Non-waivable Provisions of the Washington Limited Liability Company Act
Significant changes to the Washington Limited Liability Company Act went into effect on January 1 of this year. As I wrote in a previous blog post on the Washington Limited Liability Company Act changes, the changes were intended to make the law easier to understand and give members more flexibility in how they want to manage and operate an LLC. Under the old act, the non-waivable provisions were scattered throughout the act. Under the new act, the non-waivable provisions are all listed in one place for convenience— in Section 25.15.018 of the RCWs. In this blog post, we’ll discuss the non-waivable provisions in more detail.
The LLC Act allows members of an LLC flexibility in outlining through the LLC Operating Agreement how the business of the LLC should be done. However, there are some rules governing LLCs that cannot be amended or waived by the operating agreement. Here are some key provisions that cannot by waived by an operating agreement:
- Governing Law. If the LLC was incorporated in Washington, then the company cannot change the applicable law to the internal affairs of the LLC from Washington law to another state. The governing law is important among other reasons because it governs the liabilities of the members as members and manager as managers, if any, for the debts and liabilities of the LLC.
- Fiduciary Duties. The duty of care and duty of loyalty of a member in a member-managed LLC and a manager in a manager-managed LLC are codified under the new act. However, the duties of loyalty and care may be waived in the operating agreement to the extent that a waiver does not limit the member or manager’s duty to avoid intentional misconduct and knowing violations of the law. An operating agreement also cannot waive or amend the duty of good faith and fair dealing.
- Limitations on Distributions. An LLC cannot make a distribution if doing so would make the company insolvent, and the operating agreement cannot amend or waive this rule. The company can make a distribution, if after the distribution: the company is able to pay its debts as they become due in the usual course of business; the company assets are in excess of the company liabilities (except liabilities to members on account of their capital contributions); and the distribution is permitted under the terms of any loan or credit agreement.
- Personal Liability for Improper Distributions. The new law imposes personal liability on a manager in a manager-managed LLC or a member in a member-managed LLC who consents to improper distributions for the amount that exceeds what would have been a proper distribution under the law, and the operating agreement cannot limit or eliminate this personal liability.
- Personal Liability for A Breach of Duty. The operating agreement may eliminate or limit the personal liability of members or managers, for their conduct as members or managers, to the company, its members, or other persons bound by the operating agreement, so long as the operating agreement does not eliminate or limit the liability of a member or manager for intentional misconduct, a knowing violation of the law, making improper distributions, or a breach of the contractual duty of good faith and fair dealing.
- Derivative Actions. The operating agreement cannot unreasonably restrict a member’s right to bring a derivative action.
- Company Records and Information. The operating agreement cannot unreasonably restrict a member’s right to access the records and information that the company is required to maintain by law. Document requests could be burdensome, so LLCs should develop internal policies on how to produce, or otherwise make available to members, documents that they request.
It is important that members and managers of LLCs are familiar with these non-waivable provisions of the Washington Limited Liability Company Act and that their operating agreements don’t try to amend these rules. Working with non-waivable provisions is just one key consideration in drafting an operating agreement.
If you have any questions about the Washington Limited Liability Company Act, operating agreements, or if you need help drafting one for your business, please contact us today.