Washington’s New LLC Act: Members and Managers Beware

Substantial amendments to Washington’s existing Limited Liability Company Act, Chapter 25.15 RCW (the “Act”), became effective on January 1, 2016.  These amendments create new default rules that make it more important than ever for a multi-member Washington LLC to have a clear operating agreement, in writing, that addresses how the LLC will be managed and when and to what extent the Act’s new default rules will govern the LLC.  We strongly encourage all existing LLCs in Washington to consider updating their operating agreements, which may be inconsistent with the new Act or may not address these new default rules.

Significant changes to the Act include:

  • Oral Operating Agreements Are Allowed.  Under the former Act, an LLC could choose to alter how the default rules for limited liability companies would apply to the LLC in a written agreement commonly known as an operating agreement.  Under the new Act, operating agreements can now be made verbally, or be implied from the conduct of members and managers; the only exception is that a written agreement would be required to eliminate members’ dissenters’ rights to a merger.  For LLCs with written operating agreements, this new rule may allow for those operating agreements to be modified by verbal agreement or by conduct that is inconsistent with the written agreement, which could lead to unintended results, leading to unintended consequences unless there is protective language in the operating agreement.
  • New Default Rule:  One Vote Per Member.  Unless an LLC’s operating agreement provides for a different manner of voting, each member of an LLC will now have one vote on matters requiring member approval.  This new default rule may come as a surprise to members who expect that voting will be in proportion to their equity ownership, and may have the effect of giving minority owners greater control over LLC decisions requiring member approval.  LLC members should consider whether it is appropriate to establish a different manner of voting in an operating agreement.
  • Fiduciary Duties of Managers and Managing Members.  The new Act includes a new section which specifies that managers and managing members owe fiduciary duties of care and loyalty to the LLC.  In some cases, an operating agreement can modify, expand, restrict, or eliminate these fiduciary duties.  LLC managers and managing-members should become familiar with these standards of conduct and consider whether those standards should be modified in light of the LLC’s business.
  • LLCs Are Now Required to Maintain and Provide Members with Access to a More Expansive List of Records.  The new Act imposes a new default rule that greatly expands the list of records required to be maintained by an LLC and available for member inspection, such as accounting records.  The Act also creates a defined procedure by which members of an LLC can request to inspect those records, and by which an LLC must respond to that request.  An operating agreement can modify that procedure so long as it does not “unreasonably” restrict a member’s right to the records or information.

PDF of Newsletter.

Should you have any questions about how the new Act may affect your business, please contact Pamela Grinter, Erin Letey or Rachel Schaefer.