Thursday, June 15, 2017

Changes to Illinois LLC Act - Members With Authority

Get ready for changes to the Illinois LLC Act.  Last year a bill to amend the statute was signed into law, but with its effective date deferred to July 1, 2017, and is now less than a month away.  This is a significant update to the statute and may potentially affect existing LLCs; it is worth taking a look at an LLC's current Operating Agreement in light of the changes, to see if any updates are in order.  For a complete review of all the changes, see the text/markup of the statute here.

There are many changes to the statute, but I'd like to focus on one, particularly significant change.  LLCs will now be able to designate certain members having authority to act for the company.  This is a very significant change; existing LLCs may wish to revisit their management structure and operating agreements to see whether they could benefit by utilizing this new process.

As part of the application to file Articles of Organization, Illinois LLCs are required to designate to the State whether the LLC will be managed by its members (the owners), or by a "manager."  The Manager referenced in the statute is not merely the person managing the day to day business, but is defined as the "person vested with authority" under Section 13-5 of the statute, which has to do with the law of agency.

Under general agency law and Section 13-5 of the LLC Act, each member (owner) is considered an agent and has authority to act on behalf of the LLC, unless the LLC elects to be "manager-managed" and designates one or more persons as "manager."  Currently, in a "member-managed" LLC, any member, regardless of their percentage of ownership, could sign contracts committing the LLC to obligations.  Some member-managed LLCs attempt to control this by having restrictions in the Operating Agreement, restricting who can act for the LLC and under what circumstances.  That is helpful and provides some recourse against a member who acts in violation, but the Operating Agreement is not binding on a third party who in good faith signs a contract with the rogue member.  Unless the third party "knew or had notice" that the rogue member did not have authority, the company would be required to honor this contract.

The July 1 changes to the LLC Act create a new, optional form, called a "Statement of Authority," that can be filed with the Illinois Secretary of State to satisfy the notice requirement and help member-managed LLCs protect against this rogue member scenario.  When filling out the form, the LLC will indicate which of the members have the authority to act for the LLC.  Any third party will then be deemed to have "constructive notice" of this; in other words, the third party will be presumed to have checked with the Secretary of State (or required the LLC to provide proof) to ensure that the person signing for the LLC actually had authority to sign.  In the rogue member scenario, if the LLC had filed a Statement of Authority designating only other members, then the rogue member's signature on the contract would not be effective to bind the LLC to honor it.

The Statement of Authority form is not yet available on the Secretary of State website as I write this, because it is not yet July 1, but after July 1, the form should be included with the other LLC filing forms, here.

If you have a "member-managed" Illinois LLC, the Statement of Authority may be an important document to consider filing after July 1, to protect your interests.  You would also be well advised to at the same time dust off your Operating Agreement and particularly read over the section about management of the company, and who has authority to act for the LLC.  If a Statement of Authority is filed, this section of the Operating Agreement should be revised to be consistent with that.

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