Opting in to new LLC law: should you or shouldn't you?
New Hampshire's new LLC act will become effective on Jan. 1, 2013, for LLCs formed on and after that date. But what about the roughly 50,000 New Hampshire LLCs that, on that date, will already be in existence?
The short answer is that these LLCs won't be subject to the new act until Jan. 1, 2014 — unless all of their members elect in writing to be subject to the new act in 2013.
Should your LLC make this election? I've stated my thoughts on this complicated question in considerable detail in my book on the new act, and it even contains forms for these elections. But here are my main thoughts about the question.
For most LLCs, the new act is a much better act than the old one. For example:
• The old act has no clear fiduciary provisions, and the new act has comprehensive fiduciary provisions. Thus under the new act, it is likely to be much easier for LLC members to resolve claims of member and manager misconduct than under the old act.
• The old act affords only limited protections to LLC members against claims by creditors, divorced spouses and trustees in bankruptcy seeking to levy on their membership rights. The new act provides very strong protections against these levies. This means that if you ever confront such a claim, your chance of retaining your LLC membership rights will probably be much stronger under the new act than under the old one.
• The old act provides no clear means for firing bad LLC managers. The new act lets you fire them by majority vote of the members.
• The grounds under which LLC members may expel other members under the new act are much broader than under the old act. (However, the new act also contains stringent safeguards against unfair expulsions.)
• Under the old act, members can't get distributions of LLC profits unless their operating agreement expressly says they can. Under the new act, the LLC must make these distributions upon a majority vote of the members of member-managed multi-member LLCs or of the managers of manager-managed multi-member LLCs.
When to say no
A substantial majority of existing LLCs are likely to gain important legal advantages by electing to be covered by the new act as of Jan. 1, 2013, and they are unlikely to incur any significant legal disadvantage from making this election.
However, for some existing LLCs, the election could cause serious harm — for example by imposing the relatively strict fiduciary duties of the new act on LLC founders who don't want the entrepreneurial restrictions imposed by these duties. Or by making it easier for investors in these LLCs to terminate founders' management rights or even their membership rights.
So what should you do on or before Jan. 1, 2013, if you're a member of an existing LLC?
If your financial or personal stakes in your LLC are not significant, you should probably just close your eyes, take a deep breath and elect in writing to be covered by the new act as of that date. No need to talk to a lawyer.
But if your financial or personal stakes in your LLC are significant, and if you're willing to pay a few hundred dollars in legal fees (and possibly more), you should hire a lawyer who specializes in LLC law and tax to review the existing written, oral and implied arrangements among the members of your LLC (or between you and your single-member LLC). This lawyer will then tell you whether you need to modify these arrangements in order to protect you from potential harm under the new act.
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.