Articles

Sweeping Changes to Illinois’ LLC Law Effective July 1

Sweeping Changes to Illinois LLC Law Effective July 1

Illinois has enacted sweeping changes through House Bill 4361 to its Limited Liability Company Act that will be effective July 1, 2017. Unlike what several others states have done in recent years, Illinois did not repeal its current statute and enact a whole new one. Instead, the current Act remains—but in a substantially amended form.

Below is a summary of some of the key changes made by House Bill 4361. Citations are to sections of the LLC Act, which is codified at 805 Illinois Compiled Statutes 180/1-1 et seq.

1. Operating Agreements

A number of changes were made affecting operating agreements, including the following:

  • Operating agreements may be oral, in a record, implied, or in any combination thereof. (Sec. 1-5) (Formerly, operating agreements were to be made in writing).
  • An LLC is bound by and may enforce the operating agreement, whether or not it manifests assent to the agreement. (Sec. 15-5)
  • An operating agreement may be entered into before, after, or at the time of filing the Articles of Organization and may be made effective at the time of formation or at a date set forth in the operating agreement. (Sec. 15-5)
  • Operating agreements are exempted from the statute of frauds. (Sec. 1-46)

2. Articles of Organization

The Articles of Organization must set forth a confirmation that the LLC has at least one member and has to set forth the names of only those members having the authority of a manager. (Sec. 5-5)

3. Execution of Documents

Documents executed on an LLC’s behalf shall be signed by a person authorized by the LLC to sign the document. (Sec. 5-45) (Formerly, documents were to be signed by a manager, or if none, by the members or a person designated by a vote of the members.)

4. Default Management Rule

An LLC is member-managed unless the operating agreement expressly provides it will be manager-managed. (Sec. 15-1) (Formerly, manager-management was designated in the Articles of Organization.)

5. Member’s Agency Status

A member is not an agent of an LLC solely by reason of being a member. (Sec. 13-5) (Formerly, each member was an agent of the LLC for the purpose of the business and an act of the member, for carrying on, in the ordinary course, the LLC’s business, bound the LLC.)

6. Statement of Authority/Denial

A Statement of Authority, stating the authority or limitations on authority on any member or manager may be filed with the Secretary of State. (Sec. 13-15) A person may file a Statement of Denial with the Secretary of State denying the grant of authority. (Sec. 13-20)

7. Fiduciary Duties

The operating agreement may do the following: (Sec. 15-5)

  • Restrict or eliminate a fiduciary duty (other than the duty of care), but only to the extent the restriction or elimination is clear and unambiguous.
  • Alter the duty of care, except to authorize intentional misconduct or a knowing violation of law.
  • Specify the method by which a specific act or transaction—that would otherwise violate the duty of loyalty—may be authorized or ratified by disinterested or independent persons after full disclosure.
  • Eliminate or limit a member or manager’s liability to the LLC and its members for monetary damages, except for certain breaches of duties, a financial benefit to which the member or manager is not entitled, an intentional infliction of harm, or an intentional crime.

8. Effect of Member Dissociation

An LLC is no longer required to cause the distributional interest of a dissociated member to be purchased. (Sec. 35-55)

9. Inspection of Books and Records

The section on the right of members to information (Sec. 10-15) was substantially revised to provide the following (among other things):

  • Within 10 days after receiving a demand for information, the LLC must provide the information or decline, stating in a record its reasons for declining.
  • A dissociated member may have access to information to which the person was entitled while a member if sought in good faith for a proper purpose.
  • The rights under this section do not extend to a transferee.
  • The LLC may impose reasonable restrictions and conditions on access to and use of information. In a dispute, the LLC has the burden of proving reasonableness.

10. Statement of Termination

A Statement of Termination (formerly, Articles of Dissolution) is filed when a dissolved LLC has been wound up in order to terminate the LLC’s existence. (Sec. 35-15)

11. Alternatives to Judicial Dissolution

In a proceeding brought by a member, dissociated member, or transferee for judicial dissolution, the court may order a remedy other than dissolution, including, but not limited to, a buyout of the applicant’s interest. (Sec. 35-1)

12. Administrative Dissolution – Name Protection

The Secretary of State shall not allow another LLC or corporation to use the name of an administratively dissolved LLC until three years have elapsed from the date of dissolution. (Sec. 35-37)

13. Conversions

The provisions governing conversions were substantially amended to provide the following (among other things):

  • An organization may convert to an LLC, and an LLC may convert to an organization other than a foreign LLC. (Sec. 37-10). Organization is defined as a general partnership, limited partnership, LLC, business trust, corporation, or other person having a governing statute, whether or not organized for profit. (Sec. 37-5) (Formerly, a partnership or limited partnership could convert to an LLC, and there was no provision for an LLC converting to another organization).
  • The other organization’s governing statute must authorize the conversion. The conversion must not be prohibited by the law of the jurisdiction that enacted the governing statute, and the other organization must comply with its governing statute. (Sec. 37-10)
  • After approval of the plan of conversion, a converting LLC must file Articles of Conversion with the Secretary of State. A converting organization other than an LLC must file Articles of Organization that sets forth that it is converting. (Sec. 37-10)

14. Merger

An LLC may merge with or into another constituent organization if the other organization’s governing statute authorizes the merger, the merger is not prohibited by the law of the jurisdiction that enacted the governing statute, and the other organization complies with its governing statute. (Sec. 37-20) (Formerly, the merger had to be permitted under the law governing the other entity.)

15. Domestication

A foreign LLC may become a domestic LLC, and a domestic LLC may become a foreign LLC. The foreign LLC’s governing statute must authorize the domestication, the domestication must not be prohibited by the law of the jurisdiction that enacted the governing statute, and the foreign LLC must comply with its governing statute. (Sec. 37-31) A plan of domestication must be approved and Articles of Domestication filed with the Secretary of State. (Secs. 37-32, 37-33) (Domestications were not provided for previously.)

Conclusion

These are just some of the changes made to the Illinois Limited Liability Company Act by House Bill 4361. The bill was in excess of 110 pages, and it amended, added, or repealed over 50 sections of law.

Nevertheless, owners, managers, and advisors of Illinois LLCs may want to familiarize themselves with the entire bill. They may also want to review the governing documents of the Illinois LLCs they own, manage, or advise to see if any changes are required, or if any change would be beneficial to the LLC and its members and managers. For example, an LLC wishing to take advantage of the ability to eliminate or restrict fiduciary duties will have to amend its operating agreement to include such a provision. Or, now that an LLC is no longer required to purchase a dissociating member’s interest, it might be beneficial to set forth in the operating agreement what will happen when a member decides to exit the LLC.

Request a Custom Quote

Have a specific question about a product? A CT Specialist will follow up with a custom quote along with a comprehensive assessment of your needs.