In 2015, the Washington State Legislature made significant revisions to the Washington Limited Liability Company Act (the “Revised LLC Act”). The Revised LLC Act became effective on January 1, 2016, for all limited liability companies (“LLCs”) formed after that date. Beginning on July 1, 2016, the Revised LLC Act will govern all LLCs, including those formed before January 1, 2016. The Revised LLC Act can be found in RCW Chapter 25.15.
The Revised LLC Act contains several significant revisions, including the following:
Oral Agreements. Under the Revised Act, LLC agreements can be oral or implied, in addition to written. This may be helpful if a company begins operating with some unwritten understanding between its owners. However, unwritten agreements often lead to misunderstandings, disputes, and costly legal expenses. New, multi-member LLCs almost always should adopt a written LLC agreement before beginning to operate.
Voting. It is very important that all LLC members understand the new voting provisions of the Revised Act. The new default rule is that voting is based on how many members (not percentage ownership) vote in favor of an action. Therefore, if an LLC has five members and three members vote in favor of an action requiring member approval, the action will be approved even if the three members held less than 50% of the LLC’s percentage ownership. If an LLC’s members want voting to be based on percentage ownership (which is the most common approach) rather than per member, the LLC agreement must specifically provide for that.
Fiduciary Duties. In the past, LLC members and managers often were confused about the extent to which a manager owes fiduciary duties to the LLC. The Revised LLC Act clarifies this situation by describing a manager’s duties of loyalty and care. These duties may be expanded, eliminated or modified only to the extent allowed by the Revised LLC Act.
Liability for Improper Distributions. In Washington, an LLC member who receives a distribution from an insolvent LLC will be liable to the LLC for the amount of the distribution. The Revised LLC Act extends this liability to managers or members (in a member-managed LLC) if they consent to a distribution that either violates the LLC agreement or the Revised LLC Act’s solvency requirement.
Board of Managers. The Revised LLC Act allows a manager to be “a person, or a board, committee or other group of persons.” LLCs now may have a board of managers that, as a group, will constitute a single manager. No individual manager on the board will have the authority, simply by virtue of the manager’s position on the board, to act on behalf of the LLC. As with corporations, each individual manager on a board will owe fiduciary duties to the LLC and its members.
Certain Default Provisions May Not Be Changed. While the Revised LLC Act allows LLC members to adopt LLC agreement provisions that are different than some of the Act’s default provisions, the Act contains a section that describes the default provisions that may not be changed. For example, an LLC agreement may not (a) eliminate or limit the duties or the liabilities of a member or a manager to act in accordance with the duty of good faith and fair dealing or to make improper distributions in contravention of the Revised LLC Act or the LLC agreement; (b) indemnify a member or a manager for intentional misconduct, a knowing violation of law, or an improper distribution in contravention of the Revised LLC Act or the LLC agreement; and (c) vary the requirements pertaining to company distributions covered under the Revised LLC Act.
The Revised LLC Act also contains other significant and technical changes that are not summarized above.
Members and managers of Washington LLCs should carefully review their LLC agreements and understand the impact of the Revised LLC Act. In some situations, there may be little or no impact; but in other situations, the impact may be severe and contrary to the intentions of the members.
Bob Muraski is a business attorney based in Bellingham, Washington.