Under Re-ULLCA, an LLC is not restricted to for-profit business activities. It can have "any lawful purpose, regardless of whether for profit." This expands the availability of LLCs to family vacation homes and organizations whose activities might be classified as non-profit.

This is current Arizona LLC law. Arizona Revised Statutes Section 29-609 allows an Arizona LLC to engage in any lawful activity except banking and acting as an insurer unless the Articles of Organization prohibits the activity. Currently an Arizona LLC can be a nonprofit company.

Internal affairs default rules

Re-ULLCA contains a basic set of internal affairs default rules governing the relationship members and managers of an LLC between themselves and each other, most of which can be varied by the operating agreement. For example, if the operating agreement is silent on the type of management structure, an LLC is member-managed by default. There are also default rules for decisions by members and managers and for other matters.

Current Arizona LLC law contains similar provisions. It is not relevant whether an Operating Agreement is silent about the type of management because the management type is stated in the Articles of Organization and the company is legally bound by choice of management type set forth in the Articles.

Flexible management structure

Under Re-ULLCA, it is possible to have any type of management structure the LLC members want, including a corporate-style board of directors and officers. The type of management structure is set forth in the operating agreement.

Current Arizona LLC law allows an Arizona LLC to have any type of management structure the LLC members want, including a corporate-style board of directors and officers. From time to time when forming 3,600+ Arizona LLCs I have had members of an LLC ask me to include language in the LLC's Operating Agreement that allows for a corporate management structure. If that is what the client wants I can put the appropriate provisions in the Operating Agreement although I do advise the members that I do not recommend that the LLC alter the statutory member / manager structure.

Duties and liabilities of managers

Re-ULLCA incorporates the fiduciary duties of loyalty and due care for managers and clarifies the contractual status of the duty of good faith and fair dealing. These duties may be restricted or eliminated "if not manifestly unreasonable." The business judgment rule is applicable to a case involving a breach of due care claim. The operating agreement may limit or eliminate liability of a manager to the LLC or other members for monetary damages except for breaches of the duty of loyalty, improper distributions, intentional infliction of harm to the LLC or a member or an intentional violation of criminal law. These rules are similar to those found in state corporation statutes.

Professor Ribstein begins his analysis of RULLCA's fiduciary duties with the following statement:

"RULLCA makes several significant changes with respect to the scope and nature of fiduciary duties, including changes to the duty of care and the waiver of duties. In general, RULLCA muddles the definition of fiduciary duties and adds unacceptable complexity to the LLC contracting process. These problems reflect the sharp disagreements that emerged during drafting concerning the extent to which parties ought to be able to contract for fiduciary duties. Rather than coming down firmly and consistently for a given position, and thereby producing a coherent statute that might be a suitable model for at least some states, the NCCUSL compromise process made a mess that is not a suitable model for any state."

Another detailed analysis of RULLCA's fiduciary duty provisions concluded "States adopting RULLCA should reject RULLCA’s flawed fiduciary duty provisions." See The "New" Fiduciary Standards Under the Revised Uniform Limited Liability Company Act, More Bottom Bumping from NCCUSL

Shelf LLC

It is possible under Re-ULLCA to file a certificate of organization before an LLC actually has a member. A second filing made once a member is appointed completes the formation of the LLC, assuming the second filing is made within 90 days of the first filing.

This concept is of no significance and is, in my opinion stupid. There is absolutely no need to have a shelf LLC. Many times I have formed an Arizona LLC with a nominal member solely to form the LLC and then bring on the ultimate members after they are known and the LLC was formed.

Agency authority

The authority of members and managers to bind an LLC is determined by agency law and not by status, as is the case under most existing LLC statutes. Certificates of authority may be filed in the office of the Secretary of State (and in the case of real estate in the office where real estate records are kept) to provide notice that only certain members or managers have authority to conduct business on behalf of the LLC.

Again Professor Ribstein addresses this issue best. The text below is the beginning of an article he wrote entitled "RULLCA's little agency problem

"Suppose you’re dealing with a member of a small LLC. You’re about to enter into a transaction that is clearly in the regular course of the LLC’s business. The person proves he’s a member and shows you articles of organization and an operating agreement providing that the LLC is managed by the members. Can the member bind the LLC?

Well, he could if this were an ordinary partnership. And he also could if this were an LLC governed by the laws of 49 of the 51 US jurisdictions. But if you’re unlucky enough to be dealing with an LLC organized in a RULLCA jurisdiction (Iowa or Idaho) (and if you're unlucky enough to have formed an LLC in one of those jurisdictions) you’ve got a problem."

Professor Ribstein closes his analysis of RULLCA Section 301 with the following statements:

"So, readers, I’ll leave the issue with you. If you’re organizing an LLC, do you want to wander into the murk of RULLCA’s agency provision (not to mention the rest of RULLCA’s murk covered in my Analysis article linked above)? Or are you comfortable with “other law” and “principles of law and equity”? If the latter, I’ve got some completely reliable investments I’d like to sell you."

For more on this topic see "RULLCA Section 301 - The Fortunate Consequences (and Continuing Questions) of Distinguishing Apparent Agency and Decisional Authority.

Charging orders

Re-ULLCA clarifies and simplifies the rules governing charging orders, the exclusive remedy for a creditor of a member to obtain a member's financial rights to distributions from the LLC. Re-ULLCA also provides the rules for foreclosing on a charging order and makes it absolutely clear that a purchaser of a foreclosed interest only obtains financial rights and does not become a member of the LLC by virtue of the foreclosure.

Distributions

Re-ULLCA specifies the circumstances under which distributions from an LLC can and cannot be made and contains provisions for recovery of improper distributions. Re-ULLCA also makes it clear that payment for reasonable compensation and for retirement plans or other benefits programs are not distributions.

A remedy for oppressive conduct

Reflecting case law developments around the country, Re-ULLCA permits a member to seek a court order "dissolving the company on the grounds that the managers or those members in control of the company have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member.

Direct and derivative claims, special litigation committees

Under Re-ULLCA, a member can bring a direct action for injuries to that member and can bring a derivative action to enforce a claim of an LLC. If a derivative action is filed, the LLC may form a special litigation committee to investigate the asserted claims. This stays the litigation while the committee does its investigation. The objective of the investigation is to determine if the litigation is for the good of the company.

Reorganization transactions

Re-ULLCA has comprehensive provisions authorizing LLCs to merge or convert into another type of entity and also authorizes other types of entities to merge and convert into an LLC. Re-ULLCA authorizes an LLC to domesticate in another state and also authorizes a foreign LLC to domesticate in the enacting state

Arizona law currently allows LLCs to merge or convert to another type of entity. The last sentence makes no sense to me. I don't know why LLCs are not able to take such actions now.

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