by Louis T. M. Conti and Gregory M. Marks
This is the first of four articles in the Journal that will address the changes made by the Florida Revised LLC Act (revised act). This article provides background on the revised act and addresses provisions in the revised act dealing with formation and organizational matters, new definitions, the operating agreement, nonwaivable provisions, new service of process rules on LLCs, formation of an LLC, signing and filing of records, agency and authority to bind the company, membership, contributions to the LLC, distributions from the LLC, and liability for improper distributions.
Background and Effective Dates
The revised act was the last bill (SB 1300) approved by the Florida Legislature on May 3. The governor signed it into law on June 14. The revised act was drafted by the Florida Revised LLC Act Drafting Committee (drafting committee), comprised of members of the Business Law, Tax, and Real Property Probate & Trust Law sections of The Florida Bar, who worked on the revisions over a four-year period.
The revised act is a complete revision of the LLC Act, creating new F.S. Ch. 605, effective January 1, 2014 (effective date), for all LLCs formed or registered to do business in Florida on or after the effective date. Florida LLCs in existence before the effective date will continue to be subject to Ch. 608 (existing law) until January 1, 2015, when Ch. 608 is repealed and all LLCs become subject to new Ch. 605. To ease the filing and administrative burdens on the Department of State (department), all records filed on or after the effective date with the department by either a Florida or foreign LLC must comply with the filing requirements of the revised act.
The revised act is based on the Revised Uniform Limited Liability Company Act of 2006, as amended in 2011 (RULLCA), promulgated by the Uniform Law Commission (ULC). The revised act diverges from or supplements RULLCA in many significant respects, such as when the drafting committee believed that adopting the uniform language would be too abrupt a departure from existing law or conflict with department filing procedures, or the committee determined that RULLCA language was not appropriate.
The revised act is organized in the same manner as RULLCA, with the second decimal place of the Ch. 605 section number matching the article number in RULLCA, and in most cases the second, third, and fourth decimal place corresponding to the entire section number of the corresponding section of RULLCA (e.g., F.S. §605.0101 corresponds to §101 of RULLCA, and F.S. §605.0201 corresponds to §201 of RULLCA, etc.). We urge readers to review the RULLCA commentary (found on the ULC website), as well as the legislative white paper prepared by the drafting committee, which parallel the respective section references.
This article covers §§605.0101 through 605.0406 of the revised act (which correspond to articles 1 through parts of 4 of RULLCA).
The revised act, §605.0102, now includes 69 definitions (up from 26 in existing law), plus 10 additional definitions specific to appraisal rights, which are contained in §605.1061. Many of the new definitions pertain to the new uniform terminology for matters related to mergers, conversions, interest exchanges, and domestications, which will be discussed in subsequent articles.
One commonly misused definition from existing law, “managing member,” was intentionally eliminated in the revised act. Too often, parties used that term without knowing what it meant and without understanding what consequences it had on other members in a member-managed LLC. The continued use of “managing member” by LLCs in existence before the effective date is addressed in the revised act to make it clear that the term does not, in and of itself, make the LLC manager-managed. Absent other evidence of an intent to be manager-managed, the general default rule, therefore, should apply, which means the LLC is member-managed, and all members retain statutory apparent authority to bind the LLC, notwithstanding that some members may not be designated “managing members.” For LLCs formed after the effective date, the term will not be used by the department in filings or annual reports.
The definition of “member” in the revised act differs from existing law in that it does not require the member to have any economic interest in the company. This permits a member to have voting or management rights without being entitled to any distributions.
The new broadly worded definition of “transfer,” along with definitions of “transferee” and “transferable interest,” apply to any assignment, sale, gift, encumbrance, transfer by operation of law, or other transfer of a member’s interest. A transferable interest is limited to the right to receive distributions, making it consistent with “mere assignee” treatment of a transferee under existing law. There are many other provisions dealing with transferees throughout the revised act, which will need to be considered when a member’s interest is transferred. For example, §605.0107(2) clarifies that an operating agreement amendment is binding upon a transferee (even if it changes the company’s obligations to the transferee), with the limitation that the amendment cannot impose a new debt or other obligation on the transferee.
