New Revisions to Washington’s LLC Act

LLCs have been available as an entity choice for Washington businesses since 1994. And they are a popular choice among businesses in our state. How popular? Between January 1 and June 1, 2015, Washington businesses formed 20,853 LLCs. By comparison, during that same five-month period, just 6,845 regular corporations registered in the state.

During its 2015 session, Washington’s legislature passed a major revision of the state’s Limited Liability Company (LLC) Act, which is codified at RCW 25.15. The new law becomes effective July 25, 2015, 90 days after the end of the legislative session, although both new and existing LLCs will not be subject to the changes until 2016.

What’s new?

• Boards allowed. LLCs will be able to have officers and be managed by a Board of Directors.
• Non-waivable provisions. While the terms of an individual LLC Agreement will control when the Washington LLC Act is silent, or when the LLC Agreement is inconsistent with the LLC Act, the new law designates fifteen (15) provisions as non-waiveable, meaning that the Washington LLC Act – and not the individual LLC Agreement – will control.
• Oral LLC Agreements permitted. LLC Agreements will no longer be Limited Laibility Companydefined as only “written agreements.” Like a Partnership Agreement, an LLC Agreement or specific terms of an LLC Agreement may be oral or implied. That said, Washington LLCs should not consider foregoing written LLC Agreements in favor of an oral agreement among the members – or to even rely on the Members’ oral agreement related to any aspect of the LLC’s governance. With a written LLC Agreement, the terms governing the LLC are set forth and signed by all so that they can be readily understood and relied upon by the parties and, if necessary, the courts in the event of a dispute. Otherwise, with an oral agreement, any dispute on the terms of the agreement will likely need to be settled in litigation, and any such dispute will pit the word of the Members against one another.
• Certificate of Formation changes. The LLC’s Certificate of Formation will no longer be required to specify if the LLC is manager-managed.  Instead, general principles of agency law will apply to determine whether the LLC is manager-managed or Member-managed. We recommend, to promote clarity and transparency, that these terms continue to be specified both in the Certificate of Formation and in the LLC Agreement.
• Fiduciary duties. Fiduciary duties for LLC Members are now included in the new Act, including duties of loyalty and care.
• Member voting. The new law establishes a default rule for member voting:  one member = one vote. LLC Agreements may revise this formula, however, and allow the votes to be calculated in a different way.
• Members’ access to records. The new Washington LLC Act expanded LLC Members’ rights to inspect and copy LLC records. Similar to the rules that apply to corporations, LLC Members will have a right to inspect and copy a wider category of records than under the existing law. However, the Member must have a proper purpose related to their interest as a Member, and make a proper request. Under the new law, an LLC cannot unreasonably restrict a Member’s access to records or information, although it may restrict how the information will be used.
• Dissenters’ rights may be waived. Once the new Washington LLC Act becomes effective, LLC Members may, by written Agreement, limit or eliminate their right to dissent from an LLC’s merger and demand payment for the fair value of their membership interest.

The Washington legislature’s goal was to make LLCs more flexible and user-friendly for businesses in our state, eliminate confusing provisions and promote uniformity in the laws that apply to the state’s business entities.

Have questions or concerns about what the changes to the LLC Act mean for your existing LLC? Existing Washington LLCs may want to consider modifying their LLC Agreements to take the new law into account. Our firm works with a wide range of businesses — we are happy to discuss the details with you!

Photo credit: University of Salford Press Office on Flickr