Deciding to form a legal business entity and selecting the business structure that best meets your needs can be a tricky process. It is important to understand the potential benefits and downsides associated with each type of business structure before selecting one. Additionally, it is also important to be aware that changes to your state’s business code can affect a company’s rights and responsibilities. For example, if you are involved with a limited liability company (LLC) in Alabama, or are considering forming one, it is important to note that the new Alabama Limited Liability Company Law of 2014 governs all LLCs filed since January 1st, 2015, and that it becomes retroactively effective on all LLCs as of January 1st, 2017.
Significant Changes Implemented Via Alabama’s New LLC Law
While Alabama’s new LLC law departs from our state’s current law in a number of different ways, there are a few components of the new law that are particularly important to be aware of. These key changes are outlined below.
- Operating Agreements: An ‘operating agreement’ is the agreement that LLC members enter into that governs the business and outlines the members’ financial and managerial rights and responsibilities. Under Alabama’s new LLC law, operating agreements are not required to be in writing and can be oral or implied.
- Series Segmentation: The new law allows internal ‘series’ in order to divide liabilities, members, etc. The idea behind a series limited liability company is that one series can be protected against the liabilities of another series. In some situations, this change in the law will eliminate the need for multiple LLCs. However, be aware that the IRS has not yet indicated how it will treat series LLCs for tax liability, and it also is not clear how certain issues in pending litigation, such a general liability, will be treated under Alabama common law.
- Right To Contract: The new law removes many of the old default provisions, and almost all of the default provisions that do remain can be contracted around in the LLC agreement.
- Conversions: Alabama’s new law provides a one-step conversion between LLCs and other types of business entities. After the conversion takes place, the converted entity will own the same assets and will be responsible for the same liabilities as it did before the conversion took place.
- Management: Under the new law, LLCs in Alabama are member-managed, rather than manager-managed, unless otherwise provided in the LLC Agreement. Additionally, a member or a manager’s authority to bind an LLC is governed by the LLC Agreement. If the LLC does not have such an agreement, then agency law governs their ability to bind the LLC.
- Reinstatement: LLCs governed by Alabama’s new law can be dissolved and then come back to life.
- Ability To Limit Liability Of Members For Breach Of Contract: When drafting the LLC Agreement, an LLC can now waive its ability to hold a member liable for breach of contract.
- Clawback Distributions: Under Alabama’s new law an LLC member can now be held liable for receiving distributions in excess of the fair market value of the assets.
Do I Need to Register My LLC?
Under Alabama’s Door Closing Statute (Alabama Code section 10A-1-7.21), a business entity that has not registered in Alabama, and is not a corporation or other organization formed under federal law, may not maintain any action, suit, or proceeding within our state. Alabama’s Door Closing Statute is just one reason why you may want to consider registering your business entity in Alabama. However, there are also many other practical advantages of registering your LLC, including:
- Limits certain liability exposure,
- LLCs are able to enforce good faith and fair dealing among members,
- Encourages equitable income distributions among members,
- Provides the ability to limit the authority of certain members/employees to bind the LLC,
- Allows conversion of partnerships or other entities to LLCs,
- Provides the ability to limit the fiduciary duties of members to only those with ‘oversight’,
- Affords remedies against non-performing members,
- Allows greater freedom for LLC members to contract privately, and
- Enables LLCs to better protect their assets and exposure to all types of potential litigation and/or disputes.
What Can We Do to Help?
If you live in Alabama and are interested in registering your LLC, contact the experienced business law attorneys at Cloud Willis & Ellis, LLC today by calling our Birmingham office at (205) 322-6060 or our Mobile office at (251) 545-4844.