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This is the first of a three-part series discussing the Utah Revised Limited Liability Company Act passed by the Utah Legislature on February 23, 2001. Part I gives an
overview of the Revised Act and describes part of the changes made by the Revised Act. Part II will appear in the August/September issue and will discuss other changes made by the Revised
Act. Part III will appear in the October issue and will discuss transition issues and tips for drafting and planning under the Revised Act.
I. Introduction
On February 23, 2001, the Utah Legislature passed Senate Bill 170 - Utah Revised Limited Liability Company Act (the "Revised Act").1 That Bill was signed into law by
Governor Leavitt on March 19, 2001. The effective date of the Revised Act is July 1, 2001. The Revised Act re-codifies, expands and updates the existing Utah Limited Liability Company Act 2 (the "Old Act"). The extent of changes made by the Revised Act reflects the extensive evolution of LLC laws in this country over the past ten years.
The purposes of this article are (1) to give a brief history of limited liability companies ("LLCs") in Utah, and (2) to summarize some of the changes made to the Old Act.
II. Background
The LLC "revolution" in the U.S. started in Wyoming in 1977. Although it just simmered for 11 years, the revolution exploded after the Internal Revenue Service issued a ruling in
1988 to treat an LLC as a partnership for federal income tax purposes.3
Utah enacted its LLC Act in 1991, making Utah one of the vanguard states to adopt LLC legislation. During the four years that followed, all states passed LLC laws, utilizing a variety of
formats and content. Each vintage and version of LLC statute brought some improvements and expanded the utility of LLCs in meeting the need for an entity with structural flexibility but
with limited liability and pass-through taxation for its owners.
Now, the LLC has become the entity of choice in Utah4 and in most states for most business or financial transactions.
The Old Act was amended a few times, including amendments to adapt to the IRS "Check-the-Box" regulations.5 Despite those amendments, most lawyers familiar with the Old Act have recognized the need for the Old Act to be reorganized and to bring it up to date with LLC statutes in other states.
In August 1995 the "Uniform Limited Liability Company Act" was proposed by the National Conference of Commissioners on Uniform State Laws ("NCCUSL").
In 1997, the Business Law Section of the Utah State Bar formed a committee to study the Uniform LLC Act for the purpose of possibly recommending its adoption in Utah. That committee
started with vigor, meeting monthly to read and discuss the Uniform LLC Act. After about 9 months of effort that continued into mid-1998, the committee stopped its work after coming to
the conclusion that, although the Uniform LLC Act contains many useful concepts and provisions, it also contains too many unworkable provisions to warrant its adoption in Utah. In coming
to that conclusion, the committee was also aware that, except for Illinois6, none
of the states with large populations or business law influence, such as Delaware, New York, California, Texas, Michigan or New Jersey, had adopted the Uniform LLC Act but had, instead, drafted their own LLC laws. Thus, it appeared that NCCUSL's quest for uniformity in LLC legislation would not be realized - at least not any time soon.
Although the committee of the Business Law Section stopped its work and disbanded, members of the committee felt that the focus should shift to updating the Old Act. A few
"stragglers" from the committee, the author included, re-directed their efforts to improving the Old Act rather than adopting the Uniform LLC Act. Accordingly, energy was
devoted over the following two years to preparing language for a new, re-codified version of the Old Act. That effort was encouraged by Senator John L. Valentine, of Provo, Utah, a member
of the Utah Bar who was the sponsor of the original Utah LLC legislation in 1991, and a highly respected member of the Utah Legislature and himself a renowned tax and business lawyer. The
drafting effort culminated in 2001 in Senate Bill 170, which added a new Chapter 2c to Title 48 of the Utah Code and repealed old Chapter 2b of Title 48.
III. Conceptual Underpinnings of Revised Act
A. Goal of Revised Act. Although several states have succumbed to boasting that their LLC acts are "the best in the country," the goal in drafting the Revised Act
was not to obtain bragging rights but to make the Revised Act as useful, flexible and comprehensive as possible.
B. Contract Model Used. The Revised Act, as well as the Old Act, were drafted under the "contract" model - namely, the statute sets up numerous "default"
rules that apply if the governing documents for the LLC (the articles of organization and the operating agreement) do not provide otherwise. The contract model allows LLC members to
contract out of the default rules by written agreement. In other words, LLC members are given maximum flexibility in crafting the LLC governing documents to their liking.
