On September 1, 2021, Arkansas will become one of 20 states to enact the Uniform Limited Liability Company Act (“ULLCA”) and, in doing so, will repeal the current Small Business Entity Pass-Through Act (the “Old Act”). Replacing the Old Act with the ULLCA is generally intended to clarify longstanding formation and documentation concerns while also resolving some of the ambiguities present in the Old Act. Companies formed prior to September 1, 2021, may elect to be governed by the ULLCA. This article will serve as a general overview to highlight some of the more prominent and practical changes within the ULLCA.
FORMATION: Under the ULLCA, the document filed with the Secretary of State will now be called the “Certificate of Organization” rather than the “Articles of Organization.” The information required for filing will only consist of the name of the LLC, the address of the LLC’s principal office, and the name and address of the LLC’s registered agent. The designation of member-managed or manager-managed shall now be made in the Operating Agreement rather than the Articles of Organization. If no designation is made, the default shall be member-managed. Additionally, the LLC will now be legally formed upon the acceptance of the Certificate of Organization by the Secretary of State. In contrast, under the Old Act, an entity would be formed upon the delivery to the Secretary of State’s office, resulting in an entity potentially being formed without conforming to the statutory requirements.
OPERATING AGREEMENT: Another significant shift is that a written operating agreement is no longer required under the ULLCA. An LLC may be governed by an oral operating agreement or other informal arrangements. While it is certainly still advisable to have a written operating agreement, if there is no written agreement or if the agreement does not adequately address an issue, the default provisions of the ULLCA shall govern the LLC.
STANDARDS OF CONDUCT: Members (if member-managed) and managers (if manager-managed) now have clear fiduciary duties of loyalty and care, as well as the contractual obligation of good faith and fair dealing. The duty of loyalty requires the members or managers to refrain from acting adverse to or competing with the company. The duty of care requires members or managers to refrain from grossly negligent or reckless conduct, willful or intentional misconduct, or knowing violation of the law. Regardless of whether the entity is member-managed or manager-managed, only the members may ratify or authorize conduct that would otherwise violate the duty of loyalty. The ULLCA provides these minimum standards of conduct that cannot be waived, provided some modifications are permitted.
MEMBER REMOVAL: Under the Old Act, the only remedy for removing a member was to dissolve the company. The ULLCA allows for the removal of a member upon the vote of all other members if: (i) it is unlawful to carry on the LLC business with the person as a member (for example, if a member is disbarred or loses the license necessary to participate in the business); (ii) the member no longer owns an interest in the LLC; or (iii) a member of the LLC that is an entity that has dissolved. Further, the ULLCA permits the LLC or any member of the LLC to petition the court for removal of a member for wrongful conduct, material breach of the operating agreement, or if the member has engaged in conduct that makes it impracticable to carry on the activities and affairs of the LLC.
CHARGING ORDER: The ULLCA also provides new language that grants further guidance to the process of obtaining a charging order and creditors’ rights under the provision. This new section allows for charging orders against the transferable interest of members and covers others who own such an interest. In certain circumstances, a court can foreclose on a member’s interest in an LLC to satisfy a judgment creditor.
While this is not intended to be an expansive or exhaustive list of all changes taking place on September 1, it is clear the ULLCA will bring conformity and resolve ambiguities that the Old Act simply did not address.