Among the many changes 2017 will likely bring for businesses are sweeping amendments to the Illinois Limited Liability Company Act that take effect on July 1, 2017. Earlier this year, Governor Rauner signed into law significant amendments to the Act as to how, among other things, Illinois LLCs are formed, operate, and are ultimately dissolved. We would encourage you to speak to an attorney regarding the effect of the amendments and otherwise how to improve your operating agreement – the written agreement among the members that governs the LLC’s affairs – to take advantage of the changes in the Act.
While the 112-page law provides for numerous amendments to the Act, the following amendments should be of particular interest to businesses that currently operate, or are considering operating, as an Illinois LLC.
- Default to Member Management: There is a new default rule for member-management of an LLC. The Act will now expressly provide that an LLC is member-managed unless the operating agreement specifically provides for manager-management.
- Agency of Members and Managers: As for the authority of LLC members, the amendments change existing law by expressly stating that a member is not an agent of the LLC “solely by reason of being a member.” Existing language provides that members are agents of the LLC. Ordinary agency law would nevertheless still apply as to the authority of a member to act on behalf of the LLC, but a third party can no longer rely solely on an individual’s membership when determining whether his or her acts bind the LLC.
- Unwritten Operating Agreements: The definition of an operating agreement is expressly expanded to include any agreement “whether or not referred to as an operating agreement and whether, oral, in a record, implied or in any combination thereof, of all the members of a limited liability company, including a sole member.” A “record” can include information that is “sorted in an electronic or other medium.” Additionally, the amendments expressly except an operating agreement from the writing requirements provided in Illinois’ statute of frauds.
- Statement of Authority Filing: The amendments create a new document for an Illinois LLC entitled a “Statement of Authority.” This document (which is not required) would be filed with the Secretary of State and set forth the authority or limitations on authority of any member or manager of the LLC to transfer LLC real estate or otherwise enter into transactions on behalf of the LLC. If it relates to real estate, the Statement of Authority can be recorded in the county in which the real estate is located. By recording, the LLC creates constructive notice as to who has authority to act on behalf of the LLC and protects buyers that rely in good faith on the recorded Statement, protecting the LLC should a deed be executed by an unauthorized member or manager not named in the Statement. For businesses that are concerned that certain members may contract improperly on behalf of their LLC, it would make sense to prepare and record a Statement of Authority excluding those members.
- Statement of Denial Filing: Similarly, the amendments also create a “Statement of Denial” whereby a member or manager listed in a Statement of Authority can deny the grant of authority or limitation made on the member’s or manager’s authority. The rules for filing and recording (and protections for those third parties that rely on them) are generally the same as with the Statement of Authority.
- Eliminating Fiduciary Duties: An operating agreement can now through “clear and unambiguous” language “restrict or eliminate a fiduciary duty” for members and “identify specific types or categories of activities that do not violate any fiduciary duty.” This is a worthwhile protection for claims that could arise in disputes among an LLC’s members. The restriction on a member’s fiduciary duty, however, does not apply to a member’s duty to a member-managed LLC and its members to not engage in grossly negligent or reckless conduct, intentional misconduct, or knowing violations of the law. Given this change in the law, members of Illinois LLC’s should consider including such an express disclaimer in their operating agreements as a protection from liability.
- Transferee Information Rights: When an interest in an LLC is transferred, the transferee acquires the economic rights associated with the interest (referred to as a “distributional interest” in the Act) but no membership rights unless admitted as a member under the terms of the operating agreement. Given this economic interest, the amendments grant holders of such distributional interests the right to inspect the LLC’s financial statements and tax returns for the past three years, along with certain other LLC records.
- Eliminating Buyout of Dissociated Member’s Interest: The amendments strike from the Act the requirement that the LLC purchase a member’s interest in the LLC following the member’s dissociation from the LLC. A well-drafted operating agreement would nevertheless create a mechanism for a buy-out of a member’s interests upon dissociation, including timing and valuation of the interests, and not rely on the default rules of the Act. If your operating agreement does not address these points, you should consider including these terms in the agreement and contact an attorney to review the options.
- Creditor Remedies Against Member’s Interests: The amendments clarify the procedure whereby a creditor with a judgment against an LLC member can apply to a court for an order charging the member’s interest to cause all distributions be paid to the creditor. This would occur where an individual has a judgment entered against him or her and the creditor that holds the judgment seeks to charge the LLC interest in order to help satisfy the judgment. A creditor could also seek to force a judicial sale of the LLC interest toward the satisfaction of the judgment. These more explicit procedures are a powerful mechanism for creditors to attach a judgment debtor’s interest in an LLC.
- Statement of Termination Filing: Upon the dissolution of an LLC, the members have a duty to wind down the LLC’s affairs. The amendments now call for a Statement Termination to be filed with the Secretary of State once an LLC has completed the wind down. The Statement of Termination replaces the current Articles of Dissolution.
The recent changes to the Act, which take effect on July 1, 2017, create an opportunity for Illinois business owners to improve the terms of their operating agreements and how they otherwise manage their affairs. Contact your attorney to determine how these changes might affect your LLC, as laws are complex and every situation different.