New definitions of “sign,” “signed,” and “signature” explicitly permit manual, facsimile, conformed and electronic signatures, as well as execution by tangible or electronic symbols. A new definition of “writing” includes “electronic or other intentional communication” to clarify that email is a “writing.”
The new “knowledge” and “notice” rules, based on RULLCA, impute knowledge or notice, as applicable, of certain facts or events, including certain information contained in articles of organization, statements of authority, and certain other filed records. This is significant for third parties who are dealing with persons purporting to represent an LLC and who want to ascertain management authority.
The Operating Agreement
An LLC is a “creature of contract” as well as an entity enabled and governed by statute. The “contract” in an LLC is its operating agreement, which means the law of contracts generally applies to operating agreements, but the revised act also provides specific rules governing operating agreements.
The “operating agreement” definition expands existing law by providing that in addition to written or oral agreements, an operating agreement may be in other forms, such as “implied, in a record, or in any combination thereof.” The definition of “record” is itself very broad, meaning any information that can be inscribed in a tangible medium or stored in electronic or other medium, as long as it can be retrieved in perceivable form (unless excluded by a well-drafted integration or merger provision in a written operating agreement that excludes oral, email, and other everyday communications, and those implied from a course of dealing among members).
The term “operating agreement” presupposes the existence of the entity and members, so although the revised act authorizes “pre-formation” agreements, such agreements are not operating agreements.
The definition of operating agreement should be read in conjunction with new §§605.0105, 605.0106, and 605.0107, which among other things, describe the scope, function, and limitations of the operating agreement and its effect on the company, its members, transferees, and third parties.
Section 605.0105 addresses six essential functions of the operating agreement:
1) Establishes the primacy of the operating agreement in evidencing the relationship among the limited liability company and its member(s), the rights and duties of any manager(s), and the activities and affairs of the company;
2) Recognizes the LLC statute as containing “default” rules relating to matters for which the operating agreement provides no guidance to the contrary. As in existing law, whenever the operating agreement is silent, the statute’s rules impose on the company, its member(s), and any managers, various rights and duties, and require compliance with other rules concerning the company;
3) Lists those matters that are not subject to change by the operating agreement by setting forth 17 “nonwaivable” statutory provisions (increased from six provisions in existing law), some of which are described below;
4) Lists certain provisions frequently found in operating agreements, authorizing some unconditionally, and others as long as “not manifestly unreasonable”;
5) Delineates the meaning of “not manifestly unreasonable” and the factors, timing, and information that a court must consider in determining whether a provision is manifestly unreasonable; and
6) Confirms that an operating agreement may include specific penalties or other consequences if a member fails to comply with its terms or upon certain events specified in the operating agreement.
Among the many important “nonwaivable” provisions in §605.0105(3), several merit highlighting. For example, it is not possible to waive judicial dissolution (unlike existing law), unreasonably restrict a member from bringing a direct legal action against the company, another member, or any manager, or maintaining a derivative action, or to unreasonably restrict the rights and duties of persons concerning the inspection and copying of records and other information relating to the company.
One of the most debated topics is the degree to which an operating agreement may limit the liability of a member or manager concerning a breach of fiduciary duty or the obligations of good faith and fair dealing.
The revised act provides that an operating agreement may not exonerate a person from liability for conduct involving bad faith, willful, or intentional misconduct, or a knowing violation of law. It also provides that the duties of loyalty and care may not be eliminated or altered except in compliance with specified parameters.1 These parameters are essentially consistent with existing law and require the “manifestly unreasonable” standard to be applied to any elimination or alteration of any aspect of the duty of loyalty or alteration of the duty of care. However, §605.0105(5) supplements existing law by requiring a court to decide “as a matter of law” (which takes this decision out of the hands of a jury), whether a term in an operating agreement is manifestly unreasonable. The court must make this determination by considering only those circumstances that existed when the term became part of the agreement. The court may invalidate the term only if, in light of the purposes, activities, and affairs of the company, it is readily apparent that 1) the objective of the term is unreasonable, or 2) the term is an unreasonable means to achieve the provision’s objective.
