2009 Iowa LLC Law Changes: Operating Agreement Pitfalls
This blog post is second in a series of blog posts highlighting changes in the 2009 Iowa Limited Liability Company Act. The new law applies to all LLCs filed in Iowa after January 1, 2009. The new LLC law will apply to older LLCs beginning on January 1, 2011 unless otherwise agreed by the members.
Beginning in 2009 there are a couple of issues relating to operating agreements that LLC business owners must consider. The operating agreement is the document that sets forth how the LLC is governed and run.
- LLCs are not required to have an operating agreement in writing but watch out. On its face the fact an operating agreement is not required in writing might excite LLC owners. However, it is not advisable to go without a written operating agreement, particularly if there are two or more members in the LLC. Even a single member LLC should consider a written operating agreement in order to protect against piercing the corporate veil. If an operating agreement is not in writing, the provisions of the new statute will automatically apply to the LLC. In many instances, the statute has provisions that may surprise and bite unknowing LLC owners especially with regard to management rights, profit distribution and transfers of interest. It is best practice to have a written operating agreement.
- Operating Agreements may be amended orally. LLC owners may amend their operating agreement orally under the new statute. Again, while that may make it easy to amend the agreement it will likely remain best practice to override this statutory provision to include language in the written operating agreement requiring an amendment to be in writing. That way members may avoid the enevitable arguments that ensue when agreements are not memorialized in writing. People tend to remember things differently when agreements are not in writing and the agreement is more difficult to prove in court.
Check back for more on the Iowa LLC law changes in future blog posts.
I for one am glad that these agreements can now be amended orally. I faced many challenges with the fact that they previously could not. This will definitely save me time and allow me to better serve my clients.
Iowa should be the future source of a lot of new litigation among LLC members, for LLC's formed under new law. Verbal agreements are great until there is a dispute - then of course everyone has a different memory of what the agreement was. I have a question about the right to verbally amend written operating agreements. What if agreement provides that it can only be amended in writing, signed by all members - or something close to that? Would that be enforceable to prevent verbal amendments - or can the parties orally amend that provision and thereby allow verbal amendment? Good post Rush
Gavin Craig
Gavin:
I agree with you. I think there will be an uptick in litigation over the amendment issue and I think it will be difficult to prove if there is not some writing setting forth an amendment. It is my understanding (although individuals should seek their own legal advice for their particular situation) that members will be able to override the statutory provision by requiring that amendments be in writing in their operating agreement.
With respect to bankruptcy attorney's comments, I wonder how oral amendments allow you to better serve your clients? I guess I would need an explanation for your position on that. In a traditional business law sense I don't think that provision is particularly appealing. Just my opinion.
Rush
Rush, I am interested from the standpoint of creating entities throughout the US. Do you believe this new legislation will become popular outside of Iowa. Other than enhancing opportunity for litigation and reducing costs of amending written operating agreements, I see no wisdom or common sense in this. Specifically what inspired this law?
David Milliken
David:
Thanks for your comment. It is my understanding our new law is based upon the uniform limited liability company act. Therefore, I do believe this new legislation will have some appeal outside of Iowa. There are many facets to the law other than those mentioned in this blog post. I am not sure whether there were critical problems in our current law that needed to be addressed. Some of the changes in the law make it important to consult a business attorney when setting up an LLC.