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Potential Adverse Consequences Under the New Jersey Revised Uniform Limited Liability Company Act

February 2014

On March 1, 2014, the New Jersey Revised Uniform Limited Liability Company Act (the “Act”) will become fully effective and will govern all New Jersey limited liability companies, regardless of the date of the LLC’s formation.

Among other changes being made to the prior law, the Act provides that an LLC operating agreement may now be oral, written, implied or any combination thereof. Previously, an operating agreement was required to be in writing.

As a consequence of this change in law, one or more parties discussing a potential business venture may maintain that an operating agreement was formed as the result of discussions, emails and/or drafts of an operating agreement that have been disseminated. If a party is successful in establishing that an oral or implied operating agreement exists, he/she is free to argue about the terms of the operating agreement as well. Those terms may be established through emails, discussions and draft agreements. If, however, such communications are not sufficient to allow a court to determine the terms of the operating agreement as intended by the parties, the default provisions of the Act will apply. In that regard, the Act states that, unless otherwise provided in an operating agreement, an LLC is managed by its members, each member (regardless of his/her economic interest) is entitled to an equal voice in management, and the operating agreement can only be amended by the unanimous consent of all members. The application of these default provisions may create a balance of power that was never intended by the party who conceived of the business venture.

It will now be even more important for an entrepreneur who is considering forming an LLC to consult with corporate counsel prior to initiating discussions with third parties, to ensure that the appropriate safeguards are put in place to protect the interests of the entrepreneur and avert costly and disruptive litigation.

For more information regarding the New Jersey Revised Uniform Limited Liability Company Act and how it will affect New Jersey LLCs, please contact:

Laurence M. Smith | Member of the Firm | | (973) 530-2021
John P. Maloney | Counsel | | (973) 530-2070