Similarly, the revised act states that the obligations of good faith and fair dealing may not be eliminated, but the operating agreement may prescribe standards for satisfying these obligations if the standards are not “manifestly unreasonable” (the determination would be made by a court in the same manner described above). Another nonwaivable rule prohibits an operating agreement from providing for indemnification of a member or manager in cases involving certain misconduct (including bad faith, willful or intentional misconduct, a knowing violation of law, or breach of fiduciary duties or the obligations of good faith and fair dealing). This provision is not in RULLCA, but the drafting committee believed it was a necessary corollary of the other nonwaivable rules dealing with misconduct and to be consistent with the indemnification provisions in existing law.
Section 605.0106 establishes the validity, enforceability, and binding nature of the operating agreement, clarifying that the operating agreement is not subject to any “statute of frauds” (other than capital contribution obligations), may be enforced by the LLC (even when not a party), does not have to be signed by a member when other conditions are met, is binding upon a manager or transferee (even when not signed or formally accepted by such a person), may be adopted by only one person, and may grant rights to a person who is not a party. It also enables the operating agreement to provide for the admission of a member or the transfer of certain member rights to a third party without execution of the operating agreement by the new member or third party, as long as any conditions in the operating agreement are satisfied. These provisions reflect common practice and case law and were added to provide certainty for legal advisers and businesses.
Section 605.0107 addresses the effect of the operating agreement on third parties, including transferees and creditors, and confirms that an operating agreement amendment may require the approval of someone who is not a party to it or the satisfaction of another condition. It also makes ineffective a provision in the articles that would be ineffective in an operating agreement (that is, not compliant with the “nonwaivable” rules) and resolves any conflict between the operating agreement and articles by requiring the members, managers, and transferees to be governed by the operating agreement provision in question, while providing that the inconsistent provision in the articles prevails as to third persons who reasonably relied upon the publicly filed articles. Other aspects of a person’s reliance upon filed records are addressed in other sections of the revised act.
Registered Agents and Service of Process
Section 605.0113(3) limits the duties of a registered agent to forwarding process, notice, or demand served upon it to the company, as well providing notice of the agent’s resignation to the company.
Service of process on an LLC2 is now compatible with new §48.062, which was also passed as part of SB 1300. Under existing law, service of process is made in the same manner as service is made on a partnership, which has caused considerable confusion because of the differences that often exist between the management structures of LLCs and partnerships. The revised act provides an ordering of the persons upon whom service will be deemed effective, starting with the registered agent. If the registered agent does not exist or cannot be served after reasonable diligence, service may be made upon the manager of a manager-managed LLC or any member of a member-managed LLC, or upon the department, but only as a last resort. Section 48.062 also specifies the circumstances when service may be made upon an employee of the registered agent, manager, or member, as applicable, or another person in charge of the LLC during regular business hours.
Formation and Filings with the Department
Consistent with existing law, the revised act requires that an LLC have at least one member for its formation.3 So-called “shelf” LLCs were considered by the drafting committee but were not adopted. The person signing the articles of organization must affirm that the company has or will have at least one member when the articles become effective (i.e., this is implicit in the new definition of “authorized representative”). The revised act requires only the name, address, and identity of the registered agent in the articles, but any other provision may be added so long as not inconsistent with the nonwaivable matters described in §605.0105(3). The articles may declare whether the LLC is “manager-managed,” which is common practice under existing law because of the triggering effect this has under the deemed notice rules in §605.0103 and management structure designation requirement in §605.0407(1), as well as in corresponding actual and apparent agency provisions. In addition, if the articles identify one or more persons who either have, or do not have, the authority to act as an agent for the company, third parties will be deemed to have notice of that information.
As under existing law, articles may be amended or restated at any time by a filing with the department, but the revised act provides more guidance as to amendment and restatement requirements and provides rules for the “signing” and delivery of records to the department.
