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.
Drafting decisions for an LLC are definitely affected by the New LLC Act–that is, for LLCs subject to the New LLC Act. Below, each primary LLC document is identified and comments on some related drafting decisions are added:
1. Pre-Formation Agreement.
This is an agreement prepared and signed by all of the would-be members before the LLC is formed. Usually the pre-formation agreement spells out in some detail most of the rules and data that will be in the LLC’s operating agreement. As a best practice, the pre-formation agreement could be expressly designated to become the operating agreement automatically upon formation of the LLC. [§48-3-111(3); see also discussion of this approach in 3. below]
2. Certificate of Organization.
This is the charter document for an LLC. The New LLC Act takes a ‘minimalist’ approach to this document–only requiring 2 items of information–the LLC name and the name and address of the LLC’s registered agent. Some of the drafting decisions regarding the certificate of organization include:
(a) Should the certificate of organization be a ‘bare-bones’ document–including only the information required by the statute but nothing else?
That depends on the objectives desired by the LLC members. If the members want secrecy, then the least possible information meets that goal. If the members want transparency, the more information the better. The bare-bones version will likely mirror the blank form for the certificate of organization that will be provided by the Division and is the type of form usually generated by most Internet self-help services.
If a copy of the certificate of organization (as filed in bare-bones version) is later furnished to a third party, there will likely follow a series of questions, such as:
- What is the LLC’s business purpose?
- Is the LLC manager-managed or member-managed?
- Who are the managers?
- Who are the members?
- Who has authority to bind the LLC?
- Are there any limits on that authority? If so, please describe them.
- Have the members approved this transaction?
The third party will want documentary proof of these matters.
(b) Should other information besides the required information be added to the certificate of organization?
Yes, in most cases. The certificate of organization may contain information and statements as to matters not required to be included. [§48-3-201(3)] Although the effect of such additions is not totally clear under the New LLC Act [compare §48-3-103(c) with last sentence of §48-3-201(3)] , any additional information in that certificate will become public information when the certificate is filed.
Additional information could be useful in giving information about the LLC to third parties, such as its business purpose (and if applicable, the single purpose of the LLC), the name and address of those with authority to bind the LLC, a description of any limits on such authority, certain bankruptcy-remote provisions, the address of the LLC’s principal office and, if different, its primary office in the State of Utah.
It may be useful to also include an affirmative statement that all information in the certificate of organization, as amended from time to time, may be relied upon by third parties. Under that approach, when a certified copy of the certificate of organization is issued at a future date, the text of that document will provide information that a proper recipient may be seeking.
For all LLC documents filed with the Division, the LLC’s control persons are under a duty to keep them current and accurate. A breach of that duty could impose personal liability for damages on anyone who signs the inaccurate document, anyone for whom another person signs such document , and the LLC’s control persons. [See §48-3-207]
3. Operating Agreement.
The operating agreement is the supreme document for an LLC under the New LLC Act. There are many drafting questions and choices regarding an LLC’s operating agreement. Some of them are discussed below:
(a) When should the operating agreement be prepared?
Early on. Best practice will now likely be to get it prepared and signed by the would-be members before the LLC’s certificate of organization is filed with the Division and then have it expressly provide that such pre-formation agreement will automatically become the LLC’s operating agreement when the LLC is formed. This approach is counter to past practice in which the articles of organization were prepared and filed and then, several weeks later, the operating agreement was finalized and signed.
Why prepare the operating agreement first? Here’s one reason: Suppose some would-be LLC members desire to form a manager-managed LLC. The New LLC Act provides that an LLC is deemed to be a member-managed LLC if not “expressly” stated otherwise in its operating agreement. [§48-3-407(1)] Suppose further that the would-be members form the LLC using a ‘bare bones’ version of certificate of organization, but no operating agreement is prepared or signed until three months later.
