Limited liability companies are a relatively new form of business entity. In the late 1970s, Wyoming became the first U.S. state to adopt an LLC statute. Within a few years after the publication of IRS Revenue Ruling 88-76, which declared that a Wyoming LLC would be taxed as a partnership while maintaining limited liability for its members (similar to the liability protection enjoyed by the shareholders of a corporation), the rest of the states, as well as the District of Columbia, adopted LLC statutes of their own.
Iowa’s first LLC statute (Iowa Code Chapter 490A) was adopted in 1992. It has been replaced by Chapter 489, Iowa’s “Revised Uniform Limited Liability Company Act,” which was adopted in 2008. Chapter 489 became effective 01/01/09 for Iowa LLC’s formed on or after that date; and as of 01/01/11 its provisions apply to all Iowa LLCs, regardless of when formed.
The revised Iowa LLC statute adopted in 2008 was patterned after the Revised Uniform Limited Liability Company Act drafted by the National Conference of Commissioners on Uniform State Laws. The Commissioners approved and recommended the new “uniform” template for enactment by all states at their 2006 annual conference.
Discussion of Selected Provisions of Chapter 489: Iowa’s Revised Uniform Limited Liability Company Act.
The first obvious change set out in Iowa revised LLC Act relates to the entity’s formative documents. Chapter 490A provided that an Iowa limited liability company was formed by filing “articles of organization” with the Secretary of State. Chapter 489 provides that an Iowa limited liability company is formed by filing with the Secretary of State a “certificate of organization.” The statutory requirements for what must be included on an LLC’s certificate of organization under the revised act are similar, but not identical, to what was necessary to include in articles of organization under the former statute.
Unchanged is the requirement that organizational document (now called a certificate of organization) include the company’s name, the name of its original registered agent, and the street address of its initial registered office.
The former statute also required that the street address of the principal office of the company, and the period of its duration, be included in the articles of organization. This information is not required to be set forth in the certificate of organization under filed pursuant to the revised LLC Act.
Both the former and the current statutes also permit the organizational document to include additional information. However, recitations contained in the certificate of organization regarding the authority (or limitations on authority) of members are not effective as a “statement of authority” as authorized and described at § 489.302; that document must be separately filed and meet all of the requirements of such section as discussed in more detail below.
Under Iowa’s former LLC Act, a limited liability was formed upon executing and filing the organizational document with the Secretary of state. That generally remains true under the revised act. However, the revised LLC Act contains a provision allowing the certificate of organization to state a delayed effective date. When a delayed effective date is included in the certificate of organization, unless a signed statement of cancellation is sooner filed, the effective date will be the date specified in the certificate of organization rather than the date the certificate of organization was presented to the Secretary of State for filing.
Under the former statute, the default management of an LLC was vested in its members; and an election to have management by manager(s) could be made by so providing in either the articles of organization or in the operating agreement.
The default management structure remains in the members under the revised LLC statute. However, the revised statute provides that only the inclusion of specific language in the operating agreement can change the management structure from member-managed to manager managed.
The former statute provided that under the “default” rules (i.e. unless otherwise provided in the articles of organization) all members in a member-managed LLC were agents of the company. In other words, even if no other members agreed to it, any one member could take an action which was legally binding on the company. This is no longer true under the revised act; instead, § 489.301(1) provides that: “[A] member is not an agent of a limited liability company solely by reason of being a member. “
Statement of Authority.
The LLC may, however, file a “Statement of Authority” with the Secretary of State. This is a separate written document containing the name of the company, the street address of its principal place of business, and a detailed description of the particular authority granted to (or limitations placed on the authority of) persons holding specified position(s) within the company. The statement of authority describes only the power of a person to bind the LLC to persons who are not members. It becomes effective on the date specified in the writing (or the effective date of the most recent amendment thereto), and remains in effect for five years, at which time it is canceled by operation of law.
The operating agreement is the foundational contract among the company’s owners which governs the operation of the LLC. It was broadly defined in the former Iowa LLC Act as: “…any agreement, written or oral, of the members as to the affairs of a limited liability company and the conduct of its business.”
The revised Iowa LLC Act provides that the operating agreement does not have to be called an “operating agreement.” It is defined in the revised Act as an agreement which can be oral, in a record, implied, or in any combination thereof, of all of the members of a limited liability company, concerning: (a) relations among the members as members and between the members and the limited liability company; (b) the rights and duties of a person in the capacity as a manager; (c) the activities of the company and the conduct of those activities; and (d) the means and conditions for amending the operating agreement. To the extent that the operating agreement fails to make provision(s) for some or all of these matters, the revised LLC Act provides the default rules which will govern them.
Because of the many issues and aspects of its operation which may be included in a company’s operating agreement, the revised LLC Act includes three separate but related sections which address matters regarding the operating agreement.
The first, section 489.110, details “Scope, function, limitations.” In addition to broadly setting out the scope of what the operating agreement governs as stated above, this section also describes some things the operating agreement is prohibited from doing. For example, it cannot change the LLC’s capacity to sue and be sued in its own name; nor can the operating agreement alter the company’s obligation to comply with applicable Iowa law governing the company’s affairs and the rights of members and third parties. However, this section does provide that subject to limitations, the terms of the operating agreement may alter, restrict or eliminate certain fiduciary duties of members and/or managers.
Next, section 489.111 sets forth the effect of the operating agreement on the LLC and persons becoming members. The LLC is bound may and may enforce the operating agreement; and any person that becomes a member of the company is deemed to assent to the operating agreement. This section also permits a “preformation” agreement. In other words, one or more persons who intend to become members of an LLC may make an agreement which provides that, upon formation of the LLC, such agreement will become the company’s operating agreement.