Two sections of the revised act deal with the consequences of filing records with the department that contain inaccurate information, and emphasize the need for members and managers (as applicable) to be vigilant with respect to company filings, including annual reports (which are “records” for this purpose). Section 605.0205 permits a person who suffers a loss by reliance on the inaccurate information to recover damages not only from the person who knew it was inaccurate, but also from a member of the member-managed company or a manager of the manager-managed company, as applicable, on whose behalf the record was filed, if the member or manager (as applicable) had notice of the inaccuracy for a reasonably sufficient time before the information was relied upon and could have effected an amendment, statement of change, or correction or filed a petition with a court to effect the required modification of the inaccurate record. In a member-managed company, a member may be relieved of this potential liability if the operating agreement expressly so states and imposes the obligation to correct inaccurate filed records on one or more other members.
An LLC may correct inaccurate information in a filed record by filing a statement of correction under §605.0209. The effective date of the correction will relate back to the filing date of the record being corrected (subject to the deemed knowledge and notice rules in §605.0103(4)), except as to persons who relied on the uncorrected filed record and were adversely affected by the correction. Existing law only permits a correction to articles of organization if the correction is made within 30 days after filing.
The rules for filing annual reports in §605.0212 clarifies existing law to allow multiple annual reports to be filed in a single year, with the first filed report being the “annual report” for that year and subsequent reports being amended reports. The filing of multiple reports may become more widespread as concerns increase about the liability exposure under §605.0205 for inaccurate information. This section only applies when the inaccuracy was present at the time of filing, and not to changes occurring after filing. Likewise, updated filings may become the norm as more people consider the impact of correctly identifying managers and officers in the annual report under the apparent agency principles in the revised act.
Agency and Authority
There are four ways in §605.0301 for a person to have the power to bind an LLC: 1) as an agent of the LLC under §605.04074; 2) by grant of authority to do so under the articles or operating agreement; 3) by grant of authority pursuant to a filed statement of authority; or 4) by having the status as an agent, authority, or power under laws other than Ch. 605 (including common law).
Existing law is carried over in §605.0301 to provide “statutory apparent authority” of members in a member-managed LLC and for managers in a manager-managed LLC. Importantly, this differs from RULLCA, which eliminates statutory apparent authority in an LLC.
LLCs may now file “statements of authority” (SOA) with the department, which under §605.0302 provide record notice to third parties of a person’s power to bind the LLC or limitations on a person’s power. An LLC may file an SOA with respect to status (member or manager), or position (or office) of a person in the LLC, and may state the authority, or limitations on the authority, of all persons having such status or holding such position.
SOAs are divided into two contexts: those pertaining to real property and those pertaining to everything else. An SOA to execute an instrument transferring/affecting real property in the name of the LLC requires a second-step “recording” of a certified SOA in the real property records office to provide constructive notice.
SOAs used to authorize non-real property actions on behalf of, or otherwise act for or bind the LLC, require only the initial filing with the department, which is conclusive in favor of a person who gives value in reliance on the grant of authority, subject to exceptions, but does not provide constructive notice.4
SOAs affect only the power of a person to bind the LLC to persons who are not members, and may be amended or canceled by a filing with the department at any time. Unless earlier canceled, an effective SOA is canceled by operation of law five years after the date on which the SOA, or its most recent amendment, becomes effective. Effectively filed articles of dissolution also cancel filed SOAs in certain respects under §605.0302(8).
A certified copy of an effective SOA may be recorded in the office for recording transfers of real property, including “interests in real property” (such as mortgages, easements, leases, etc.) to provide constructive notice. When so recorded, the SOA is conclusive in favor of a person who gives value in reliance on the SOA, without knowledge to the contrary, except a) where the SOA has been canceled or restrictively amended and a certified copy of the cancellation has been recorded in the office for transfers of real property; or b) a limitation on the grant of authority is contained in another SOA that became effective after the original SOA became effective, and a certified copy of the later SOA is recorded in the office for recording transfers of real property. If a certified copy of an effective limitation on a grant of authority is recorded in the office for recording transfers of real property, all third persons are deemed to know of the limitation.
Section 605.0303 allows a person who has been granted authority in an SOA to deny the grant of authority by subsequently filing a statement of denial. An effective statement of denial operates as a restrictive amendment of the earlier filed SOA, and may also be recorded by certified copy in the office for recording transfers of real property.
