By James Forrest

One of our core practice areas at the Forrest Firm is advising companies in matters pertaining to corporate formation.  In the course of our work, we help our clients find and execute the best entity models that fit their respective businesses, from a manageability perspective as well as protecting ownership interests of those involved in the company.

One of the more popular entity types in North Carolina, and certainly among many Triangle businesses, is the limited liability company, popularly known and referenced in its abbreviated form, LLC.  The North Carolina General Assembly recently enacted new legislation to make the LLC even more flexible for business owners in the Tar Heel State.  Specifically, the intent of the new legislation is to give maximum effect to the principle of freedom of contract and the enforceability of operating agreements among owners.

Since the new legislation takes effect in the approaching new year, here are some of the many highlights that should help business owners and executives use the LLC model to more effectively run their businesses.

Rights and Duties

Parties to the LLC Act can modify or waive rights and duties by agreement.   Also, the statute outlines the rights and limitations of members of the LLC with regard to company information.

Executive Flexibility

The statute provides for the appointment of “officials” (President, Vice President, etc) in addition to “Managers,” the previously-held title within LLC agreements.  With the new statute, newly-appointed officials do not necessarily have to be Managers of the entity itself. In addition to the distinction between officers and managers, the statute also clearly defines a distinction between those having a purely economic interest in the company and those with a membership interest relating to voting and management.

Oral Amendments and Agreements

Statute 57D makes a perfunctory change, allowing for lack of enforceability of oral amendments to the operating agreement if the agreement requires such amendments are done in writing.  Furthermore, the statute notes that oral agreements among certain parties to an operating agreement would not override an inconsistent part of the operating agreement, if that oral agreement is to the detriment of other parties who rely on the written operating agreement.

Supremacy of the Operating Agreement versus the Articles of Organization

Chapter 57D also takes a stance in matters involving conflicts between an operating agreement and the LLC’s articles of organization. The statute allows for the operating agreement to prevail in conflicts among parties to the agreement and company officers, while the articles of organization prevail for those who reasonably rely solely on the publicly-filed document.

Miscellaneous Provisions

The new legislation makes several clarifications and changes to existing guidelines in a variety of areas.  For example, the GA eliminated provisions relating to low-profit LLCs.  The statute also aligns provisions governing out-of-state LLCs with those governing out-of-state corporations under the Business Corporation Act, and it simplifies provisions concerning contributions to and distributions from the LLC.

North Carolina business owners can familiarize themselves with these and the other changes outlined in the new legislation by referencing the North Carolina General Statutes, where Chapter 57D covers limited liability companies (LLCs), replacing the former LLC-governing statute, Chapter 57C.  57D takes effect on January 1, 2014 and applies to both existing limited liability companies and those formed in North Carolina thereafter.