Recent Revisions to Illinois Limited Liability Company Act

Recent Revisions to Illinois Limited Liability Company Act

By: Pamela Gros

The Illinois Limited Liability Company Act (the “LLC Act”) was originally enacted in 1993 and was later revised in 1998. The LLC Act has recently undergone significant revision, which such revisions became effective on July 1, 2017.  The changes to the LLC Act align with the revised Uniform Liability Company Act and Illinois now joins fifteen other states and the District of Columbia in modeling the revised Uniform Liability Company Act.  Although the LLC Act is often minimally revised, this is the first major overhaul of the LLC Act in two decades.  The most significate revisions of the LLC Act are described below.

  1. Revised Articles of Organization, Operating Agreement, and Statement of Termination.  Under the prior version of the LLC Act, the management of the LLC was designated in the Articles of Organization.  The goal of the 2017 revisions, however, is to make the LLC’s Operating Agreement the primary controlling document for the LLC.  The revised Illinois Secretary of State Form Articles of Organization does not specifically inquire as to whether or not the LLC is member-managed or manager-managed; but rather requests the names of the managers of the LLC and any member(s) with the authority of the manager. Therefore, the LLC is presumed to be member-managed unless the Operating Agreement indicates that the LLC is manager-managed.

Also, the revised LLC Act now permits an LLC to have an oral Operating Agreement, exempting the Operating Agreement from complying with the Illinois Statute of Frauds (which requires certain contracts, including those that cannot be performed within one year, must be in writing.)  However, it is strongly recommended that all LLCs have a written Operating Agreement in the event a dispute arises between members as to the terms of such Agreement.

Further, the revised LLC Act has done away with the Articles of Dissolution for the LLC.  Upon dissolution, members still have a duty to wind down the affairs of the LLC.  Upon completion of the winding down, a Statement of Termination replaces the prior Articles of Dissolution and is required to be filed with the Illinois Secretary of State.

  1. Fiduciary Duty. Under the revised LLC Act, an LLC may now restrict or eliminate the duties of trust that managers and members owe to the LLC, also referred to as fiduciary duties, so long as it is clear and ambiguous in the Operating Agreement.  The Operating Agreement can identify the specific activities that will not violate the member or manager’s fiduciary duties to the LLC.  For example, the duty of care of either a manager or member, requires that such individual avoid engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. The duty of care cannot be waived or eliminated, but it may be altered by the Operating Agreement, so long as such alterations do not allow for intentional misconduct or a knowing violation of law.  Further, such modifications of the fiduciary duties, including the duty of care, cannot alter or eliminate the obligations of good faith and fair dealing.  It is highly recommended that an LLC’s Operating Agreement include specific language providing that any alterations or waivers will be allowed to the extent they are permissible under the LLC Act and other applicable law.
  1. Member’s Authority to Bind LLC. Previously, a member was able to bind an LLC to agreements “solely by being a member”.  Now, a third party can no longer rely on an individual’s status as a member of the LLC to bind the LLC to any agreements executed by the member. A third party will want to conduct further due diligence to confirm such member’s authority to bind the LLC.  The revised LLC Act requires that there be express authority granted by the LLC to the member in order for the member to bind the LLC to any contractual obligation.  A Statement of Authority may be filed by the LLC with the Illinois Secretary of State indicating which managers and members have the authority to bind the LLC and to what extent. The Statement of Authority will be deemed to be “constructive notice” to third parties (i.e., the third party should have known, after due inquiry, of the individual’s authority to bind the LLC since the Statement of Authority is public record). For example, the Statement of Authority will indicate which managers and members may execute documents for transactions relating to the LLC’s real estate and other transactions on behalf of the LLC.  If the Statement of Authority does pertain to real estate, the Statement may also be recorded in the county in which the real estate is located and can be relied on in good faith by potential purchasers. On the other hand, if a manager or member does not want the authority granted to it in a Statement of Authority, the manager or member has the option to file a Statement of Denial with the Secretary of State, retracting any such authority.
  1. Distributional Member’s Right to Inspect Records of LLC. A transferee who obtains a membership interest in the LLC but who is not admitted as a member of the LLC (generally, the Operating Agreement provides for the procedure to admit a transferee as a full member of the LLC), now has the right to access the books and records of the LLC so long as such distributional member has a proper purpose.  Such records accessible to the distributional member include the LLC’s financial statements and tax returns for the prior three years.  The LLC must allow the distributional member access to the books and records within ten days after receipt by the LLC of the distributional member’s written demand. Further, the revised LLC Act also permits dissociated members’ access to the books and records of the LLC.

As a result of the significant changes to the LLC Act, it is imperative to have a current Operating Agreement in place for your LLC.  The LLC Act applies to all Illinois limited liability companies; therefore, where an LLC Operating Agreement is silent on a particular issue, the LLC Act’s provision governs.  Therefore, we encourage you to consider the impact of the revisions on your LLC and its Operating Agreement, conduct a review of your LLC’s existing Operating Agreement, or consider preparing a new Operating Agreement.

For more information on the revisions to the LLC Act or to discuss any of the above recommendations, please contact:

Pamela Gros at:

312-312-0100 or at pgros@lgattorneys.com.

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