The vicarious liability shield for members and managers of an LLC from the debts, liabilities, and obligations of the LLC is in §605.0304. The shield is not available for traditional direct claims against a member or manager (e.g., for personal guaranties, wrongful conduct, malpractice, etc.). The revised act now explicitly provides that failure to observe formalities in the activities and affairs of the LLC will not be a basis for imposing liability on members and managers.
Becoming a Member
Florida, like most other states, describes LLC membership admission in two stages: 1) initial membership at formation, and 2) subsequent admission after formation. The revised act §605.0401 generally follows RULLCA, except in the provision regarding initial member admission. One or more persons become a member if agreed to by the prospective member(s) and the authorized representative forming the LLC. An authorized representative is a person authorized by a prospective member of an LLC to form the company by executing and filing its articles of organization. The authorized representative can be, but need not be, a prospective member.
RULLCA uses the term “organizer” rather than “authorized representative,” but Florida decided to retain the existing law nomenclature of authorized representative for consistency. An “organizer” has a much more limited function than an authorized representative generally; however, there is no functional difference between organizer and authorized representative in the context of filing the articles of organization.
The revised act provides four ways to become a member after formation: 1) The operating agreement can provide requirements for admission; 2) the admission of members occurs as a result of a merger, interest exchange, conversion, or domestication; 3) a person becomes a member with the consent of all the members (this differs from existing law “majority-in-interest” consent to the admission, unless the prospective member is an assignee, in which case unanimous consent of the members is required); and 4) in dissolution when an LLC has no members for 90 consecutive days, a member may be admitted by consent of the transferees owning rights to a majority of the distributions.
New to Florida law, §605.0401(4) provides that a person may become a member without acquiring an economic interest, and without making or being obligated to make a contribution to the LLC. This is a departure from existing law, which defines a member as a person with an economic interest in the LLC. This significant change permits springing members, facilitates special purpose LLCs, and allows for participation in governance by members with no economic interest in the company.
Form of Contribution
Contributions are addressed in §605.0402, which differs slightly from existing law by expressly adding “contracts for services to be performed” as a form of permissible contribution.
Liability for Contributions
A member who has promised to make contributions to the LLC faces consequences if the promise is not kept. To be enforceable, a member’s promise to contribute must be in writing and signed under §605.0403. An obligation is not excused by death, disability, or other inability to perform. If the contribution obligation was for property other than money and the person fails to contribute that property, if the LLC chooses, the member must pay money equal to the value of the contribution that has not been made. In addition to any other remedies, the LLC may also require specific performance of a nonmonetary contribution obligation, if so provided in the articles, operating agreement, or applicable law.
A member may be relieved of a contribution obligation if all members consent; however, if a creditor has extended credit in reliance on the obligation, the creditor may enforce the obligation, unless there has been notice of a compromise.
As under existing law, specified penalties or consequences, including reduction or loss of one’s membership interest, may be included in the operating agreement as remedies for a member’s failure to make a promised contribution.
Distributions made by an LLC before its dissolution and winding up must be shared by its members and persons dissociated as members on the basis of the agreed value of contributions, as stated in the LLC records. Section 605.0404 generally continues existing law; however, it ignores the value of any contributions that have previously been returned. The revised act’s default rule does not follow RULLCA, which provides that distributions must be shared equally among members per capita.
A person (member, dissociated member, or transferee) does not have a default right to demand a distribution, and a member’s dissociation does not automatically trigger a right to any distribution or return of capital.
In a new provision, the distribution may not take any form other than money, and a person does not have the right to demand otherwise. The exception is that an LLC may distribute an asset in kind if each part of the asset is fungible and each person receives a percentage of the asset equal in value to the person’s share of distributions.
In another new provision, the revised act provides that if a member or transferee becomes entitled to receive a distribution, the member or transferee has the status of and is entitled to all remedies available to a creditor of the LLC with respect to that distribution.
Profits and losses must be allocated among members and persons dissociated as members on the basis of the agreed value or the contributions made by each person, as stated in the records. RULLCA does not provide a default rule for allocation of profits and losses.
