As most business law practitioners are aware at this point, the Illinois Limited Liability Act has been amended by HB 4361 and the amendments were effective July 1, 2017. The amendments to the Limited Liability Company Act include numerous provisions regarding member managed companies. This article will address some of the concerns regarding the amendments as they relate to member managed Limited Liability Companies ("LLC").
The Amended Limited Liability Company Act ("ALLC") institutes major changes to the "statutory apparent authority" previously granted to member managed companies. Under the former Limited Liability Company Act ("FLLC"), each member was designated as an agent to act on behalf of the company for carrying on its ordinary course of business unless the operating agreement stated otherwise and the person with whom the member was dealing with knew the member lacked authority.
Under the ALLC, the member will have no power of agency solely by reason of being a member. That being said, a person's status as a member will not prevent the application of other law, namely agency law, from imposing liability on a company because of the person's conduct. Of course, it is also subject to the same limitations of authority set forth under the operating agreement and if the person knew of such limitations to act.
The purpose of the changes is to eliminate the "statutory apparent authority" reflected under the FLLC.' A major reason for the change was to avoid confusion of authority. The codification of power to bind the company under the FLLC had potential to cause issues because of the LLC's flexibility of management structures (i.e. member-managed/manager-managed) and the company's name does not provide any detail into its management structure. Therefore, a third party would have to check the public record, which may reveal that the LLC is manager-managed and the member would have no apparent statutory power to bind the company, unless the member was also a manager. The ALLC rejects statutory apparent authority and eliminates the default provisions that a member is an agent solely by owning membership interests. This eliminates some potential for confusion, especially for LLCs with large numbers of members.
The ALLC further eliminates potential for confusion by requiring the articles of organization to set forth the names and business address of the members or managers having management responsibilities.2 This departure from the FLLC will presumably permit members of member-managed LLCs to remain anonymous so long as they do not hold management responsibilities within the company. In 2018, member-managed LLCs will be required to set forth the name and business address of any and all members having authority of a manager.' This will provide evidence and notice of actual authority to third parties dealing with the LLC which they may rely upon.
The actual authority of a member will be delegated under the management provisions of the operating agreement. If the operating agreement does not address the management of the company, the company will be deemed to be member-managed and each member will have equals rights in the management and conduct of the company's business and any matter relating to the business of the company may be decided by a majority of the members, subject to limitation under the Amended LLC Act.4
In the event two business savvy individuals unwittingly decided to organize an LLC by filing articles of organization with the state of Illinois and neglect to execute an operating agreement, the ALLC provides that the company will be deemed a member-managed company. Each of the members will have equal rights in the management and conduct of the company's business and any matter relating to the business and company may be decided by a majority of the members, subject to limitations of course.
If the LLC was not formed under any written operating agreement, the member-manager rights may be limited by any oral agreement or implied understanding reached between the parties because the ALLC now statutorily provides for such interpretation.' Assume for example two real estate entrepreneurs decide to go into the business of purchasing and managing real estate and come to an understanding through many discussions that Member A will handle the purchasing and Member B will handle the management of the real estate. These discussions will be deemed to be the operating agreement under the ALLC and will constitute a manifestation of the LLC members' agreement concerning the scopes of their respective authority to act on behalf of the LLC under agency law. The same result could be achieved through common law as well.
If the two savvy business individuals decide to execute an operating agreement and choose to limit each other's authority to the respective duties of purchasing real estate and managing the real estate under the operating agreement, these limitations of authority may also be reflected by filing a statement of authority with the Secretary of State. The ALLC allows companies to file a statement of authority reflecting the nature of the authority and any limitations of any member or manager of the company or any other persons to execute an instrument transferring real property held in the name of the company; or enter into other transactions on behalf of, or otherwise act for or bind, the company.' This can avoid misconceptions caused by the apparent authority by providing notice. However, a limitation on authority of a member or manager of the LLC contained in a statement of authority is generally not by itself evidence of knowledge or notice of the limitation. That being said, a certified copy of a statement of authority that grants authority to transfer real property and is recorded in the county's recorder's office is conclusive evidence in favor of a person that is not a member and that gives value in reliance on the grant without knowledge to the contrary.'
Further, if the recorded certified copy of a statement of authority places limitations on the authority to transfer real property all persons that are not members are deemed to know the limitation.' Thus, the ALLC provides a statutory provision imputing knowledge to alleged bona fide purchasers. For example, in the scenario above, if the members file a certificate of authority and record it in the county where their LLC owns property restricting Member B's scope of authority solely to management of the property, and managing Member B decides to sell the property by executing a deed in favor of a third party, the third party will not be considered a bona fide purchaser as all persons that are not members are deemed to know the limitations and the transaction will be considered void.
Lastly, the statement of authority provides evidence that a member may be held personally liable if the member acts outside the scope of the statement of authority. If damages are incurred by a third party in a transaction with the member acting outside the scope of his or her authority, the member will likely be held personally liable for the member's actions.
Note: This post was originally published in the Business and Securities Law Forum, the newsletter of the Illinois State Bar Association's Section on Business and Securities Law (May 2017, Vol. 62 No. 3)