Section 489.112 describes the effect of the operating agreement on third parties. It also describes the relationship to records effective on behalf of the LLC. For example, the operating agreement may state that the approval of a person who is not a party to the agreement is required in order to approve an amendment thereto. Such provisions are enforceable, rendering an amendment ineffective if the condition of approval is not met.
Additionally, the LLC’s obligations to transferees or dissociated members are governed by the operating agreement. An amendment to the operating agreement made after a person becomes a transferee or dissociated member is effective with regard to the debts and obligations of the LLC or its members to a transferee or dissociated member, subject only to a “charging order” entered by a court pursuant to § 489.503(2)(b).
The operating agreement governs the relationship between members, dissociated members, transferees, and managers. The public record (documents submitted to the Secretary of State for filing) is binding upon others to the extent that they reasonably rely on such record.
As noted above, § 489.110 contains language expressly permitting the inclusion of provisions in the operating agreement which may alter or eliminate certain fiduciary duties. For example, §489.110(5) provides that: “The operating agreement may specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure of all material facts.” Other provisions permit the operating agreement to shift of fiduciary responsibilities from members who would ordinarily have them to other members, or even to eliminate the fiduciary duty which ordinarily would have pertained to such responsibility.
However, there are limitations. Some obligations and duties cannot be eliminated, including for example, the liability of a member’s or manager’s to the LLC for money damages for: breach of the duty of loyalty, receipt of a financial benefit to which the member or manager is not entitled, intentional infliction of harm on the LLC or a member, or an intentional violation of criminal law.
A limited liability company may have no members, one member, or more than one member upon formation. The organizer of the company may be, but is not required to be, an initial member of the LLC. If there will be members at the time of formation, the organizer(s) act on behalf of the initial member(s) in forming the company; if there are no members at the time of formation, the organizer(s) may later consent to one or more persons becoming the company’s initial members.
After an LLC is formed, a person can become a member: (a) as provided in the operating agreement, (b) as the result of a transaction such as a merger, (c) with the consent of all members, or (d) if, within 90 consecutive days after the company ceases to have any members, both of the following occur: (1) the last person to have been a member, or the legal representative of that person, designates a person to become a member, and (2) the designated person consents to become a member.
A person may become a member (at or after formation of the company) without acquiring a transferable interest and without making or being obligated to make a contribution to the LLC. Thus, the last method described in the preceding paragraph is particularly useful in the case of a single-member LLC whose sole member has died. It allows the administrator or executor of the deceased single-member’s estate to designate the decedent’s heirs/beneficiaries as the new members of the LLC (provided they consent to become members). Thus, rather than winding up the affairs of the LLC and selling any property owned by it, the LLC continues in existence and with the heir/beneficiaries as the new members.
Transferable Interests and Rights of Transferees and Creditors.
A transferable interest in an LLC is personal property. A transfer of an interest in an LLC is permissible, and does not by itself cause a member’s dissociation or a dissolution and winding up of the LLC’s activities. However, the transfer (subject to the rights of the personal representative of a deceased member as specified in § 489.504) does not entitle the transferee to participate in the management or conduct of the company’s activities. Furthermore, except for being entitled to an account of the company’s transactions in the case of dissolution and winding up an LLC (from the date of dissolution, the transferee is not entitled to have access to records or other information concerning the LLC’s activities. In other words, the transfer of a transferrable interest in an LLC does not confer the rights of a member upon the transferee.
The transferee does, as the result of the transferred interest, have the right to receive distributions from the company to which the transferor would otherwise have been entitled.
Except when a member dissociates from a company, a member who transfers a transferrable interest retains all membership rights other than the right to distributions; and all duties and obligations of membership are also retained.
The exclusive remedy of a judgment creditor who seeks to enforce said judgment against a member of an LLC (or the member’s transferee) is to apply for, and obtain from the court, a charging order against the member’s transferrable interest. The charging order is a lien on the transferrable interest and requires the LLC to pay to the judgment creditor any distributions which would otherwise be paid to the judgment debtor.
Germany appears to have been a leader in this area, authorizing a similar form of business organization in the early 1890s. Over the next several decades, from about 1917 through about 1950, a number of other countries in Europe and Central America followed Germany’s lead in adopting laws permitting non-corporate limited liability business entities.
Former Ch. 490A was repealed effective 12/31/10.
The name must contain the words “Limited Company” or “Limited Liability Company,” or the abbreviation “L.C.” or “L.L.C.” The name may not include the words “Corporation,” “Incorporated,” “Limited Partnership” or the abbreviations “Corp.,” “Inc.” or “L.P.” See §§ 490A.303(1) and 498.108.
See §§ 490A.303(1) and 489.201.
Compare § 490A.303(1) with § 489.201(2).
See §§ 490A.302(2) and 489.201(3).
See §§ 490A.301 and 489.201(4).
§ 489.407(1) requires that in order to change the management of the entity from member(s) to manager(s), the operating agreement must expressly provide that any of the following apply: “(1) the company is or will be ‘manager managed.’ (2) The company is or will be ‘managed by managers.’ (3) Management of the company is or will be ‘vested in managers,’ [or] (b) Includes words of similar import.”
See §489.102(15) and § 489.110(1)(a)-(d).
See §§ 489.401(1) through(3).
See §§ 489.502(1)(a), (b) and (c)(1).
page was written on 11233.
Back | Home | Forward