Members of any New Jersey company that operates as a LLC need to fully understand the 2012 Revised LLC Act. This New Jersey LLC law applies to all LLCs, whenever formed. The Act improved and filled gaps in prior New Jersey law. Likewise, the Revised LLC Act updated existing law that had become outdated.

At its passage, the Act was largely viewed as a modern regulatory scheme for the creation and operation of LLCs. That said, its complexity could be a trap for the unwary.

Permissible form of operating agreement

Prior law defined an operating agreement among members as one that is in writing. The Act allows for an operating agreement to be proven even if it is oral or implied. What matters is the way the LLC actually operates. In practice where there is a dispute between members, this could be detrimental where no written agreement is in place and where one member claims the existence of an oral or implied agreement. A claim of an oral or implied agreement could possibly cause protracted and expensive litigation.

Disassociation of a member

Provisions of the Revised LLC Act eliminated a major pitfall concerning LLCs. Resigning owners are no longer entitled to receive the fair value of their LLC interest upon resignation. Rather, when a member resigns, he or she becomes disassociated as a member but retains rights of an economic interest holder.

Management Authority

The Revised LLC Act, by default, will provide each member with equal rights in management. Any difference arising among the members as to matters in the ordinary course of business may be decided by majority of the members. However, the Revised LLC Act differentiates between ordinary course and outside the ordinary course. As such, acts that are outside the ordinary course can only be undertaken with the consent of all members.

Remedies for deadlock and oppression

The Revised LLC Act extends many of the traditional remedies available at common law or pursuant to statute, to LLCs. It allows a member to seek a court order dissolving the company on the grounds that the managers or those members in control of the company have acted in manner that is oppressive and was, is, or will be directly harmful to the member. It also permits a less drastic form to resolve deadlock in the form of an appointed custodian.

Distributions

Members are to receive distributions on a per capita basis unless otherwise agreed upon. This is another reason to put your agreement in writing. This highlights the importance of drafting a written operating agreement for any business to avoid prolonged and expensive litigation in the event of member discord.

Our corporate and commercial litigation practice groups are available to counsel your business in these areas, whether it be to help you adopt a written operating agreement or to provide counsel with respect to any inter-member disputes or litigation. Please contact me for more information about the New Jersey LLC Law.