New and Improved: Alabama's Limited Liability Company Law of 2014, 0115 ALBJ, 76 The Alabama Lawyer 30 (2015)
| Author | Jack West, J. |
| Position | Vol. 76 1 Pg. 30 |
Jack West, J.
Introduction
Effective January 1, 2015, Alabama will have a new law governing limited liability companies. Designed to clarify, improve and augment the existing law, the Alabama Limited Liability Company Law of 2014 (the "2014 Law") will replace the current law with Chapter 5 A of the Business and Nonprofit Entities Code and make corresponding amendments to the "hub" provisions in Chapter 1 of Title 10A.1 As Alabama's LLC law has not been significantly updated since 1997, the 2014 Law, drafted by the Alabama Law Institute (ALI), makes material changes, and practitioners will find a more comprehensive and navigable statute. Alabama will now have some of the most developed laws governing LLCs in the country.
The ALI's prefatory Reporters Note identifies seven noteworthy features of the act, including an emphasis on the contractual nature of limited liability companies, the change to a notice-filing system for documents filed with the secretary of state, an express covenant of good faith and fair dealing and the addition of series provisions. Though the 2014 law gives parties to a limited liability company agreement increased flexibility to govern the entity through contract, default provisions supply clearer rules governing members and the entity in the event of unthoughtful drafting.
This article charts the most significant changes made by the 2014 law and highlights its advantages-provisions that existing LLCs may wish to opt into in 2015. Embracing the terminology of the 2014 law, this article refers to an LLCs "certificate of organization" (formerly articles of organization) and its "limited liability company agreement" (formerly operating agreement). The shift in terms resolves some discrepancies between the hub and spokes of the current code and aligns Alabama nomenclature with that of Delaware and other states.
Modification to The General Provisions Governing LLCs
While the new act is significantly longer than the present law, its expansion makes the rules for forming and operating LLCs clearer, rather than imposing additional requirements. The revised law contains more defined terms that clarify the statutory framework and eliminate prior discrepancies. The additional terms supplant conflicting definitions contained in the hub with regard to LLCs.2 The act also clarifies issues such as formation and amendment.
The ALI's focus on freedom of contract principles has resulted in a decreased number of statutory requirements.3 For example, less information is required in a certificate of formation, articles of dissolution are now optional and a simplified statute allows for greater flexibility to ensure and indemnify members and managers. Under the new law's relaxed requirements concerning the execution of documents, signatures of members generally are not needed. Any writing to be filed under the chapter may be signed by an agent, including an attorney-in-fact, and powers of attorney do not need to be delivered to the filing officer.4
The 2014 law explicitly allows the use of LLCs for non-profit purposes;5 the comment warns, though, that in such instances "careful attention to drafting of the limited liability company agreement will be required to meet the tax requirements of the various taxing authorities."6 This grant of nonprofit status, when coupled with the new provisions discussed below, allows planners to design a single entity with separate profit and nonprofit components.
Formation and Notice Filing
Before the new law was enacted, some Alabama-based businesses formed in other states due to more favorable LLC laws. Businesses that form elsewhere must subsequently qualify to do business in Alabama, deal with the administrative hoop-jumping of multiple filings, maintain good standing in each state, potentially file tax returns in each state and understand multiple sets of state laws. The update of Alabama's LLC law positions the state to attract domestic entity formations that would otherwise be syphoned off by states with more developed statutes.
The revised act smoothes the formation process by giving more certainty to the effects of filings and greater flexibility in the timing and adoption of an LLC agreement. Present law requires a company's certificate of formation to contain substantive governing provisions such as a process for admitting additional members, the election of a manager-managed structure and the entity's period of duration. The LLC agreement and the certificate of formation currently constitute a company's governing documents.
By contrast, the 2014 law does not require an LLC's certificate of formation to contain any substantive statements. Rather, the filing of a certificate of formation functions only as notice of the mandatory facts contained in the certificate-company name, address of registered office, name of registered agent, a statement that the company has at least one member and an optional statement that the company may have one or more series of assets. Thus, the LLC agreement becomes the entity's sole governing document, and all statements previously required to originate in a certificate of formation should now appear in the LLC agreement.
Though the new law permits a certificate of formation to include any other information the members decide to publish, the insertion of additional statements, such as a purpose statement, creates a risk of conflict between the certificate and the LLC agreement and generally should be avoided.8 Surplus information in the certificate does not override any provision in the LLC agreement governing members and transferees and does not modify the LLC agreement's scope, function, and limitations.9
Unlike current law, the new statute mandates that every LLC have an LLC agreement, whether "written, oral or implied," but the law prescribes flexible timing for the adoption of the agreement.10 Members may enter into the LLC agreement at any time, whether before, after or contemporaneously with the filing of the certificate of formation, and the agreement maybe made effective as of any date provided in the agreement.11
Expanded Purpose Language and No Statutory Right to Bind
Two noteworthy features of the 2014 law include its more expansive "purpose" language and its express rejection of any statutory right to bind the entity. To provide rules for LLCs that are not strictly set up to "do business," the new law contains broader language designed to envelop alternative LLC applications. As the ALI's introductory comment explains, the new law speaks in terms of an LLC's "activities and affairs" rather than strictly its business purposes.12 This remodeling acknowledges the common practices of using LLCs as vehicles for estate planning or asset protection.
Rather than retain the convoluted agency provisions detailing situations in which the acts of members or managers do or do not lawfully bind a company, the new act jettisons those provisions in favor of a company-designated agent scheme. According to the new law, "[a]gency powers can arise under the terms of the limited liability company agreement, by consents of the members... or under the law of agency"13 This simplified agency regime reflects the drafters' intent to allow contracting members to set up an adaptable "governance structure" rather than a traditional member- or manager-managed framework14 The 2014 law does nothing to interfere with an existing entity's member- or manager-managed election, yet generates opportunities for creative control arrangements. As the comment suggests, various governing authorities within one entity may be created, each having its own limited powers in particular areas. Taken together with the new series provisions, members, managers, agents and assets can be freely combined and compartmentalized within a single entity.
Series
The most dramatic change made by the new law is the addition of provisions throughout the act, and specifically new Article 11, allowing for the formation of series LLCs. Though series LLCs have been in existence in other states for nearly two decades, formation data reveals that organizers in states offering the form have been hesitant to embrace series LLCs.1...
To continue reading
Request your trial