Illinois Enacts Sweeping Changes to LLC Act

The Illinois Limited Liability Company Act (805 ILCS 180/1-1) has undergone significant changes via House Bill 4361, which was signed into law by Governor Rauner on July 28, 2016.  These amendments took effect July 1, 2017.  The consequences of the amendments to the Act may require revisiting and amending existing documents to ensure compliance with new provisions under the Act, and consistency with the intent of the parties.  Some of these changes are detailed below.  Please feel free to contact us to discuss how these amendments may impact you.   

Oral Agreements:  The Act now provides that an operating agreement may include agreements between parties that are oral, written, implied, or a combination thereof, regardless of whether such agreement is actually referred to as an operating agreement.  The amendments also except operating agreements from the Illinois statute of frauds.

Member-Management:  The new rule is that unless otherwise set forth in the operating agreement, the LLC shall be deemed to be member-managed.

Members’ Agency:  The amendments to the Act now provide that a member is not an agent of the LLC solely by reason of being a member.  Previously, the Act explicitly stated that members were considered agents.  Ordinary agency law still applies, but this change prevents a third party from relying on an assumption that the member is an agent solely on the basis of such membership. 

Statement of Authority:  The revised Act creates a new form that can (but need not) be filed with the Illinois Secretary of State that outlines the authority of the members or managers to enter into certain transactions on behalf of the LLC, including real estate transactions.  The document serves as constructive notice to third parties in the event that actions are undertaken by unauthorized members.  For companies that have inactive, hostile, or dissociated members, it may make sense to explore the filing of a Statement of Authority. 

Statement of Denial:  In conjunction with the Statement of Authority, any member or manager listed in the Statement of Authority can file a statement denying any authority granted thereunder. 

No Mandatory Buyout Obligation:  The Act no longer provides that an LLC must purchase a dissociating member’s interest in the LLC.  Companies should ensure that operating agreements are well-drafted to override the default rule so that the rights and duties of all parties in the event of dissociation are clearly outlined. 

Creditor Rights:  The amendments provide greater clarity as to the rights of creditors that obtain a judgment against an LLC member and seek a charging order against the member’s interest, and distributions therefrom.  The Act now provides that a charging order constitutes a lien on the member debtor’s distributional interest. 

Absolving Fiduciary Duties:  An operating agreement may now restrict or eliminate fiduciary duties of members for certain activities if clearly and unambiguously drafted.  This does not apply to duties of members in member-managed LLCs or grossly negligent, reckless, or intentional misconduct of the member; which means that the duty of care cannot be eliminated. 

Statement of Termination:  The Act now requires that a Statement of Termination be filed by the members once the winding down has been completed.  This document replaces the Articles of Dissolution under the previous iteration of the Act. 

Team Members: