In my last post, I began writing about the Florida Revised Limited Liability Act (“the Act”) because it is an important piece of new legislation in Florida. It is important because more limited liability companies are created annually in Florida than any other type of businesses. As of this writing, the Florida Department of State Division of Corporations reports that there are 706,223 active registered limited liability companies in the state and in 2012 169,450 new LLCs were registered. By comparison, there were 104,490 for-profit corporations registered. The reason LLCs are so popular is because they are easy to create, easy to manage and easy to operate. The fact that the Florida law that governs limited liability companies was recently entirely revised is, therefore, important. It will affect all LLCs created as of January 1, 2014 and, effective January 1, 2015, ALL LLCs operating in Florida.
It is daunting to endeavor to write an informative blog about a statute that is so complex and comprehensive. As an example, the Act contains 69 defined terms, which is 43 more then the existing LLC statute. I could write a blog entry for each defined term per day and take two months to do it. I prefer to attempt to cover some of the important elements of the new statute and hopefully communicate useful information for those thinking about using a limited liability company for their business venture and those already using one.
The first thing to remember is that the Florida Revised Limited Liability Act (“the Act”) is a default statute. This means that unless the members of a limited liability company specifically provide how their LLC is to be structured, managed, and operated by way of an operating agreement, the statute provides the default rules. Yes, you can create an LLC and not write an operating agreement (or have an attorney like myself write it). The Act will be there to tell you what you can and can not do and what happens when . . .
But if you do invest the time or money to draft an operating agreement to establish the contractual terms under which you want your LLC to operate, then the operating agreement will supersede the statute and will be the controlling document. If, in any respect, the operating agreement is silent on a particular issue, then the statute is there as a backup to provide the rules that apply.
This is not a new concept. The existing LLC Act has provided the same default backstop. However, under the Act, there are now a lot more rules on what an operating agreement can not do. Under the existing LLC act, there were six. Now the Act provides seventeen provisions that the operating agreement can not eliminate or waive. These are referred to among attorneys as the “non-waivable” provisions. They are listed at Florida Statutes Section 605.0105(3). Instead of providing the laundry list of these 17 non-waivable conditions, I will just list a few that I find most note worthy:
- the operating agreement may not exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct or a knowing violation;
- the operating agreement may not provide for the indemnification of a member or manager for the conduct involving bad faith, willful or intentional misconduct or a knowing violation;
- the operating agreement may not completely eliminate the duty of loyalty or the duty of care that a member or a manager has, but it may put parameters on these duties so long as they are not manifestly unreasonable.
I list these rules because they affect the concept of personal liability protection. Perhaps the most common reason people choose to use an LLC for their business is that they believe an LLC provides liability protection. The name itself – Limited Liability Company – suggests that using this type of entity will protect you personally. The protection, however, is not absolute. The protection could be lost if a member or manager acts inappropriately. What is inappropriate? The Act provides the standards in Section 605.04091. This section gives us more clear definitions of the duties of loyalty and care that members and managers have to the LLC, to each other and to third parties who may be dealing with the LLC.
To the lay person or, more specifically, the person that wants to set up an LLC for their business because they think using an LLC will protect them from personal liability, these provisions will surely seem complex and legalistic and, indeed, they are. The take away point, however, is that an LLC can provide personal liability protection, but that protection is not absolute. The members of a Florida LLC (really any LLC) should try to understand what responsibilities they have towards each other and to third persons otherwise they may be at risk of acting in a way that makes them personally liable for their actions.