Impacts felt from new LLC law changes
A new law that overhauls Maine's LLC act to give businesses more flexibility in crafting deals could make filing for the popular designation less attractive to some smaller operations.
Effective July 1, the act is designed to modernize Maine's LLC law, first passed in 1997, according to Christopher McLoon, a partner at Verrill Dana who co-chaired the committee that revised the act. "The act had the taste of a 1997 act," he says. "To really do the job right, we said, 'We just need to start over.'" Describing work that began in October 2008 and resulted in a law signed by Gov. Paul LePage in June, McLoon says the changes reflect wider trends in LLC law. "The overall purpose in drafting the act was to allow business people to contract an arrangement that fit their business deal."
The act doesn't represent a drastic departure from Maine's old LLC law, but does present practical considerations for business owners. It didn't generate much public policy discussion at the state level, says David Clough, Maine director of the National Federation of Independent Business. "This was considered very straightforward and very technical," he says. LLCs formed before July 1 will be grandfathered, but may adopt changes as a result of the new law.
Chief among the revisions is the elevated role of the limited liability company agreement, formerly referred to as the "operating agreement." Before the new law took effect, an LLC could come to life simply by filing a certificate of formation with the Secretary of State's Office, and, optionally, drafting an operating agreement. Now, to be recognized by the state, filers must draft an LLC agreement that governs just about every aspect of doing business, including liabilities, operations, fiduciary duties and the relationships among members. Without the agreement, there's no LLC, and therefore no personal asset protection, a primary reason for seeking LLC status.
Wherever the LLC agreement fails to specifically spell out the members' wishes, default provisions of the law apply. That means most potential filers will need a lawyer to comb through the statute to determine where to make modifications and where to waive or accept its provisions, says Portland attorney Michelle Grenier. "It's more expensive for small businesses," she says. "Now they have to not only hire an attorney to create the filing, but also hire an attorney to write the agreement." While the act didn't include increases to existing filing fees, she estimates legal costs will more than double. "Even sophisticated business owners are going to need a lawyer to create an LLC," she says.
But in addition to the paperwork and extra time, the LLC agreement also presents a valuable opportunity by eliminating some of the old law's more rigid provisions, McLoon says. "There are very few limitations on how you can tailor your agreement to fit your business," he says.
The law's major impacts
Among the mandates no longer included in the law is one dictating that an LLC must be run by members or managers. Now, filers can bestow whatever titles they like on those who manage the company. McLoon suggested to a client of his, 3 Dogs Café in Rockport, that they ditch their manager designations in favor of "Labradors," after the family's black, chocolate and yellow Labs.
Similarly, those involved in an LLC can be assigned specific authority to act on its behalf, regardless of their title. The old law presumed that members, managers, presidents and treasurers could all sign contracts for an LLC, but the new law, through a document called a "statement of authority," allows greater adaptability. For example, a manager in a commercial property company, say the "chief nail hammerer," could be given authority only over construction matters, and not over investments. If financing went awry and the LLC wound up in court, that manager wouldn't be held liable, McLoon says.
Still, the statement represents one more legal document to file, and a $50 fee. Without one, the broader authority automatically applies.
The new law also allows owners some leeway in fiduciary duties. The LLC agreement can expand, restrict or eliminate those duties, provided they pass the good faith and fair dealing test. Say two real estate developers form an LLC for the sole purpose of buying an office building, to cite an example used in a Maine Bar Journal series on the new law. By default, they'd be prohibited from "competing" with the LLC, and therefore barred from negotiating other deals or investing in additional commercial properties, even if both parties had no qualms about those activities. But now, their LLC agreement could explicitly free them from those prohibitions.
The new law also ushers in the use of a new business entity, the low-profit limited liability company, or L3C, for the first time in Maine. A hybrid of a nonprofit and a for-profit company, an L3C is generally defined as a for-profit business with social change as its primary goal, and profit as a secondary goal, says Kevan Lee Deckelmann, a Bernstein Shur attorney who was a member of the Maine State Bar's LLC act drafting committee.
The drafting committee felt that including L3Cs in the new law was premature, Deckelmann says, but lawmakers pushed for it. "The L3C legislation lacks punch without what I would call the companion federal legislation," she says, which would have made it easier for foundations to invest in L3Cs, but failed to gain traction. MOOMilk, a cooperative of Maine organic dairy farmers, operates as an L3C in the state, but incorporated in 2009 in Vermont.
The new law also allows for electronic filing of LLC documents — annual reports can already be submitted online — but the Secretary of State's Office has no plans to implement that any time soon. "Certainly it's something that we'll do eventually," says spokeswoman Caitlin Chamberlain.
All in all, the law appears to pose the greatest potential complications for businesses that rely on stock LLC agreements, sometimes found on the Internet, to avoid the time and costs of closer legal scrutiny. "People are using off-the-shelf agreements, I see them all the time," McLoon says with more than a hint of exasperation. "And from people you think should know better." He hopes the new act discourages would-be companies, wooed by the tax implications and liability shield LLCs offer, from skipping the process of thinking through whether another business entity would best suit their needs.
While the added costs for small businesses worry Grenier, she says the act does include many positive changes. "It's very important businesses know what's required to comply," she says.
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