Florida’s Revised LLC Act and how it Affects Both new and Existing LLCs

The Florida Revised Limited Liability Act (the “Act”), which will become Chapter 605 of the Florida Statutes, passed unanimously in both the Florida House and Senate.  The Act is effective for every new Florida LLC formed on or after July 1, 2014.  For existing LLCs, the Act becomes effective on an elective basis between July 1, 2014 and January 1, 2015 and becomes mandatory as to every Florida LLC on January 1, 2015.  The question all Florida LLC members want to know is, “How will this new Act affect me and my business?”

This blog presents a brief overview and summary of those changes written into the new Act most likely to materially affect LLCs going forward.  To begin with, the new Act is modeled primarily after the Uniform Law Commission’s 2006 Revised Uniform Limited Liability Company Act (“RULLCA”), but the new Act also preserves the most desirable provisions from Florida’s existing LLC laws currently codified in Chapter 608 of the Florida Statutes.

The most important aspect of the new Act is that, similar to Florida’s existing LLC statutes, it is a “default statute.”  This means that many provisions of the new Act only apply if the members fail to address certain important issues in the LLC’s operating agreement.  Stated another way, an LLC’s operating agreement can still override the default provisions of the new Act, except for those specifically labeled as “nonwaivable.”  The number of nonwaivable default provisions did expand under the new Act; however, the amount is still minimal.  Consequently, an LLC’s operating agreement still packs plenty of power and controls most of the rights and responsibilities of its members.

The following is a brief list of the most prominent changes made under Florida’s new LLC Act:

• Concerning member fiduciary duties, the new Act replaces the “business judgment rule” with a duty to refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or knowing violation of law.

• Florida’s existing concept of “managing member” has been eliminated.  If an LLC is managed by a “managing member,” the new Act simply considers that LLC as a member-managed LLC.

• The new Act also limits when indemnification of members and managers is allowed.

• What constitutes effective service of process on LLCs has also been changed under the new Act.

• The rules for derivative actions have been modified, effectively changing the way members can bring an action on behalf of the LLC.

• The new Act changes the rules governing member dissociation and the dissolution of the LLC.  This also includes changes to provisions governing the judicial dissolution process and the appointment of receivers.

• The new Act modifies the default voting rules for members and managers.

• The rules governing the power of members and managers to bind the LLC have been modified.  Namely, the new Act allows for the filing of “Statements of Authority” for placing the public on notice as to who has authority to bind the LLC if certain member authority is limited.

• The provisions concerning mergers and conversions of LLCs have been modified as well.

• In another notable change, Florida LLCs are now allowed to have a non-economic member, which is a member who doesn’t contribute capital or have an economic stake in the LLC.

Although the new Act includes a few other changes, these will be the changes most apparent to managers and members.  One area not modified by the new Act is the law governing charging orders.  The landmark holding in the Olmstead case, which is that a charging order is the sole and exclusive remedy of a judgment creditor seeking to levy against a member’s LLC interest, remains.  Olmstead v. F.T.C., 44 So.3d 76 (Fla. 2010).

In regards to the previously mentioned nonwaiveable provisions of the new Act, which operating agreements cannot override, the following is a brief list of such provisions:

• The liability for a member’s bad faith or willful misconduct cannot be avoided by the operating agreement.

• The power of a member to disassociate cannot be limited.

• The right of one member to bring action against another member cannot be waived by agreement.

The good news for Florida entrepreneurs and business owners is that Florida’s new LLC Act is intended to make the LLC form of company formation more attractive.  Yet a business owner must be cognizant of how Florida’s new laws will affect his or her business.  In closing, we highly recommend that all current Florida LLCs have their operating agreements reviewed in light of the changes made to Florida’s LLC laws.  A review may uncover areas where operating agreements need tweaking and revisions to prepare for the coming changes.  Such preventative actions will ensure a smooth transition and help LLCs avoid unexpected results as Florida implements the new Act in 2014.