GSB Vol. 16, NO. 1, Pg. 20. The Georgia LLC Act Comes of Age.

• Author: by L. Andrew Immerman and Lee Lyman

Georgia Bar Journal

Volume 16.

GSB Vol. 16, NO. 1, Pg. 20.

The Georgia LLC Act Comes of Age

GSB JournalVol. 16, NO. 1August 2010The Georgia LLC Act Comes of Ageby L. Andrew Immerman and Lee LymanThe Georgia LLC Act (the Act) has been a runaway success. A series of amendments to the Act in 2009 should ensure that its popularity continues and even increases. Although the amendments cover a wide array of disparate points, an overall theme emerges: that of accommodating the use of the LLC -limited liability company -in situations where corporations used to be the entity of choice, without sacrificing the LLC's distinctive nature and flexibility.

The first Georgia limited liability company was formed in 1994, under legislation passed the previous year.(fn1) The original Act was amended sporadically over the years. But in view of the explosive growth of LLC law and in the use of Georgia LLCs,(fn2) the Partnership and LLC Committee of the State Bar of Georgia's Business Law Section undertook a comprehensive review of the Act beginning in 2007. The consensus of the Committee was that the Act had held up well and that major revisions were not essential. Although the Committee's final legislative proposals were lengthy, they were hardly radical. The package of proposals was endorsed by the State Bar of Georgia, introduced into the Georgia Legislature as H.B. 308, and ultimately enacted effective July 1, 2009 (the 2009 Amendments).(fn3)

The 2009 Amendments continue the longstanding "policy of this state with respect to limited liability companies to give maximum effect to the principle of freedom of contract and to the enforceability of operating agreements."(fn4) From the beginning, the guiding principle of the Act has been respect for the agreement of the parties. The flexibility granted to the members by the Act helps account for the Act's continuing vitality. The parties can put almost anything they want into Georgia operating agreements and rarely need to worry about exceeding the statute's generous grant of flexibility. Accordingly, the Act is intended mostly as a series of default rules, which the parties are free to vary by agreement, although on many points a departure from the LLC default rules requires a written, and not merely oral, agreement.(fn5)

LLCs Are Not Corporations

In one sense, the growth of the LLC was too rapid. Many businesses-often on the sound advice of tax professionals-adopted LLCs in place of corporations, but without appreciating the significance of the switch.(fn6 )Unfortunately, in the move from corporations to LLCs, corporate law practitioners and businesspeople too often assume that an LLC is just a corporation that happens to have different initials at the end of its name. If an LLC and a corporation are essentially synonyms, little more is required in adapting to the LLC world than a mechanical substitution of other synonymous terms: "member" or "unitholder" for shareholder; "units" or "membership interests" for stock; "managers" or "governors" for directors; "company" for corporation; and so on.

Despite some similarities to corporations, Georgia LLCs are not constrained by the traditional apparatus of corporate law. There is nothing in the LLC world that is comparable to corporate shares of stock, shareholders, directors or officers - although the LLC operating agreement, as a contract, may employ those terms and may assign some meaning to them. The 2009 Amendments are to a large extent an attempt to clarify the similarities and differences between LLCs and corporations.

Using an LLC Instead of a Corporation

Despite the clear differences between LLCs and corporations, in certain instances it is appropriate for the structure and operations of an LLC to be similar to those of a corporation. Certain of the 2009 Amendments were designed to reflect that correspondence, as we discuss below.(fn7)

Limited Liability

It is fundamental to LLC law that LLC members should have protection against unlimited personal liability that is at least as strong as the protection enjoyed by corporate shareholders. Two of the 2009 Amendments are designed to protect that fundamental principle.

The 2009 Amendments clarify that, unless otherwise agreed in writing, members, agents, employees and managers of an LLC are not at risk of unlimited personal liability to other members or to assignees of interests merely by virtue of their status as members, agents, employees and managers.(fn8 )This protection should have already been abundantly clear, but an out-of-state court decision might have raised needless doubts about it. In Ederer v, Gursky,(fn9) New York's highest court held that a partner in a New York LLP bears unlimited personal liability to the other partners in the LLP, without regard to personal fault, and apparently without regard to the type of claim that the other partners may be making. If the members of the LLC want to waive liability protection, they may do so,(fn10 )but unlimited personal liability of the members to each other should be the exception and not the rule.

Ederer concerned LLPs rather than LLCs, and, we believe, would have come out differently had the entity been an LLC. Nevertheless, Ederer was so troubling that it was important to leave no room for doubt that the rule in Ederer is inapplicable to Georgia LLCs. Because the 2009 Amendments concerned only Georgia LLCs, those amendments make no attempt to modify Georgia's LLP provisions.(fn11) As Ederer itself pointed out, however, the partners may vary their responsibilities to one another and the partnership through agreement. Georgia LLPs may want to examine their partnership agreements to see whether there is any possibility that the liability of partners to each other might be greater than intended.

Another one of the 2009 Amendments helps protect members and managers against personal liability on distributions that do not violate Georgia law. This is a subtle but important issue. Section 14-ll-407(a) prohibits distributions that render the LLC unable to pay its debts, or that reduce assets below liabilities. The personal liability of a member or manager who wrongfully consents to such a prohibited distribution is not...