The policy statement in the Revised Act underscores the pre-eminence of contract law in the LLC arena: "It is the intent of the Legislature that this chapter be interpreted so as to
give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements of companies."7
C. Provisions of Old Act Retained. Most provisions and concepts of the Old Act are included in the Revised Act, but with a new Section number and, in most cases, in revised
form. Thus, the Revised Act is a re-codification of the Old Act.
D. Terminology and Definitions. Much of the terminology and concepts from the Old Act was preserved, with a few exceptions. The Old Act has 10 defined terms - bankruptcy,
business, division, foreign limited liability company, limited liability company, person, professional services, regulating board, state and successor limited liability company. All of
those terms, except the last one, were retained but the definitions for most of them were revised.
E. Sources for Borrowed Provisions. In drafting the Revised Act, besides preserving most provisions from the Old Act, numerous provisions were borrowed from other Utah
statutes, from LLC statutes of other states and from other sources. In particular, provisions were borrowed from the Utah Revised Business Corporation Act, the Utah Revised Uniform
Limited Partnership Act, the Utah Professional Corporation Act and the Utah Revised Nonprofit Corporation Act. Provisions were also borrowed from the Prototype Limited Liability Company
Act8 and the Uniform Limited Liability Company Act and from the LLC statutes of California, Colorado, Connecticut, Delaware, Mississippi, North Carolina, New York, Virginia and Washington.
IV. Changes Made by Revised Act
The Revised Act makes numerous significant changes to the Old Act. We will discuss many of those changes following the sequence of provisions in the Revised Act.
A. New Definitions. Thirteen new general definitions were added by the Revised Act: capital account, distribution, designated office, entity, filed with the division,
interest in the company, manager, manager-managed company, member, member-managed company, operating agreement, proceeding, and signed.
In addition to the general definitions, definitions relating to "winding up" are included in Part 13, special definitions on professions are included in Part 15 and special
definitions on indemnification are included in Part 18 of the Revised Act.
1. Nature of Business. The definition of "business" was changed slightly by the Revised Act. The law of agency generally imputes apparent authority to a manager of
an enterprise consistent with the "regular business" of the enterprise. Therefore, the scope of an LLC's "business" may determine the authority of its managers to bind
the LLC. Typically, an LLC's business is described in its Articles of Organization. The Old Act allows LLCs to engage in any "business," which is defined as "every trade,
occupation or profession," but the Old Act language, originally taken from the Uniform Partnership Act, allows an LLC to conduct or promote any "lawful purpose, activity or
business," which could include non-profit activities. Under the Revised Act, "business" includes any lawful business, investment or other activity, whether or not carried
on for profit. Thus, a non-profit activity is referred to as a "business" under the Revised Act even though the activity is not a business in the common meaning of the term.
Under the Revised Act, unless a more limited purpose is set forth in its Articles of Organization, a domestic LLC is deemed to have the purpose of engaging in any business. [Section
48-2c-105] Accordingly, if an LLC's purpose is described in its Articles of Organization as "any lawful business," then each member (in a member-managed LLC) could be an agent
of the LLC in the broadest sense.
2. Capital Accounts. Under the Old Act, the default standard for voting on significant member actions is the members' percentage interests in the profits and losses of the
LLC. But, that rule for determining a member's percentage interest is geared to the "value of the contributions made by each member to the extent they have been received by the
limited liability company and have not been returned." The same rule applies for allocation of LLC distributions to members. Yet, upon dissolution and winding up of an LLC under the
Old Act, the assets of the LLC are distributable to the members based on their "claims for capital."
Some practitioners have experienced difficulty calculating a member's "value of contributions" at a given point in time. To eliminate this difficulty, the Revised Act replaces
the concept of "value of contributions" with the partnership concept of "capital account" as the default measuring standard for profits and losses, distributions,
voting and distribution of assets on winding up.
3. Designated Office. The term "designated office" is new and means the street address in Utah where the LLC records required by the Revised Act are to be kept. The
designated office must be a geographical address - not a P. O. Box and an LLC's records must be available for inspection at its designated office. Thus, every domestic LLC must have a
designated office which, by default, would be the LLC's registered office if a separate address for a designated office is not listed in the records of the Division of Corporations.
For new domestic LLCs, the designated office address must be included in the Articles of Organization. For all domestic LLCs, the designated office address must be included in their annual
reports filed with the Division of Corporations and any statement of change of such address must be filed within 30 days of such change.
