Alabama's New Limited Liability Company Law


On October 2, 2015, Tripp Watson spoke to the Alabama Business Law Conference about Alabama's new Limited Liability Company Law. The ALBC is a continuing legal education program focused on issues that affect businesses in the state. Watson was joined by other business attorneys and judges from around the Birmingham area to speak on changes in the laws affecting area businesses.

On January 1, 2015, Alabama put into effect its new LLC law. The Alabama Limited Liability Company Law of 2014 makes substantial changes to the way LLCs operate in the state. The new law repeals the old version of the law that was amended in 2011, which means that LLCs filed after Jan. 1 of this year are subject to the new law, and all LLCs, no matter when they were formed, will be subject to the law beginning January 1, 2017.

The law makes major changes to the existing LLC laws that anyone, attorney or not, should be aware of.

Series LLCs

Arguably the biggest change to the LLC law is the addition of series LLCs. Series Limited Liability Companies are essentially holding companies that can subdivide and segregate assets and liabilities internally without the need to manage multiple legal entities. Already adopted in a number of states, series LLCs still occupy a grey area when it comes to the IRS, who has not adopted formal rules for how the entities will be taxed, yet.

Preservation of Right to Contract

The second major revision under the new law is the explicit recognition of the right to contract. Alabama LLCs used to have default provisions that could not be amended in the company's operating agreement. However, the new law allows for essentially any legal duty to be amended, or even eliminated entirely, from the company's Limited Liability Company Agreement (the new name for an Operating Agreement). While this change will greatly increase the flexibility LLC members will have to operate their company, many worry that savvy investors will use this as an opportunity to abuse minority LLC members.

Addition of Bad Faith Claims

Seemingly in an attempt to provide some protections for minority shareholders, in spite of the broad discretion afforded by the rest of the Act, the legislature has adopted a duty of "good faith and fair dealing." This will mean that LLC members will have a bad faith cause of action as a last recourse if they find themselves abused by a fellow member. Since bad faith law in Alabama has been largely restricted to insurance law cases, we're not sure how this will be interpreted by the courts yet.

Bottom Line

The Limited Liability Company has been the most popular legal entity formed in the US for many years now. This law will do nothing to curb that popularity. However, the elimination of the default rules in the Code and the addition of Series LLC provisions will make it more important than ever to have a thorough LLC Agreement. If you LLC does not have an agreement, or if you do not know what your agreement allows, you run a substantial risk of operating an LLC. More than ever, setting up an LLC can and will be a trap for the unwary.

To find out more about the new Alabama LLC law, contact our office at 205-545-7278 in order to set up an appointment, use the form on this page, or set up an initial consult by going here.