Embracing change is tough, because it rarely hugs you back. But the recent changes to the Washington State LLC Act (RCW Chapter 25.15) at least have some provisions that are affectionate toward family businesses and LLCs in general.
Introduced to Washington in 1994, LLCs have gained in popularity every year. More and more family businesses are either choosing that designation upon establishment of the business or converting their current corporate status to the LLC for some of the many benefits it offers. In 2014 there were 37,994 new LLCs formed in Washington, compared to 7,384 new business corporations. The revisions expand the aesthetic of the law, allowing LLCs to take on traits that adhere to a more traditional corporate model, while retaining the core benefits of the LLC structure.
“The primary goal was to make the LLC more flexible and user-friendly by eliminating or modifying provisions that create unnecessary pitfalls for business people forming and operating LLCs, as well as update the language of the LLC Act,” said Brian Todd, a co-chair of the Partnership and LLC Law Committee of the Business Law Section of the WSBA and a partner at Davis Wright Tremaine LLP.
Benefits of New LLC Rules For Family Businesses
Boards as Managers.
Boards will now be specifically allowed to serve as managers of Washington LLCs. Prior to the change, LLCs were “manager-managed” and had manager meetings, but not a board. With a board of directors, family members who may not otherwise participate in the overall operations of the company can bring valuable skills and insight into the direction and policy of the company.
“Members of an LLC who desire to use a board structure will need to include in their LLC agreement provisions to designate its board as a manager and to name or provide a procedure to elect board members,” Todd pointed out. “Members should also consider setting forth in their LLC agreement rules for matters such as qualifications of board members, terms of directors, vacancies on the board, notices of board meetings, quorum requirements, voting of board members, and resolution of conflicts of interest.”
Clarity on Fiduciary Duties.
The law does not distinguish between fiduciary duties applicable to a family owned business and fiduciary duties applicable to any other business. However, under the new rules, duties of loyalty and care are now described, as well as the components of each.
One Member – One vote
Votes may be calculated as a single vote system, but LLC agreements may revise the voting structure. Currently, the LLC’s “default rule” requires the vote or consent of members contributing more than 50% of the agreed value or required to be made by all members. The revised default rule simply requires a majority of the members, voting on a per capita basis, for members to approve an action.
Members Requesting LLC Records
Subpoena of LLC records is still strictly enforced, but now an LLC cannot restrict a member’s reasonable and stated request to access records or information. However, the LLC may restrict how the information will be used.
Rights of Family Member or Board Member to Dissent
With written agreement, LLC members may choose to limit or eliminate their right to dissent from an LLC’s merger, in turn demanding payment for the fair market value of their interest in the LLC.
Family Business LLCs
In a more general sense there are other provisions that all LLC business owners need to know that in some cases may not be optimal for the family business environment, particularly when family matters enter the board room.
For example, LLC operating agreements will no longer be defined only as “written agreements,” but specific terms of an LLC agreement may be oral or implied, like a partnership agreement. Certainly, LLCs should not forego written agreements or rely on the members’ oral agreement related to any aspect of the LLC’s governance. Any material dispute over an oral agreement will likely need to be settled in litigation, and any such dispute will pit the word of the members against one another. As a matter of “best practices,” LLC agreements should provide that they can be amended only by a written amendment.
The LLC’s Certificate of Formation will now incorporate general principles of agency law to determine whether the LLC is manager-managed or member-managed. For reasons of clarity and transparency, these terms should continue to be specified both in the Certificate of Formation and in the LLC agreement among board members
Practitioners and others should note that the amended act designates fifteen provisions as “non-waivable.” This means that the individual LLC agreement will relinquish control of these provisions to the Washington LLC Act with an exception for when the Act is either silent or the Agreement complies with the provisions.
Though the revisions were made law in July 2015, LLCs — newly formed or otherwise — won’t be affected by these rules until 2016. Family businesses that embrace these changes may find that the added opportunity for the participation of family members in the board process can help preserve the business model and promote consensus among family members regarding the direction of the company.