The New Alabama LLC Act
The New Alabama LLC Act (§10A-5A)
On January 1, 2015, the new Alabama LLC Act will go into effect, bringing many changes to the legal entity in the state. Originally enacted in 1993, limited liability companies (LLCs) have undergone multiple revisions in their short history. Some of the changes that will go into effect next year, such as Series segmentation, have been long awaited, but others are more questionable, as we will talk about below. While the law is not effective against LLCs filed before Jan. 1, 2015 that don't avail themselves of the new law, it will become completely enforceable on ALL Alabama LLCs on January 1, 2017. Watch the video below to see the lunch and learn I conducted on October 24, 2014, about the new law.
Here are some of the big changes that are coming down the pipe:
Recognition of Right to Contract
One of the big goals of the legislature in enacting this bill is to preserve the right to contract in LLCs. Because LLCs are based upon partnership law, the legislature did not want to intervene between two people's right to conduct business in the manner they saw fit, regardless of the consequences.
Legitimizing Existing Practices
For better or worse, many people operating LLCs simply ignored many of the code sections, either because they were willfully ignorant or were trying to contract around some of the requirements. By enacting the new law, the state legislature has essentially condoned these actions, basically saying, "You're adults, so if you want to let one of your partners run roughshod over the business, we will give you enough rope to hang yourself." Like many other attorneys, I do see potential for abuse of the unwary. However, I believe that if you are going to avail yourself of a potentially powerful act like this one, and not do it the right way, you are only reaping what you sew.
The addition of the ability to segment an LLC into multiple Series is one of the most exciting additions of the new law. A Series is a subdivision of an LLC that acts as a separate legal entity without the requirement of setting up a separate legal entity because it can operate under the same LLC umbrella. This is fantastic for companies that want to segment high-risk liabilities from mission-critical operations without juggling multiple LLCs. This makes the new Series LLC option fantastic for real estate, construction, and other businesses that need to segment liability internally. I have been waiting years for the Series LLC to come to Alabama, and I'm pretty pumped about it.
Major Changes to Operating Agreements
The new LLC act brings significant changes to the enforceability of Operating Agreements (now called "Company Agreements" for whatever reason). Operating Agreements can now be "oral" or even "implied," Members can contract out of fiduciary responsibilities, and even limit or remove liability for blatantly violating the Operating Agreement. Furthermore, non-performing Members can be docked their ownership stake, and some Members can even be explicitly locked out of company financials, so long as it is in the Operating Agreement. These changes are massive changes from the requirements of the existing law. Inevitably, these will become traps for the unweary.
Addition of Bad Faith Actions
Bad Faith is a controversial cause of action that is generally only recognized in insurance law in Alabama. However, Alabama has explicitly expanded bad faith actions to LLCs. Because this is largely a new concept in the corporate law realm, we really don't know how this is going to look yet. And with the phased roll-out of the new law, we probably won't see enough examples kicked out of the appellate courts to discern a clear picture of what the law means for several years.
The new Alabama LLC act is probably a step in the right direction. I'm still worried about the minority shareholder protections, because there are almost none in the new law. However, I'm really excited about the new Series LLC option, which should make corporate governance of multi-tiered LLCs significantly easier. However, the new law makes operating an LLC without proper guidance even more dangerous than it was before. I often discourage people from filing LLCs because I can quickly tell that they won't do what it takes to make an LLC truly advantageous. An LLC can be a double-edged sword if you don't treat it with respect (and most Members don't), and the new law has legitimized that practice for the most part. So the bottom line is this: If you're going to go with an LLC, it is more important than ever to have a knowledgeable attorney help you with the drafting of the company's operating agreement. You conduct business without it at your own risk.