4. Manager-managed vs. Member-managed. The Revised Act continues the distinction included in the Old Act between a member-managed LLC and a manager-managed LLC. Yet, the
Revised Act highlights that distinction since many other rules in the Revised Act pivot one way or the other depending on which structure is used. Under the Revised Act, an LLC must elect
to be either member-managed or manager-managed and designate such election in its Articles of Organization. The principal effect of this distinction is to clarify who has apparent
authority to bind the LLC in dealing with third parties and to give constructive notice of such authority.
The Revised Act also provides that a manager-managed LLC is converted to a member-managed LLC upon the death, withdrawal or removal of the sole remaining manager (and other events) where
another manager is not appointed by the members within 90 days.
5. Operating Agreements. The Revised Act requires LLC operating agreements to be in writing - oral agreements do not constitute operating agreements under the Revised Act.
Operating agreements pertain to the internal affairs of the LLC and, where in conflict with the Articles of Organization or the Revised Act, the Articles or the Revised Act controls. The
initial operating agreement must be adopted by all of the members and, unless otherwise provided, can only be amended by written consent of all members.
6. Signed. To accommodate the electronic age, the Revised Act defines "signed" as including any electronic or digital signature approved by the Division of
Corporations, as well as a manual signature or facsimile thereof.
B. Organization. The Old Act has 59 sections, but no parts or recognizable organization. In contrast, the Revised Act has 181 sections and is organized into 19 Parts:
Part Heading
1 General Provisions
2 Filing Requirements
3 Service of Process
4
Formation
5 Operating Agreements
6 Limited Liability
7
Members
8 Management
9 Contributions - Profits and Losses
10
Distributions
11 Assignment of Interests
12 Dissolution
13 Winding Up
14 Conversions and Mergers
15 Professions
16 Foreign Limited Liability Companies
17
Derivative Actions
18 Indemnification
19 Miscellaneous
C. LLC Powers. The Old Act empowers an LLC to lend money or otherwise assist its managers and employees, but does not mention members. The Revised Act includes members, as
well. The Old Act also empowers an LLC to indemnify or hold harmless an LLC manager. The Revised Act expands an LLC's power to indemnify any person and includes detailed procedures
regarding indemnification - similar to procedures under Utah corporate law.
D. New Records to be Kept. The Revised Act requires that where the LLC was formed by an organizer that is not a member or a manager, the LLC's records must include a
"statement of organizer" showing the identity of the initial members and initial managers of the LLC.
E. Inspection of Records. The Old Act grants members, managers and their agents the right to inspect LLC records, but the procedures are not clear. The Revised Act gives
explicit procedures for inspection and copying of records by members, managers and their agents, as well as former members and former managers and their agents. It also allows reasonable
copy costs to be charged and a court-ordered procedure for inspection of records, including attorney's fees, if inspection of records is denied.
F. Non-waivable Provisions. Under the Old Act, it was unclear which statutory provisions were non-waivable by private agreement. The Revised Act contains a detailed list of
provisions that cannot be waived by an LLC's Articles of Organization or operating agreement.
G. Constructive Notice. The Old Act allows no "notice" effect to an LLC's Articles of Organization or other documents on file with the Utah Division of Corporations
(except that the LLC has been "legally organized"). In contrast, the Revised Act allows an LLC's Articles of Organization to give constructive notice to third persons (as well
as members and managers) of all statements required to be included in the Articles of Organization and certain statements permitted to be included in the Articles of Organization (but not
allowing incorporation by reference to other documents). Similar constructive notice effect is given to items required to be included in an LLC's annual report to the Division of
Corporations. Thus, limits on authority of members or managers in an LLC, or in the scope of the LLC's business, can be included in the LLC's Articles of Organization to give constructive
notice of such limits.
H. Statement by Manager or Member. A person who ceases to be a member or manager of an LLC may file a statement to that effect with the Division of Corporations. The Old Act
has no such provision.
I. Required Filings. The Revised Act adapts provisions from the Utah Revised Business Corporation Act on requirements for filing documents with the Division of Corporations,
including the effective date and time, and signing, of filed documents. In addition, it clarifies the Division's duty to file documents and allows an appeal from the Division's refusal to
file documents. For most filings, only a single copy is now required, unless the person filing wants a copy back for his or her records.