Limitations on Distributions
Section 605.0405 permits distributions only when the company is solvent. “Distributions” do not include amounts constituting reasonable compensation for services. The revised act provides two disjunctive methods for determining insolvency: 1) if the LLC “would not be able to pay its debts as they become due in the ordinary course of the company’s activities and affairs”; and 2) if the
company’s total assets would be less than the sum of its total liabilities, plus the amount that would be needed if the company were to be dissolved and wound up at the time of the distribution to satisfy the preferential rights of members and transferees whose preferential rights are superior to those of persons receiving the distribution.
The company can make solvency determinations by reference to financial statements, as well as fair valuation “or other methods” that are reasonable under the circumstances. Both of these methods are addressed in RULLCA, but RULLCA does not expressly mention transferees in addressing preferential rights.
The revised act provides time frames for measuring whether various distributions meet the solvency requirements. The effect of a distribution is measured:
1) In the case of a distribution by purchase, redemption, or other acquisition of a transferable interest in the company, as of the earlier of the date on which a) money or other property is transferred or the debt is incurred by the company; and b) the person entitled to distribution no longer owns the interest or right being acquired by the company in return for the distribution;
2) In the case of a distribution of indebtedness, as of the date on which the indebtedness is distributed; and
3) In all other cases, as of the date on which a) the distribution is authorized if the payment occurs within 120 days after that date; or b) the payment is made, if the payment occurs more than 120 days after the distribution is authorized.
Another new provision clarifies that an LLC’s indebtedness is not a liability for purposes of insolvency if the terms of the indebtedness provide that payment of principal and interest is made only if a distribution could then be made under this section. If the indebtedness is issued as a distribution, however, and payments of principal and interest are required to be made only to the extent a distribution could be made under this section, then each payment of principal or interest of that indebtedness is treated as a distribution. The effect of that indebtedness treated as a distribution is measured on the date the payment is actually made. In measuring the impact of distributions made in connection with an LLC’s winding up, claims that are discharged in dissolution are ignored.
Liability for Improper Distribution
A member of a member-managed LLC or manager of a manager-managed LLC can be personally liable if they consent to an improper distribution, and, in consenting to the distribution, fail to comply with the standards of conduct in §605.04091. The personal liability is equal to the amount of the distribution that exceeds the amount which could have been properly distributed.
A member of a member-managed LLC may escape personal liability if the operating agreement expressly relieves him or her of the authority and responsibility to consent to distributions. This provision, from RULLCA, is new to existing law.
A person who receives a distribution and knows that it is in violation of §605.0405 is also personally liable, but only to the same extent that a member or manager with the authority and responsibility to consent to distribution is liable. Existing law does not impose direct liability on recipients, but rather provides for the right to seek and obtain contribution from persons who knowingly receive an improper distribution.
Once an action is commenced to determine personal liability, a person may implead another person who may be liable and seek to enforce a right of contribution from that person. The defendant in any such action may also implead a person who knowingly received an improper distribution and seek to enforce a right of contribution. An action must be commenced within the two years after the improper distribution.
Part two of this series of articles begins with §605.0407 and will cover fiduciary duties, conflict of interest transactions, records to be maintained and access to records, transfers of membership interests, charging orders, dissociation, dissolution, and winding up.
1 Fla. Stat. §605.0105(4).
2 Fla. Stat. §605.0117.
3 Fla. Stat. §605.0201.
4 If the articles, rather than an SOA, grant or restrict the authority of a person, then third parties are deemed to have constructive notice of the provision(s) in the articles under Fla. Stat. §605.0103.
Louis T. M. Conti and Gregory M. Marks served as the chair and reporter, respectively, of the drafting committee. Conti is a partner in the Tampa office of Holland & Knight, a uniform law commissioner, and a former chair of the Business Law and Tax sections of The Florida Bar. Marks is a partner in the Sarasota office of Shumaker, Loop and Kendrick, and has served on the executive council of the Tax Section of The Florida Bar. Both authors have previously served in leadership positions of previous Florida Bar business entity drafting committees.
This column is submitted on behalf of the Business Law Section, Stephen E. Nagin, chair, and Mark Nichols, editor.