On January 1, 2016, the new rules governing Washington State Limited Liability Companies (RCW 25.15; “the Act”) went into effect. The Washington legislature’s passed a major revision to the Act in an attempt to make LLC’s more flexible and user-friendly for businesses. The primary goal was to eliminate confusing portions of the Act and promote uniformity in the laws that apply to the state’s business entities. At Holmquist & Gardiner PLLC, we highly recommend that you learn these changes and revisit your operating agreement, as they may affect your LLC. Although there were numerous changes – a few highlights are discussed below.
Non-waivable provisions (RCW 25.15.018). One of the main attraction to creating an LLC’s is the flexibility provided to the businesses. Normally, the operation of the LLC is memorialized in an operating agreement which controls where the Act is silent or is inconsistent with the Act. The new rules modifies this prior flexibility in designating fifteen (15) provisions as non-waivable, meaning that the Act and not the individual LLC operating agreement will control regardless. Click here to see the full text of RCW 25.15.018.
Oral LLC Agreements can now be Valid: Under the prior rules, the definition of an LLC company agreement required the document to be in writing. The new rules will no longer be limited to only “written agreements.” An LLC operating agreement or specific terms of an LLC operating agreement may be oral or implied. The allowance of oral or implied agreements can create inadvertent complications. While the legislature’s goal was to allow small LLC business to run more efficiently, the new rules could create more complications and litigated disputes relating to individual member’s recollection of the oral LLC agreement. With these revisions to the Act, a written agreement now becomes even more important. The terms governing the LLC can be laid out and signed by all so that each member has a clear understanding of their respective roles and the overall operation of the LLC. If necessary, the written agreement will provide clarity in the event of a dispute between the members. Otherwise, with an oral agreement, any dispute on the terms of the agreement will likely end up in a complicated game of “he-said, she said” requiring court involvement.
More Records Available to Members: Another goal of the legislature was to ensure transparency of LLC operations. With that goal in mind, the amendments expanded LLC members’ rights to inspect and copy LLC records. Similar to the rules that apply to corporations, LLC members will have a right to inspect and copy a wider category of records than under the existing law. However, there are limitations placed on such requests contained in the Act. To request records: (1) the member must have a valid purpose for requesting the records, (2) the member must make a proper demand, and (3) the records must be directly connected to the member’s purpose. If these three things occur, the LLC is given 10 days to respond to the member’s request. An LLC is free to place reasonable restrictions on the access of records in the operating agreement, but they cannot “unreasonably restrict” any member’s right to copy and inspect records.
One Member = One Vote: A drastic change in the Act is found in the default voting scheme of members. Previously, the voting defaulted to votes based on equity ownership (unless otherwise set forth in a written LLC agreement). The legislature felt that this default provision created confusion and uncertainty and amended the default to a “per capita” vote (i.e. one vote per head). With this new provision, it is imperative that a written LLC agreement clearly sets forth how voting is conducted. Otherwise, a business can end up in a situation where a minority owner has the same voting power as the majority owner.
Manager-managed specification in Certificate of Formation. Under the new rules, the LLC’s certificate of formation will no longer be required to specify if the LLC is manager-managed. This was previously required and led to many questions and confusion as to how the LLC was managed (manager-managed v. member-managed). The hope is that this will resolve the numerous discrepancies found in LLC certificates of formation and annual reports. It will also create more flexibility because an LLC will be able to change its management type without requirement of filing with the Washington Secretary of State. To avoid any confusion, we recommend that these terms remain specified in both in the certificate of formation and in your LLC operating agreement.
Fiduciary Obligations: Fiduciary obligations for LLC members are now included in the new rules, including duties of loyalty and care. The Act previously did not explicitly contain a provision for fiduciary obligations which required the courts to recognized fiduciary obligations of LLC members similar to those of a partner in a partnership. Taking this out of the hands of the court, the new rules codify fiduciary duties under RCW 25.15.038.
Board as a Manager: The previous provisions of the Act gave the LLC the power to place the management of the LLC into the hands of one or more “Managers,” however, it did not expressly allow for a corporate approach of allowing a traditional board of directors (committee or other group of persons) to manage the company. Importantly, if a board will serve as manager of an LLC, the LLC operating agreement should be revisited and revised to account for how elections are run, the required qualifications of board members, clearly identifying conflicts of interest, the terms of the board, how vacancies are treated, a quorum requirement for conducting business, and voting powers of Board members. The Act does not set forth default rules for these matters; they should be contained in the LLC operating agreement if this is a management style that your LLC is interested in pursuing.
Are there more Changes?
Yes – this article is not intended to cover every change being made to the Act, it only focuses on a number of noteworthy changes. Click here to access a full version of the LLC Act.
If you have any questions or concerns about what the changes to the LLC Act means for your existing LLC, please feel free to contact Holmquist & Gardiner PLLC at 206-438-9083. Given the many changes in the Act, existing Washington LLCs may want to consider modifying their LLC operating agreement to take the new law into account. Our firm works with a wide range of businesses — we are happy to discuss the details with you!