The Journal of The DuPage County Bar Association

Back Issues > Vol. 30 (2017-18)

Key Points of the Revised Illinois Limited Liability Company Act
By Gregory M. White

Background. Limited liability companies (“LLCs”) are the business entity of choice for real estate investments and closely held businesses. A limited liability company (“LLC”) provides favorable income tax treatment to owners, flexibility in how they are governed, including the ability to restrict or eliminate fiduciary duties of those in control, customized capital and participation arrangements and liability protection for personal asset of its members. Effective July 1, 2017, Public Act No. 099-0637 (the “Act”) extensively revises the Illinois Limited Liability Company Act, 805 ILCS 180/1-1, et seq. making Illinois a more business-friendly environment to operate an LLC. Many of the revisions are based upon the Revised Uniform Limited Company Act (2006), (Last Amended 2013) developed by the Uniform Law Commission. All section references herein are to the Act.

Formation. An LLC’s Articles of Organization (“Articles”) may be filed without the existence of a member, provided a member exists at the time the Articles become effective, which must occur within sixty (60) days from the date the Articles are filed.1

Membership. Members need not make capital contributions or acquire a distributional (economic) interest.2 Thus a member can have springing voting rights that arise upon the occurrence of some event without being entitled to distributions. A person who acquires a distributional interest without becoming a member has only the rights of a transferee.3 In addition to cash, property or services, a member’s capital contribution may now consist of any “other benefit” provided to the LLC.4 The Act provides a non-exclusive list of remedies or consequences that the Operating Agreement may impose on a member who fails to make a required capital contribution.5

Operating Agreement. The Operating Agreement is the linchpin of the operational structure of the company by setting forth how the LLC is governed, the duties and responsibilities of members and managers, and other operational issues. The Act remains a default statute meaning that if the Operating Agreement fails to address an issue, then the applicable provision of the statute applies. The Act significantly expands the ability of members to restrict or override certain default rules, although others are mandatory and cannot be changed. The Operating Agreement can be implied, oral or written (this means paper, electronic or in another medium that is perceptible and retrievable) or any combination thereof6 and is not subject to the Statute of Frauds.7 The company itself is a party to the Operating Agreement8 and a member is bound to its terms whether or not he or she signs the agreement (which includes a tangible or electronic symbol, sound or process).9

Management. Whether the company is a member-managed or managermanaged is typically provided for in its Articles. An LLC is member-managed by default unless the Operating Agreement stipulates as such, or it will be manager-managed, managed by managers, management is vested in managers or words of similar import.10 LLCs that are managed by a “managing-member” will be deemed to be member-managed under the Act.11

Fiduciary Duties. A member of a member-managed LLC and a manager of a manager-managed LLC owe fiduciary duties to the LLC and its members, including the duties of loyalty and care.12 Duties must be discharged and rights exercised consistent with the obligations of good faith of any fair dealing.13 A member of a manager-managed LLC that is not a manager owes no duties to the LLC or other members solely because it is a member.14 The Act, to a greater extent than is currently permitted, allows fiduciary duties to be restricted or eliminated. Any fiduciary duty of a member or manager, other than the duty of care, may be restricted or eliminated if the Operating Agreement is clear and unambiguous.15 The duty of care can also be altered, except to authorize intentional misconduct or a knowing violation of the law.16 The obligations of good faith and fair dealing cannot be eliminated or limited. However, the Operating Agreement may identify specific types or categories of conduct that do not violate any fiduciary duty17 and may set standards by which the performance of a member’s duties or the exercise of a member’s rights are to be measured.18 No longer may an act that violates the duty of loyalty be authorized or ratified by a percentage or number of members or disinterested managers. Only persons who are fully informed, disinterested, and independent may authorize or ratify such acts.19

Authority To Act. Statutory apparent authority of a member or manager for purposes of carrying on the LLC’s business has been eliminated. The ability of a member to bind the LLC is determined by the law of agency or other applicable law.20

An LLC may file a Statement of Authority (“SOA”) with the Illinois Secretary of State, describing the authority, or limits of authority, of any member, manager or other person associated with the LLC to enter contracts, transfer real property, or engage in other transactions.21 However, the SOA may not grant authority to an unidentified person who holds a particular position or office (e.g., “President”). SOAs not involving transfers of real property conclusively bind the LLC as to non-members who give value in reliance on the SOA without knowledge to the contrary.22 For transfers of real property, a second step is required to protect the transferee. A certified copy of the SOA must be recorded in the county where the real property is located to conclusively bind the LLC as to non-members who give value in reliance on the SOA without knowledge to the contrary. If a SOA involving the transfer of real property is certified and properly recorded, then any limitation of authority is binding on all persons who are not members whether or not they know of the limitation.23 In situations other than a transaction involving real property, a limitation of authority in a SOA is not evidence of knowledge or notice of a limitation of authority by any person.24 Authority granted or limited in the Articles do not bind a person who is not a member or manager unless the person received actual notice in a record from the LLC that agency authority is limited in the Articles.25 If the SOA conflicts with the authority granted or limited in the Articles, the SOA controls as to a person who is not a member or manager.

