Governor Bentley recently approved the Alabama Limited Liability Company Law of 2014. This law, which went into effect at the start of 2015, greatly affects Alabama business owners operating under an LLC. Currently the act only applies to LLCs created after January 1, 2015. On January 1, 2017 though, all existing LLCs will become bound to the new law. The law redefines how we create, operate, and understand LLCs. We’ve highlighted a few noteworthy parts of the law below.
Operating agreements are a fundamental part of LLCs. Under the new legislation, operating agreements are no longer required to be in writing. We advise our readers to be wary of any oral or implied agreements made. This section of the law was implemented to give the LLC owner more flexibility. We recommend LLC owners continue to use written agreements where possible. Oral agreements don’t hold up well in court, as they are difficult to prove. This change in legislation is sure to bring about an increase in LLC litigation.
Another significant change under the law pertains to LLC management structures. LLCs can be member-managed, manager-managed, or managed by a combination of officers. Under the new act, if the LLC operating agreement does not specify a manager, it is assumed the LLC is member-managed. This aspect of the legislation is meant to protect the LLC operators and limit fiduciary responsibilities.
Something else to consider when writing an operating agreement is your plan for dissolution. Every business ever created has dissolved or will dissolve eventually. Please take this into consideration, particularly for those of you who co-own a company. If you co-own a business with your spouse, I implore you to create a plan for dissolution; economic conflicts can inflict lasting strains on a marriage. You don’t want to deal with the heartache or the stress of dissolving a business in court.
It is clear a well-written operating agreement is essential to a successful LLC. We advise you have an attorney look any existing operating agreements. You want to be sure your agreement is compliant with the new law and written in the interest of your company.
Another way one might protect his or her company is through the utilization of series LLCs. Under the new law, Alabama business owners are now permitted to create said series LLCs. In a series LLC, assets of the LLC are distributed into various “cells”. The contents of each cell are owned and operated separately. This creates a distinction between the different parts of the LLC, which protects the owner should one of the cells be litigated. The cells enter into contracts separately and serve as completely unique entities.
LLCs are created largely to protect business owners from being held personally liable for their business’s debts. LLCs work great most of the time, but they are extremely complicated. If you don’t understand the laws put forth, you run the risk of a creditor “piercing the corporate veil”. Piercing the corporate veil refers to when courts are able to hold an LLC owner personally liable for their company’s debt. If you wish to avoid this scenario, it’s imperative you follow the instructions of the law correctly.
At the start of the New Year, the new LLC act will go into full effect. If you would like to learn more about how the law will affect your business, please contact the Reid Law Firm today. We would love to take a look at your business and answer any questions you might have. Maybe a series LLC is right for you. The Reid Law firm is experienced in LLCs and S-corps formation, as well as many other facets of business law. If you'd like to schedule a time to talk, please contact the Reid Law Firm today at (334) 319-8225! Chris Reid can be reached online with this form. All communication to the Reid Law Firm is protected by attorney-client privilege, so any information submitted will be held in confidence. Initial consultations are always free. For a complete list of our practice areas please visit our home page.
Our firm practices the following areas of law: wills, trust, and estates, divorce and family, DUI and drug offenses (only first and second-time offenses), and car accident cases. We also handle business law, including formation of business entities and drafting contracts. Additionally, I co-host Yellowhammer News every Monday during lunch from 11-12 on 101.1 FM Birmingham (but our show is broadcast throughout most of the state).