New Florida Limited Liability Company Act

In 1982, Florida became the second state in the Union to authorize the formation of limited liability companies ("LLCs"). But because of both federal and Florida tax policies and the perceived complexities of the organizational requirements and documents for LLCs, they never became exceedingly popular in Florida. Due to changes in the federal tax law in 1996, which made it easier to elect the kind of tax treatment desired for business organizations, and the changes to Florida’s corporate income tax laws in 1998 (eliminating the corporate tax for LLCs), Florida has witnessed a surge in the formation of LLCs. It soon became apparent to lawyers and businessmen alike that Florida’s LLC law was outdated and that sweeping changes were in order. The revisions to the Act are meant to modernize Florida’s limited liability statutes and make them more attractive to businesses that have been looking elsewhere to form their LLCs. The Act contains many of the same provisions found in the Uniform Limited Liability Company Act and in the model LLC laws of states such as Delaware and Virginia.

The filing fees and other Department of State administrative fees have been reduced significantly. For example, the filing fee upon formation was reduced from $250 to $100 and the recurring annual report fee was reduced from $100 to $50. Also, because of the elimination of the requirement to file an affidavit stating the anticipated capital contributions, there is no longer a $250 fee for filing a supplemental affidavit when those contribution amounts change. The new law simplifies the filing of the articles of organization substantially by eliminating many of the former mandatory provisions and clarifying that an authorized representative may file on behalf of a member identified in the operating agreement of the LLC. (Note that the more common term "operating agreement" now applies in the Act rather than the former term of "regulations"). This will allow the articles to be filed immediately by corporate service companies without a member’s signature. This change, as well as the elimination of the need to include the names and addresses of the initial managers and the amount of anticipated capital, should appeal to clients with confidentiality concerns. It will now also be easier to make significant organizational changes in the operating agreement alone (without amending the articles).

With the advent of the simplified "check-the-box" rules for electing income tax treatment, the Act offers more flexibility on issues like the percentage of member consents required for dissolving the LLC, continuing the business upon a dissolution event, adding new members or allowing an assignee of a member’s interest to become a member. Voting by members is based on percentage interest in the LLC’s profits and normally a majority in interest is required. The Act still requires unanimous consent for certain major decisions such as allowing assignees to become members or dissolution, but makes it clear that these vote requirements can be changed by the operating agreement. Action can also be taken by written consent of members holding at least a majority in interest, as long as they provide notice to the other members who have not voted within ten days.

The new law clarifies that members can be absolutely prevented from assigning their member interests and changes the presumption under prior law that a member could withdraw at any time and receive a return of that member’s capital. It also clarifies a member’s right to receive information from the LLC and review its records, including at times after the member has withdrawn, while also providing that managers may withhold information if in their reasonable discretion it constitutes a trade secret or the disclosure could damage the company or its business.

The Act follows the example set by the uniform LLC and partnership laws by imposing upon managers and managing members the minimal fiduciary duties of loyalty and care, and the requirement of discharging their duties consistent with the obligations of good faith and fair dealing. These duties cannot be eliminated or substantially mitigated by the operating agreement. However, the operating agreement may identify specific activities and standards of performance that would not violate the duty of loyalty if not "manifestly unreasonable." The Act also adds a conflict of interest section modeled after the Florida corporate law. In general, the fiduciary standards for managers and managing members under the Act are much more elaborate than under prior law. By comparison, the Delaware LLC statute does not contain provisions pertaining to fiduciary standards of conduct.

The new statute provides that any member or manager that relies in good faith on the LLC’s articles of organization or operating agreement is not liable to the LLC or its members, while allowing this exculpatory language to be expanded or restricted by the operating agreement. Another part of the statute also protects managers and managing members from personal liability regarding claims pertaining to the exercise of their management authority except for more egregious conduct (criminal or reckless acts, deriving improper personal benefits, voting for unlawful distributions and the like). The Act now also specifically allows derivative lawsuits similar to those that a shareholder in a corporation could bring for improper acts of management, and unlike the old law, the Act provides that indemnification of managers, officers, employees and other agents of the LLC is elective and in theory could be eliminated by the operating agreement. The new law does not allow indemnification for specific situations pertaining to violations of criminal law, deriving improper personal benefits, willful misconduct and the like.

