How Could Existing LLCs Be Affected By New LLC Act?

Note: All articles on Utah’s New LLC Act are in the process of being updated to conform to the changes made before it was enacted in 2014. Please check back to see the revised articles.

As of October 26, 2011, there were 135,987 Utah LLCs in existence.  All of them will be affected greatly by enactment of SB 131 and the New LLC Act.

To begin with, SB 131 repealed all of the Existing LLC Act as of July 1, 2012, without replacing several key provisions.  More importantly, SB 131 left all existing Utah LLCs (those formed before July 1, 2012) without any LLC enabling statute for 18 months–until January 1, 2014.  If not timely corrected, that error in SB 131 will cause all existing Utah LLCs (especially those with no operating agreement or a deficient operating agreement) to have no statutory default rules to back them up.  That could be a real mess!

That error could be corrected by keeping the Existing LLC Act in effect for existing LLCs until January 1, 2014.  Existing LLCs may elect to become subject to the New LLC Act prior to that date.

Even if that error is corrected timely, existing Utah LLCs will still be impacted in many ways, such as:

1.  There are numerous provisions of the Existing LLC Act that were not replaced by the New LLC Act.  Since those deleted provisions constitute default rules for existing Utah LLCs, those LLCs will have to function without those statutory default rules after July 1, 2012.  For LLCs having operating agreements that do not treat the issues covered by those deleted default rules, either they will need to add appropriate provisions to their operating agreements by July 1, 2012 to cover the issues treated by those default rules, or they will need to ‘get by’ without any rules on those issues — either statutory or contractual.

The repealed provisions that were not replaced by any functional provision in the New LLC Act include:

  • deadlock remedies for judicial dissolution
  • definition of profit and loss and how profits and losses are allocated
  • distinctions between distributions of profits and return of capital
  • detailed indemnification protocols
  • capital account definition and related provisions
  • disclosure in annual reports of changes in management people or their addresses
  • definition of fair market value of an LLC member interest
  • duty of member to return distributions made by mistake

In addition, for the many repealed provisions that were replaced with other provisions — most of the replacement provisions changed the substance of the repealed rule in that process.

2.  Since the operating agreement is now an LLC’s supreme document, the operating agreement for each existing LLC will need detailed review to identify which provisions should be added, changed or clarified to properly and accurately override the New LLC Act (where desired) and to embody an accurate description of the members’ current collective agreement. [see “How Could Drafting Decisions Be Affected By New LLC Act?“]

For example, if the members do not want any oral or implied provisions to be deemed part of the LLC’s operating agreement, an affirmative statement to that effect would be in order.  Similarly, if the per capita rule for voting and for distributions is not desired, express provisions of other rules for voting and for allocating distributions must be included in the operating agreement.

3.  LLC record-keeping is more important than ever–there is an expanded need for records to include a current and accurate list of members and the percentage interest of each in profits, losses, capital, interim distributions and liquidating distributions.

4. Existing LLCs may want to consider avoiding the New LLC Act altogether. That could be done either prior to July 1, 2012 or up to January 1, 2014, depending on strategy and circumstances. There are several ways to avoid the New LLC Act–by actions such as:

  • incorporating as a Utah corporation and then, if desired, electing to be taxed under Subchapter S of the Internal Revenue Code; or
  • converting to another entity, such as an LLP or a limited partnership, and thereby becoming subject to that other entity’s statute; or
  • forming a new LLC under a friendlier LLC statute and then merging into that new entity; or
  • merging with another type of existing entity that has a more favorable set of rules under its statute; or
  • dissolving and transferring all assets into a new LLC formed under a friendlier LLC statute; or
  • some combination of the above.

If a Utah LLC shifts out of Utah in one of the above ways but, in its new form, still needs to continue its business in Utah, that new entity could file with the Division as a foreign entity and thereby qualify to do business in Utah.