Utah s New LLC Statute: 10 Things You Need to Know

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1 Utah s New LLC Statute: 10 Things You Need to Know P R E S E N T E D B Y : R U S S E L L K. S M I T H M A R K L. A S T L I N G D U R H A M J O N E S & P I N E G A R

2 Outline of Topics 1. Opting-In 2. Perpetual Existence 3. Enhancing Asset Protection 4. Management Flexibility 5. New Statutory Default Provisions 6. Modifying Fiduciary Duties 7. Protection for Creditor-Members 8. Limiting Public Disclosure 9. Oral Agreements 10. Comprehensive Provisions for Business Transactions 2

3 Opting-In Election to have the new LLC statute apply to your LLC as of January 1, 2014 Requires an affirmative statement in the LLC s Operating Agreement Recommend a careful review of provisions in your Operating Agreement dealing with amendment of the current agreement Should also file a certificate of organization to supersede any previously filed articles If an LLC has not opted-in, the new LLC statute will apply on January 1, 2016

4 Perpetual Existence Utah s old LLC statute: Limited the number of years that an LLC may exist to 99 years. See, Utah Code 48-2c-403(4)(c) and (5) Utah s new LLC statute: Default rule is that an LLC may exist for a perpetual duration. See, Utah Code 48-3a-105(3)

5 Enhancing Asset Protection Owner Judgment Creditor: Car wreck victim has a negligence claim that exceeds insurance policy by $2,000,000. LLC Operating Business $1,000,000 $ Charging order: a lien that acts like a garnishment Foreclosure : permanent economic rights in the LLC interest

6 Enhancing Asset Protection The new LLC statute increases an LLC owner s protection from judgment creditors. Foreclosure available only if judgment creditor can show that the distributions under a charging order will not pay the judgment debt within a reasonable time Limits the power of a court to orders that give effect to the charging order Limits foreclosure to a transferable interest (except single member LLCs) and limits the records that a judgment creditor is entitled to demand from the LLC

7 Enhancing Asset Protection Consider choosing a different jurisdiction for even greater asset protection. Delaware Code Ann. tit. 6, (c)(2009) provides: [t]he entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of a member s assignee may satisfy a judgment out of the judgment debtor s limited liability company interest. However, a Utah court may chose to apply Utah law with respect to enforcing a creditor s rights

8 Management Flexibility Old LLC statute is inflexible Statutory apparent authority by position Manager Managed Member Managed New LLC statute is very flexible Eliminates Statutory Apparent Authority Management structure determined in the Operating Agreement (not publicly disclosed) Statement of Authority

9 New Statutory Default Rules The new LLC statute contains certain default rules that, unless otherwise altered by an operating agreement, will apply to a Utah LLC: Member voting (one member one vote) No default rules for allocation of profits and losses Distributions are made in equal shares Fiduciary duties may be altered or, in some cases, eliminated provided not unconscionable or against public policy

10 Modifying Fiduciary Duties Fiduciary Duties may be altered or eliminated New LLC Statute does not limit the applicable fiduciary duties ( un-cabined ). Provided that it is not unconscionable or against public policy certain fiduciary duties can be altered and others can be eliminated. Suggestion Cabin-in duties in the operating agreement

11 Protect Creditor-Members A member may become a creditor of their LLC in a number of ways: Lend money (secured or unsecured) to LLC; Provide services to LLC for remuneration; Sell goods to LLC on credit; Right to receive indemnification payments; Right to reimbursement for expenses paid by member on behalf of LLC; or Lease real or personal property to LLC.

12 Protect Creditor-Members Old LLC statute penalizes creditor members Creditor-Members are subordinated behind other creditors in liquidation New LLC statute protects creditor members Creditor-Members are on par with other creditors in liquidation.

13 Limiting Public Disclosure Old LLC statute required disclosure in the Articles of names and addresses of: All members in a member-managed LLC All managers in a manager-managed LLC New LLC statute Does not require disclosure in Certificate Statement of Authority Statement delivered to the Division of Corporations and Commercial Code Provides for authority or acts as a limit on authority by position and/or person

14 Creditor-Members New Statute does not subordinate creditor-members in liquidation. Loan: $50K Member LLC Assets:$40K Bank Loan: $50K Old LLC Statute: Bank receives: $40K Member receives: $0 New LLC Statute: Bank receives: $20,000 Member receives: $20,000

15 Oral Agreements The new LLC statute defines operating agreements very broadly: [An] agreement, whether or not referred to as an operating agreement and whether oral, implied, in a record, or in any combination thereof, of all the members of a limited liability company. Utah Code 48-3a-102(16) Recommendations: Have a written operating agreement Use an Integration Clause Require that amendments to the Operating Agreement be in writing

16 Business Transactions The new LLC statute contains comprehensive provisions for: Mergers Interest Exchanges Conversions Domestications

17 Questions? 17

18 This presentation and the material contained herein are provided as general information and should not be construed as legal advice on any specific matter or as creating an attorney-client relationship. Before relying on general legal information or deciding on legal action, request a consultation or information from a Durham Jones & Pinegar attorney on specific legal needs 18