Reflecting the Parties’ Intentions in Operating Agreements: Reminder on Silent Terms

Does your operating agreement reflect your intentions?

New Jersey’s Revised Uniform Limited Liability Company Act (the “RULLCA”) became effective on March 18, 2013. As noted in a post we authored in 2014, although initially applicable only to limited liability companies formed after its effective date, the RULLCA now governs all New Jersey limited liability companies.

Similar to other limited liability company statutes in other states, the RULLCA provides a number of default provisions that apply if the members of a limited liability company (the “LLC”) have not adopted an operating agreement for the LLC or if the operating agreement is silent on a particular issue.  As a result, the rules that apply to New Jersey LLC’s and their members may not reflect the parties’ intentions as to certain topics, even if the parties had previously entered into an operating agreement drafted to conform to the New Jersey’s original Limited Liability Company Act (the “Original LLC Act”).

By way of example, and without limitation, in the absence of a contrary provision in an operating agreement the RULLCA provides that: (1) distributions made by an LLC to its members are to be made to the members in equal shares (in lieu of proportionate distributions based on capital contributions); (2) most decisions are made by a majority in number of the members of a member-managed LLC (rather than based upon the vote of members holding a majority of the interests in the profits of the LLC); (3) an assignment of a member’s “transferable interest” in an LLC is an assignment only of the member’s right to receive distributions from the LLC (with the transferring member retaining all voting rights of member, unless such transferring member is expelled by the unanimous consent of the remaining members following the assignment of a member’s entire “transferable interest” in the LLC).

These are just some examples to highlight the importance of  reviewing with counsel your existing operating agreements, particularly if prepared prior to the adoption of the RULLCA, to confirm that the operating agreement complies with current law and overrides any default provisions of the RULLCA that are contrary to the parties’ intended business arrangement. Further, the current law provides some other possible provisions which may be desirable and which were not available under the Original Act. The same holds true for entities formed in other states. It is important to note that the default provisions of the RULLCA do, in certain cases, differ from the default provisions of limited liability company statutes in other states. For example, under the default provisions of the New York Limited Liability Company Law, distributions by an LLC are made to the members in proportion to their capital contributions, member voting is in proportion to the members’ respective interests in profits, and a member ceases to be a member or have any voting rights upon the transfer of all of his membership interest in the LLC.

Regardless of the state of formation, you should be certain that what your operating agreement says (and does not say) accurately reflects the parties’ business deal.