New Act Leads to Changes for New Jersey LLCs
LLCs, or Limited Liability Companies, are one of the most common business structures in New Jersey. But while LLCs may be popular, they’re about to be facing some drastic changes when it comes to how voting power is distributed across company owners.
New Jersey LLCs Under the Old System
To understand the weight of the changes that are coming to New Jersey’s LLC community, you first have to rewind. In the past, the standards of New Jersey LLC operation was governed by the Limited Liability Company Act. Under the old LLCA, the power held by each LLC member was based on their percentage of ownership. For example, imagine a hypothetical LLC owned by three people, one of whom owns 98% of the LLC, with the other two each owning 1%. In that scenario, the person who owns 98% of the company also controls 98% of the voting power, and reaps 98% of the profits.
However, a new act will change the way that voting power and profit management are distributed across LLC owners. Instead of these factors being based proportionally, on a percentage of ownership, they will be averaged across the total amount of members involved.
New Changes to Redistribute Power for Preexisting LLCs
The new act, appropriately titled the Revised Uniform Limited Liability Company Act, reassigns voting and financial weight on an entirely new basis. The scope of voting power and profit-making will no longer be tied to the percentage of ownership an owner may hold, but will be assigned instead on a simple per-capita basis.
Under the old ownership-percentage system, the hypothetical 98% owner essentially has 98% of the control of the LLC, whether that applies to deciding on policy, the company’s creative direction, or any other factor where decision-making comes into play. Under the provisions of the new act, each member has equal control, because of the new per-capita weighing system. That means that our two 1% owners could outvote the 98% owner, in a literal case of two heads being better than one.
By its terms, the “new” act which came into effect on March 18, 2013, had heretofore only been applicable to LLCs that were formed after its adoption. Existing LLCs were grandfathered until March 1, 2014 at which time, they also become subject to the provisions of the “new” act. Therefore, it is recommended that members and managers of all LLCs consult with their attorney to determine what this change means for them and to ensure continuity of management and operations as they become subject to the provisions of the new act.
Other jurisdictions which have joined New Jersey in adopting the Revised Uniform Limited Liability Company Act include Utah, Nebraska, California, Wyoming, Idaho, Iowa, and the District of Columbia.
If your LLC, parternship, or corporation needs an experienced New Jersey business litigation attorney, call our law offices today at (800) 891-2657.