J. Powers of Division. The Revised Act grants the Division of Corporations and its director the power to interpret and administer the provisions applicable to them. Thus, the
Division has the power to adopt rules interpreting the filing requirements and related procedures at the Division.
K. Registered Agent. Under the Old Act, any change in the registered agent's address had to be approved by the LLC members or managers. The Revised Act allows the registered
agent to change its street address in Utah by filing a written notice of such change, without any official LLC action.
L. Service of Process. The Old Act contains provisions for service of process only for a domestic LLC. The Revised Act adds specific directions on how service of process is
effected on a foreign LLC, a dissolved LLC, a withdrawn foreign LLC, as well as a foreign LLC not authorized to do business in Utah. Those provisions were drawn primarily from parallel
provisions in the Utah Revised Business Corporation Act.
M. Organizer. The Old Act requires an LLC to be formed by a member or a manager. The Revised Act also allows an "organizer" to form an LLC - meaning a person who is
not a member or a manager. A member could still organize a member-managed LLC and a manager could still organize a manager-managed LLC. Thus, an attorney or other agent could organize an
LLC on behalf of the members without being a member or a manager. Yet, there is a small catch. Where an "organizer" is used, the organizer must prepare:
. . . a writing to be held with the records of the company which sets forth:
(a)The name and street address of each initial member
of the company; and
(b)If the articles of organization provide that the com-
pany is manager-managed, the name and street
address of each initial manager.
Thus, there still must be at least one member for an LLC to be formed under Utah law and a record to that effect must be kept.
N. Articles of Organization. The Revised Act adds new requirements for an LLC's Articles of Organization, and allows some permissive provisions which could have constructive
notice effect.
O. Transfers and Domestications. The Revised Act allows a domestic LLC to transfer to or domesticate in another jurisdiction by filing Articles of Transfer after the
requisite member approvals are in place. Similarly, the Revised Act allows an LLC not formed under Utah law to become subject to the Revised Act (and other Utah law) by filing Articles of
Domestication after the required member approvals are obtained.
P. Exceptions to Limited Liability. The Old Act contains numerous exceptions to the general rule of limited liability for LLC members, but such provisions are scattered
throughout the Old Act. The Revised Act collects in one section all such exceptions to limited liability and deletes one exception in the Old Act that makes "any person" liable
for damage "occasioned" by omitting the words "limited liability company" (or their abbreviation) from the commercial use of an LLC's name.
Q. Waiver of Wrongful Distributions. Both the Old Act and the Revised Act contain exceptions to limited liability for unpaid contributions by a member and for wrongful or
mistaken distributions of property to a member, but allow such exceptions to liability to be waived or compromised by consent of all members. The Revised Act clarifies that no such waiver
or compromise as to a wrongful distribution affects the rights of an LLC creditor if the creditor extended credit in reliance on a representation as to the LLC's financial condition prior
to such distribution and without notice of such waiver or compromise.
R. No Formalities Required. Under the Old Act, questions arose whether an LLC was required to comply with any formalities (records, meetings, etc.) in order for the limited
liability shield to remain available to the LLC's members. The Revised Act confirms that no formalities are required to maintain limited liability.
With the prevalence and constant use of LLCs in Utah, attorneys need to become familiar with the Revised Act and how to use it to assist and protect their clients.
The Revised Act makes numerous other changes to the Old Act. Part II of this article, coming in the August/September issue, will discuss those other changes.
Footnotes
1. A full text copy of the Revised Act (SB170) can be downloaded from the State of Utah web page www.le.state.ut.us.
2. Utah Code ¤48-2b-101 et seq.
3. Rev. Rul. 88-76, 1988-1 C.B. 360.
4.
Statistics from the Utah Division of Corporations indicate that of 14,770 new domestic entities formed in Utah in 1999, 7,708 (52%) were LLCs, 773 (5%) were limited partnerships and 6,287 (43%) were corporations. For 2000, the numbers were 6,467 (51%), 572 (5%) and 5,621 (44%), respectively.
5. Treas. Reg. ¤¤301.7701-1 through 301.7701-3.
6.
When Illinois revised its LLC Act in 1997, it adopted the Uniform LLC Act. Seven other states have also adopted some variations of the Uniform LLC Act - Alabama, Montana, Hawaii, South Carolina, South Dakota, Vermont and West Virginia.
7. Utah Code ¤48-2c-1901.
8. An act released in 1992 by the Business Law Section of the American Bar Association to be used as a tool in drafting LLC legislation.
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