In addition, unless the operating agreement states otherwise, all distributions, as well as profits and losses, are to be allocated among members according to the agreed value of their contributions, less the amount of contributions returned to them.

One of the benefits of an LLC over a corporation is the tremendous latitude provided in the drafting of the operating agreement and the flexibility afforded on fundamental issues such as members’ contribution obligations, members’ distribution rights, member and management voting powers, profit and loss allocations, governance structure and the like. The Act goes further than former law in protecting the "freedom of contract" principle that underlies LLCs generally, by allowing almost all of the "automatic" provisions of the Act to be overridden or modified by the operating agreement. On the other hand, the new law does contain certain "non-waivable provisions," such as the prohibitions on unreasonably restricting the right of a member’s access to information or records, changing the winding-up requirement upon dissolution of the LLC, restricting the rights of persons other than managers or members (such as vendors and other third parties dealing with LLC), and as noted above, eliminating the minimal fiduciary duties owed by a manager.

The new law contains detailed standards and rules relating to when certain members or managers are entitled to bind the LLC, which generally follow traditional principal-agent laws and concepts. It also makes clear that members or managers of an LLC have the authority to delegate their rights and powers to agents of the LLC, including boards of managers or directors, officers, employees and other persons. There is no longer a suggestion in the law that the managers, officers or other delegates need to be appointed annually or from the manager group.

One of the troublesome areas of the former law was the rules pertaining to the ability of creditors to recover distributions from members for up to six years after the distribution and the hodge-podge of wrongful distribution rules that applied. The new law states that a member will be required to return the distribution to the LLC and its creditors for a period of three years if a distribution was wrongfully made. The test for wrongful distributions is greatly simplified, now providing that it is wrongful only if all of the liabilities of the LLC exceed the value of the LLC’s assets at the time of distribution. The test for whether managers may be liable for improper distributions is a little different, following more closely the bankruptcy definition of insolvency, but the manager’s liability exposure is limited to two years after the distribution.

The dissolution provisions of the new law have been greatly simplified allowing the entity to continue perpetually, except as set forth in the articles of organization or operating agreement. Also, since a single-member LLC is now allowed in Florida (actually since 1998), the new law makes it clear that upon the death of an individual member or termination of an artificial entity acting as a single member, the LLC may be continued by the personal representative or other legal representative of the last remaining member, or by assigning the right to continue to a designee of that representative (such as someone purchasing the LLC business from the representative). The new law also contains conversion procedures, allowing other entities (including partnerships and LLC’s created outside of Florida) to become a Florida LLC. This could become an attractive alternative to the cross-entities merger statute passed in 1998 because of the lack of a recorded deed requirement (and payment of documentary stamp tax) for converting entities holding real estate.

The new law also contains a statutory provision consistent with the Department of Revenue’s 1998 public announcement that LLCs would be treated for Florida income tax purposes the same as they are treated for federal income tax purposes. Generally speaking, a multi-member LLC will be treated as a partnership and a single-member LLC will be "disregarded" as a separate entity for tax purposes in the same manner as it is disregarded for federal income tax purposes. This effectively exempts the LLC from the Florida corporate income tax unless the LLC elects to be taxed as an "association" (i.e., a corporation). While the Florida Bar LLC Act Revision Committee had also proposed a bill eliminating the intangibles tax on member interests in LLCs, this bill did not make it beyond committee during the 1999 session. Therefore, a member’s LLC interest will continue to be treated the same as stock in a corporation for Florida intangibles tax purposes.