Articles

New Law Could Force Structural Changes on Some Florida LLCs by Richard A. Berkowitz


Posted on August 28, 2013 by Richard Berkowitz

Investors doing business as Florida limited liability companies, or LLCs, need to understand a new state law altering LLC rules and regulations.

 

On June 14, 2013, Florida Gov. Rick Scott signed into law a bill that creates new rules for limited liability companies, applicable to new LLCs formed on or after Jan. 1, 2014, and to all LLCs starting Jan. 1, 2015.

 

Operating agreements that govern LLCs supersede certain requirements of the Florida LLC law. Like similar laws in other states, the LLC law in Florida is known as a “default statute” because it provides standard rules for LLC governance unless the company’s operating agreement overrides them.

 

But in its new incarnation, the state law will have a larger number of mandatory requirements for running LLCs that cannot be waived through an LLC operating agreement.

 

The new law expands from six to sixteen the number of LLC requirements in the statute that will be immune to variation through an LLC operating agreement.

 

This is one reason why the law could force changes in the way some Florida LLCs operate. Law firm Akerman Senterfitt issued an online advisory May 22 calling the new LLC law “a complete re-write” of the ground rules for running a Florida limited liability company.

 

A note to clients issued May 22 by law firm Baker Hostetler cited several examples of how the new law could lead to changes in LLC operating agreements. For example, an effort to alter the right of an LLC member to approve a merger would be unenforceable under the new law, even if members of a limited liability company authorized such action in the company’s operating agreement.

 

Baker Hostetler reported that other unenforceable clauses in LLC operating agreements include those that shield an individual from personal legal liability, alter the ability of a member to terminate his or her membership in an LLC, or change the capacity of an LLC to sue or be sued.

 

The new Florida LLC law could have a widespread impact across the state, forcing many limited liability companies to amend their operating agreements to ensure their terms remain legally enforceable.

 

Their tax benefits and flexible operating structures have made LLCs the business entity of choice for many investors.  The limited liability company is the most popular type of business entity in Florida based on the number of annual new LLC filings. They increased to 169,450 last year from 152,275 the year before and 138,287 in 2010, according to the Florida Department of State.

 

Among active Florida business entities statewide, the most common type is the domestic for-profit corporation. There were 759,931 of them as of March 13, according to the Department of State. The comparable number of LLCs was 706,223, making them the second-most common type of active business entity, well ahead of other types, including limited partnerships and general partnerships.

 

The new Florida LLC law could put this popular form of organizing a business in even greater demand. Among other business-friendly features, the new law will allow a non-U.S. company to operate as a domestic LLC while retaining its status as a foreign entity. “This should promote foreign investment in Florida,” law firm Bilzin Sumberg reported in client alert on its website.

 

Bilzin Sumberg also said in its client alert that the new law allows for two types of managerial structures for LLCs, which can be managed by their members or by one or more managers. Bilzin Sumberg reported that the new state law eliminated a provision in the old law allowing for “a somewhat unique third category of management, the ‘managing member,’ which has caused a great deal of confusion over the years.”

The new state law “should make the use of a Florida LLC more attractive for business owners considering the use of an LLC,” Louis T. M. Conti, a partner in the Tampa office of law firm Holland & Knight, wrote in a recent report on the LLC legislation.

Conti said in a May 21 report on the Holland & Knight website that the new state law modernizes the regulation of Florida limited liability companies by incorporating elements of a model LLC law that other states have embraced.

For example, the new law adopts the language of the model law in clarifying the duty of care that LLC members must exercise in making business judgments. Under the new law, LLC members will have a “duty to refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or knowing violation of the law,” Conti reported.

But he also warned: “Businesses that are currently LLCs operating in Florida should consult with counsel to determine whether changes to their operating agreements should be made in light of the new LLC act.”

Entrepreneurs and business executives who need assistance navigating the new rules of LLC laws can contact our business consulting practice.

 

 

About the Author: Richard A. Berkowitz JD CPA is CEO of Berkowitz Pollack Brant and leads the firm’s Business Advisory practice. For more information, call (305) 379-7000 or contact info@bpbcpa.com.