The person named in a SOA may file a Statement of Denial (“SOD”) with the Secretary of State, denying the grant of authority or the limitations, and if intended to apply to transfers of real estate, a certified copy of the SOD must be filed in the applicable real estate office.26

Inspection Of Business Records. There is no change in the business records that a company must maintain or make available to members and the legal representatives of a deceased or legally disabled member.27 However, a transferee of a distributional interest is now permitted to inspect these records but only for a proper purpose.28 The LLC must supply the records or state a reasonable time to do so within 10 days after receiving the demand.29

Rights To Information. The right of members and dissociated members to information concerning the LLC’s activities, finances, and other circumstances is now expanded. Whenever a member has a right to vote on a matter, the LLC is required to provide the members, without demand, all information known to the LLC material to the member’s decision.30 In order for members of an LLC to properly exercise their rights and duties, they are entitled to information concerning the LLC or information that is material to their ownership.31 This same information is available to a dissociated member if it relates to the period the person was a member, and is sought in good faith.32 On the other hand, a transferee has no rights to such information.33 In addition to restrictions contained in the property agreement, the LLC is permitted in the ordinary course of its business to impose reasonable restrictions and conditions on access to and use of the information provided.34

Dissociation/Withdrawal. LLCs are no longer required to purchase the distributional interest of members upon dissociation. A dissociated member retains its distributional interest solely as a transferee35 and has no right to vote. A member’s dissociation does not discharge the person from any debt, obligation or other liability incurred as a member.36

Judicial Dissolution. The ability of a member, dissociated member, or transferee to cause the involuntary dissolution of the LLC is more difficult under the Act, and courts are provided greater flexibility in fashioning alternative remedies to dissolution, including but not limited to, a court-ordered buy-out of the applicant’s interest in the LLC.37

A transferee may no longer petition to dissolve the LLC on the basis that it is equitable to do so. To dissolve the LLC, a transferee must obtain a judicial decree that those in control have acted, are acting, or will act in a manner that is illegal or fraudulent, or have acted, or are acting in an oppressive manner that is directly harmful to the transferee.38 The right of a member or dissociated member (but not a transferee) to a judicial dissolution because another member has engaged in conduct that makes it not reasonably practicable to carry on the LLC’s business has been replaced with the requirement that all, or substantially all, of the company’s activities are unlawful.39

Rights Of A Creditor. A judicial charging order against a distributional interest creates a lien thereon and requires distributions otherwise payable to the judgment debtor to be paid to the creditor. No other rights with respect to the assets or affairs of the LLC are granted thereby.40 However, a court may foreclose the lien on a distributional interest which entitles the purchaser to the judgment debtor’s rights to distributions and those rights available to a transferee [to inspect records that the LLC is required to maintain and petition for a judicial dissolution of the LLC in limited circumstances].41 The Act clarifies that although other laws may permit a lien against a distributional interest or “other rights of a member or transferee” the lien under such law is treated only as a charging order subject to the Act.42

Series LLCs. No substantive changes are made to the existing law.

Conclusion. The Act provides members greater freedom of contract in defining the relationship among members, managers and the LLC. In turn, an Illinois LLC will be a more flexible and investor friendly business entity that can more easily adjust to the everchanging needs of real estate investors and closely held businesses. Given the numerous and significant changes created by the Act that apply to existing LLCs, it is important to consider the impact these changes will have on your LLC and to update its Operating Agreement accordingly.

1. Sections 5-5(a)(4) and (b)
2. Section 10-1(c)
3. Section 10.1(b)
4. Section 1.5
5. Section 20-5(e)
6. Section 1.5
7. Section 1.46
8. Section 15-5(f)
9. Sections 15-5(f) and (g)
10. Section 15-1(a)
11. See Section 15-1(a)
12. Sections 15-3(a) and 15-3(g)(2). Since the list of fiduciary duties is not exclusive, courts may interpret or expand on the standard of conduct appropriate for those operating the LLC.
13. Section 15-3(c)
14. Section 15-3(g)(1)
15. Section 15-5(c)(1)
16. Section 15-5(c)(3)
17. Section 15-5(c)(2)
18. Section 15-5(b)(7)
19. Section 15-5(d)
20. Sections 13-5(b) and (c)
21. Section 13-15(a)(2)
22. Section 13-15(d)
23. Section 13-15(f)
24. Section 13-15(c)
25. Section 13-15(h)
26. Section 13-20
27. Section 1-40(b)
28. Section 1-40(c)
29. Section 1-40(d)
30. Section 10-15(c)
31. Section 10-15(a)
32. Section 10-15(d)
33. Section 10-15(g)
34. Section 10-15(h)
35. Section 35-55(a)(4)
36. Section 35-55(b)
37. Section 35-1(b)
38. Section 35-1(a)(5)
39. Section 35-1(a)(4)(B)
40. Section 30-20(a)
41. Section 30-20(c)
42. Section 30-20(g)

Gregory M. White is Of Counsel with Johnson & Bell, focusing his practice on addressing the business and legal interests of privately held and family owned companies as well as corporate, professional, real estate and banking clients. He is recognized by his peers with an AV Preeminent rating from Martingdale-Hubble. He received his J.D. from DePaul University and his L.L.M. in Taxation from John Marshall Law School.

 
 
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