In the meantime, is the LLC member-managed or manager-managed? Neither the certificate of organization nor the non-existent operating agreement makes any such designation. Therefore, it appears to be a member-managed LLC until an operating agreement is signed by all members. Accordingly, does each member of the LLC have power to bind the LLC during the 3-month gap period? Probably. That unexpected result can be prevented if the operating agreement is in place at the time the LLC is formed.
(b) Should the operating agreement be detailed or short and bare-bones?
As detailed as reasonably possible. Why? Because the New LLC Act provides that the signed operating agreement reigns supreme over the certificate of organization and over the LLC law itself, except only for ‘non-waivable provisions.’ Therefore, the more comprehensive and clear the LLC’s governing rules, the better.
(c) Should the operating agreement be entirely written or should it allow oral or implied provisions to be included?
Entirely written. Although the New LLC Act permits oral or implied provisions to be part of an operating agreement, the best practice and the safest approach is to expressly prohibit, in the operating agreement, any alleged oral or implied provisions–or even various bits of paper, emails, text messages or other writings not specifically designated as an amendment to the operating agreement– from becoming part of the operating agreement. To make written operating agreements the only way to go will help prevent future disputes over what is part of the operating agreement and what is not. This writing requirement is hardly a burden in today’s world.
(d) Should the operating agreement include provisions to replace parts of the Existing LLC Act that were repealed by SB 131 and not adequately replaced by a provision in the New LLC Act?
Yes. Several repealed statutory provisions that should be expressly treated in a comprehensive operating agreement might include provisions to cover:
- express business purpose of the LLC
- declaration of management structure and events, if any, that may change such structure
- identification of all managers and all members
- authority of managers or members to bind the LLC and any limits on such authority
- types of allowable capital contributions
- deadlock remedies for judicial dissolution
- definitions for capital account, profit or loss, and fair market value of an LLC interest
- how profits and losses are allocated
- how distributions are allocated
- distinctions between distributions of profits and return of capital
- detailed indemnification protocols
- use of capital accounts for voting, for sharing of profits and losses, or other stated functions
- duty of member to return distribution received by mistake or in violation of operating agreement or in excess of statutory limits
- protocols for calling, holding and voting in member meetings, if such meetings are allowed
- declaration that there are no fiduciary duties besides the duty of loyalty and duty of care
- clear standards for duty of loyalty and duty of care
- content of statement of withdrawal to be filed when a manager resigns or a member withdraws
- which specific records are to be maintained and held for inspection by members and managers
- whether a member may loan money to the LLC without approval of other members
(e) Should the LLC’s certificate of organization be incorporated by reference into the operating agreement so that anything stated in the certificate automatically becomes part of the operating agreement?
Yes, to make the two documents unified and to give the certificate of organization more binding effect on members, managers and third parties.
(f) Should the operating agreement be drafted to override any of the other express provisions of the New LLC Act?
Definitely, if desired, and especially as to:
- the per capita rule for member approvals and for electing or removing a manager
- the per capita rule for allocating ‘interim’ distributions
- the per capita rule for allocating any part of distributions on winding up
- specifying that, to become a member, a person must make some contribution to the LLC
- whether each member in a member-managed LLC has power to bind
- early withdrawal (dissociation) of a member
- definitions and terms that are inconsistent with members’ desires
- certificates for transferable interests, except for special circumstances
- exclusive list of major transactions that require member approval and which level of approval is needed for each type of transaction
- delete requirement for prior showing to court of anticipated future distributions as payments on judgment debt before court may order foreclosure of a charging order lien
4. Statement of Authority.
This is a document to be prepared and filed with the Division and that is separate from the certificate of organization. Its purpose is to state or declare the authority of positions in the LLC that carry the power to bind the LLC, to identify any persons who hold the power to bind the LLC, and to describes the limits, if any, on such authority.
Although a statement of authority can be filed at any time, one should be routinely prepared and filed at the same time as the certificate of organization to give more certainty to third parties as to who holds the power to bind the LLC. A statement of authority can be amended at any time to reflect needed changes. In that vein, a person who no longer holds the power to bind can prepare and file a statement of denial to that effect.