The Illinois Limited Liability Company Act (“Act”), 805 ILCS 180/1-1, was substantially amended this year. The changes went into effect on July 1, 2017 and can have a significant impact on the formation and operation of Illinois limited liability companies. Although there are many revisions, here are some that may have the most impact.
Domestication of a Foreign LLC.
Prior to the new Act, if a foreign LLC (one originally filed in state other than Illinois) wished to do business in Illinois or convert its LLC to Illinois, it had to file in Illinois as a foreign LLC or go through a lengthy and detailed merger process (beyond the scope of this blog). Now, the Act provides the procedures for domestication. Foreign LLCs can domesticate in Illinois by filing the necessary forms with the Secretary of State. 805 ILCS 180/37-31.
Conversion of an LLC.
The Act expands the ability of an LLC to convert to a different entity and vice versa. In order to convert, the converting entity must satisfy certain criteria, including that the laws currently applicable to the organization allow such a conversation. 805 ILCS 180/37-10.
Oral Operating Agreements are Recognized.
Previously, oral operating agreements were not explicitly recognized by the Act. Although the best practice is still to have a written operating agreement, the Act now sees oral operating agreements as effective and enforceable. 805 ILCS 180/1-46. Additionally, the amendments expressly except an operating agreement from the writing requirements provided in Illinois’ statute of frauds. Operating Agreements can also be electronically signed. 805 ILCS 180/1-6. This will ultimately speed up the execution process for members and make it more efficient especially if members are in different states or even different countries.
Enforcement of the Operating Agreement.
The Act automatically binds an LLC to the operating agreement executed by its members’ regardless of whether the LLC assented to the operating agreement or not. The Act assumes that any individual who becomes a member of an LLC accepts and assumes the current operating agreement. There is no requirement that new members execute the operating agreement or any exhibit thereto 805 ILCS 180/15-5.
Agency of Members.
Previously, each member was an agent of the LLC for purposes of the company’s business. Now, third parties cannot rely on a member’s authority just because they are a member of the LLC. LLCs can also dictate the authority of its members with a “Statement of Authority” or “Statement of Denial” which are detailed below. 805 ILCS 180/13-5. This will effectively allow LLCs to manager who has the authority to act on behalf of the LLC and limit any unwanted and unintentional liabilities.
Statement of Authority.
The Act creates a new document entitled a “Statement of Authority.” Although not required by the Act, a Statement of Authority can be filed with the Illinois Secretary of State, detailing the authority or limitations on authority of any member or manager of the LLC to enter into transactions on behalf of the LLC. If it relates to real estate, the Statement of Authority can be recorded in the county in which the real estate is located. By recording, the LLC creates constructive notice as to who has authority to act on behalf of the LLC and protects buyers that rely in good faith on the recorded Statement, protecting the LLC should a deed be executed by an unauthorized member or manager not named in the Statement of Authority. It creates a streamlined procedure such that businesses that purchase and sell real estate could file one Statement of Authority without having to execute multiple resolutions for the title company and lender each transaction. 805 ILCS 180/13-15.
Statement of Denial.
Similarly, the Act also creates a “Statement of Denial” whereby a member or manager listed in a Statement of Authority can deny the grant of authority or limitation made on the member’s or manager’s authority. The rules for filing and recording are similar to the Statement of Authority. 805 ILCS 180/13-20.
Unless the Operating Agreement Specifies Otherwise, LLCs are Member-Managed.
Both member-managed and manager-managed LLCs are still recognized, but unless the operating agreement expressly provides that an LLC is manager-managed, or that the management of the company is vested in its managers, the default is to treat the LLC as member-managed. If LLCs intend to have its managers manager the company and they do not expressly state this in the operating agreement, the LLC can inadvertently provide its members with more authority than intended. 805 ILCS 180/15-1.
Except for the Duty of Care, Fiduciary Duties can be Eliminated and Altered.
The operating agreement may now eliminate or reduce a member’s fiduciary duties. Previously, the LLC Act did not allow the operating agreement to eliminate or reduce a member’s fiduciary duties. The operating agreement may not, however, eliminate or reduce the obligation of good faith and fair dealing and it may not restrict or eliminate the duty of care. The elimination of any other fiduciary duties must be clear and unambiguous within the operating agreement. The operating agreement may identify specific types or categories of activities that do not violate any fiduciary duty and may specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified after full disclosure of all material facts. This will allow LLCs to ensure its members and managers devote the time and attention necessary to operate the company effectively. 805 ILCS 180/15-3; 805 ILCS 180/15-5.
Creditors can Place Liens on Distributional Interests.
A charging order by a creditor now constitutes a lien on the judgment debtor’s distributional interest and requires the LLC to pay over the debtor’s distributional interest to the creditor. No other rights, however, are granted to the creditor. 805 ILCS 180/30-20.
Buyout of Member at Dissociation.
Previously, the Act required the LLC to repurchase a member’s ownership interest upon dissociation, unless the operating agreement unambiguously stated otherwise. The new Act removes this requirement completely. If the LLC decides not to purchase the member’s interest at dissociation, the member will still have economic rights to share in profits and losses of the company. The member will, however, not have any rights to the operation of the company and cannot bind the company in any manner following dissociation. 805 ILCS 180/35-55; 805 ILCS 180/35-60. Evan Sauer is a Chicago business and real estate attorney at Reda & Des Jardins, LLC a forward-thinking, technologically savvy law firm providing top-notch legal services to clients ranging from startups to large companies in a variety of industries. R&D's practice includes business, real estate, litigation, and estate planning.