Operating agreements are legally binding and enforceable once they have been signed by the members of an LLC, or even orally agreed upon as we’ll cover in greater depth below.  Operating agreements serve as crucially important foundations for LLCs, because as their name suggests, they are used to outline how the LLC will function and manage its finances.  Significantly, a new law called the Revised Uniform Limited Liability Company Act makes important changes which affect what sorts of agreements and contracts are now considered enforceable for New Jersey LLCs.

New Laws For New Jersey LLCs: The Revised Uniform Limited Liability Company Act

The laws regulating New Jersey LLCs have recently changed.  Regardless of when they were formed, all LLCs in New Jersey must now comply with the provisions of the Revised Uniform Limited Liability Company Act (N.J.S.A. 42:2C-1, et seq.), adopted September 19, 2012.  The Revised Act is also referred to as RULLCA.

Implied and Oral Agreements Are Now Enforceable

In the past, only expressed written agreements were considered enforceable.  However, under the Revised Act, oral agreements and implied agreements have also become enforceable.  An implied agreement is not explicitly expressed verbally or in writing, but is instead based on the conduct of or relationship between the parties, such as accepting a product or service which is not a gift.  This acceptance implies there will be some sort of remuneration or compensatory product or service rendered in return.

What does this mean for you?  If you and your fellow LLC members or managers entered into an oral agreement and a dispute arises, since the terms of oral LLC agreements are now considered enforceable under the Revised Act, the claims involved in the dispute could potentially lead to civil litigation.  In the past, this would not have been an issue unless the contract dispute involved a written document.  As a result, preparing clear written agreements for reference is arguably more important now than ever before.

New Fiduciary Duties For LLC Members and Managers

Prior to RULLCA, LLC members and managers were not bound to specific fiduciary duties.  However, under the new laws:

• If an LLC is managed by a manager, managers have a fiduciary duty of loyalty, but members do not.
• If an LLC is managed by a member, members have a fiduciary duty of loyalty.

If a member or manager breaches their fiduciary duty, he or she may lose the personal liability protection which would normally be in place.  Without the benefit of personal liability protection — which for many is one of the key advantages of selecting the LLC structure to begin with — your assets become vulnerable should the company ever be sued or incur debts which must be repaid.

On a related note, other scenarios and actions which can pierce the veil of limited liability protection include:

• Deliberately causing personal injury to another individual, or causing that individual to be physically injured through negligence.
• Failing to satisfy a personal guarantee that you made.  Creditors are free to pursue Guarantors’ personal assets in this scenario.
• Failing to clearly and distinctly distinguish yourself from the LLC.  If you ambiguously blur your financial affairs with the financial affairs of the entity, the courts may rule that you assume personal liability.

New Per Capita Rules for Financial Distribution

RULLCA makes significant alterations to the way finances are distributed within New Jersey LLCs, which makes it extremely important to clearly delineate your LLC’s distribution arrangements in writing.  Under the old laws, finances were distributed on a pro rata basis, meaning financial distribution would proportionally match the ownership shares.  For example, a person who owned 40% would receive 40%, while a person who owned 60% would receive 60%.

But now, in accordance with the Revised Act, the old default pro rata model has shifted to a per capita model. The Latin literally translates to “by head,” meaning per capita distribution is divided by the total number of individuals involved, and not by proportional shares as in the past.  Under the new per capita model, the 40% owner and 60% owner from our earlier example would each receive 50% of the financial distribution.

As you can see, RULLCA brings many sweeping changes to the way New Jersey LLCs may function, to the duties, rights, and responsibilities of their members and managers, and to the enforceability of their operating agreements.  If you’re considering forming an LLC or other type of business, or if you need help drafting enforceable contracts or resolving a contract dispute, the New Jersey business law attorneys of The Jayson Law Group LLC can help.

To arrange for a confidential legal consultation, call our law offices at (908) 258-0621, or contact us online today.