How to approach a Section 5 election
Forms can help LLCs decide whether to be covered by the new LLC before 2014
Attorney John Cunningham, of counsel to the Manchester-based law firm of McLane, Graf, Raulerson & Middleton, is author of "John Cunningham on New Hampshire's New LLC Act," available at cunninghamonnhllcs.com
As many readers will know, New Hampshire LLCs formed on or after Jan. 1 were mandatorily covered by New Hampshire’s new LLC act. However, those formed before Jan. 1, will not be covered by the new act until Jan. 1, 2014, unless all of their members make a written election (called a “Section 5 election”) to obtain this coverage.
A Section 5 election can be made at any time during 2013. Section 5 elections do not need to be filed with the New Hampshire Secretary of State in order to be valid.
I’ve drafted forms for use by all of the three broad types of New Hampshire LLCs that may want to make Section 5 elections — namely:
• Single-member LLCs whose members are individuals
• Single-member LLCs whose members are entities
• Multi-member LLCs
Obviously, LLC members shouldn’t use any of these forms unless they first consult with their lawyers. However, if you are a New Hampshire LLC member, I think you will find the forms to be useful starting points for you and your lawyer in navigating the Section 5 election process. (You can find all three forms by visiting cunninghamonnhllcs.com and clicking on Link 11 on the website. You’ll notice that my forms call for notarization; this is to forestall any claims of backdating. However, the new act does not require notarization.)
Look before you leap
The basic question, of course, is not what form you should use for a Section 5 election, but whether you should make the election at all. I’ve addressed this issue in previous articles and in my book on the new act, but here is a quick summary of my thinking about it:
1. The new act contains many provisions that are better for most LLCs than those of the current New Hampshire LLC act. For example, it contains much stronger asset protection provisions and, for many LLCs, much better fiduciary provisions than the current act.
2. The New Act does contain many default provisions that, at least for some New Hampshire LLCs, may be unsuitable. For example, the New Act contains a default rule that not only written LLC operating agreements, but also verbal and implied agreements are legally valid.
This rule is likely to be useful for many smaller New Hampshire multi-member LLCs that lack written operating agreements. However, for larger LLCs that have these agreements (and also for some smaller LLCs), the rule may result in bitter internal disputes among the members as to the rules that govern them.
3. If your LLC is willing to pay an LLC lawyer, you should hire one to review the new act to identify any potentially unsuitable provisions in it and to override these provisions in written operating agreements. In other words, look before you leap.
4. For many New Hampshire LLCs, the risks of incurring harm by reason of a Section 5 election is small; the potential benefits are significant; and even modest legal fees may be unaffordable. Thus, despite the potential risks, these LLCs should consider “leaping before they look.”
Attorney John Cunningham, of counsel to the Manchester-based law firm of McLane, Graf, Raulerson & Middleton, is author of "John Cunningham on New Hampshire's New LLC Act," available at www.cunninghamonnhllcs.com