This bill modifies the information required in articles of organization filed with
DFI and allows additional information to be included in the articles of organization.
The bill also specifies that an LLC has perpetual duration (although the duration
may be modified by the operating agreement). The bill allows a person, in addition
to various other permissible ways, to become a member of an LLC in any way
provided for in the operating agreement. The bill includes various provisions
regarding the formation of a one-member LLC (which is also permitted under
current law).

Current law defines “operating agreement" to include only a written document
and allows for the possibility that an LLC could be formed and operate without an
operating agreement. Under current law, “operating agreement" means an
agreement in writing, if any, among all of the members as to the conduct of the
business of an LLC and its relationships with its members.

Under this bill, the operating agreement may be oral or written, express or
implied, and an LLC cannot exist without an operating agreement. Under the bill,
“operating agreement" means the agreement, whether or not referred to as an
operating agreement and whether oral, implied, written, or recorded in a tangible or
electronic medium, or in any combination of these, of all the members of an LLC,
including a sole member, concerning 1) relations among the members as members
and between the members and the LLC; 2) the rights and duties of managers; 3) the
activities and affairs of the LLC and the conduct of those activities and affairs; 4) the
means and conditions for amending the operating agreement; and 5) mergers,
conversions, and other business combinations.

This bill provides more specific guidance, in comparison with current law, as to
when the provisions of an operating agreement override contrary statutory
provisions and when they do not. Under the bill, subject to certain exceptions, the
operating agreement governs all matters described in items 1) to 5), above, but if the
operating agreement does not provide for a matter described in items 1) to 5), above,
statutory provisions govern the matter. The operating agreement also governs the

obligations of an LLC and its members to a person dissociated as a member or a
person to whom a member's interest (right to receive distributions from the LLC) has
been transferred. The bill includes a list of matters for which the operating
agreement may not vary from statutory provisions, including matters related to a
member's fiduciary and other duties, discussed below.

This bill generally eliminates the concept of “apparent authority" in connection
with LLCs. Under current law, in a member-managed LLC, each member is an
agent of the LLC and, subject to exceptions, the act of a member for apparently
carrying on the business of the LLC binds the LLC. This principle does not apply in
a manager-managed LLC, where the managers, not the members, are the agents of
the LLC for purposes of carrying on its business.

Under this bill, a member is not an agent of an LLC solely by reason of being
a member. An LLC may file with DFI a statement of authority identifying the
authority of any position with the LLC (which covers all persons holding that
position), identifying the authority of any specific person, or identifying limitations
on the authority of any position or person. The statement of authority is effective for
five years from its original date or its most recent amendment or renewal, and the
statement affects only the power of a person to bind the LLC to persons that are not
members. The bill allows any person named in a statement of authority to file with
DFI a statement of denial of authority.

Under current law, unless otherwise provided in an operating agreement, a
member or manager cannot act, or fail to act, in a manner that constitutes willful
misconduct; a willful failure to deal fairly with the LLC or its members where the
member or manager has a material conflict of interest; or, with exceptions, a violation
of criminal law. Unless otherwise provided in an operating agreement, a member or
manager cannot derive improper personal profit from a transaction. A member or
manager must account to the LLC, and hold as trustee for it, any improper personal
profit derived, without the consent of a majority of the disinterested members or
managers, from a transaction connected with the LLC or from use by the member or
manager of LLC property, including confidential or proprietary information.

Under this bill, unless the duty is permissibly modified in the LLC's operating
agreement (as discussed below), a member of a member-managed LLC, or a manager
of a manager-managed LLC, owes to the LLC, and to its members, fiduciary duties
of loyalty and care, as described below. A member or manager must also discharge
its duties and obligations, whether statutory or arising under the operating
agreement, and exercise its rights, consistently with the contractual obligation of
good faith and fair dealing. However, a member does not violate a duty or obligation
solely because the member's conduct furthers the member's own interest.

Under the bill, a member of a member-managed LLC, or a manager of a
manager-managed LLC, owes a duty of loyalty that includes the duty 1) to account
to the LLC and hold as trustee for it any property, profit, or benefit derived by the
member or manager in the conduct or winding up of the LLC's business, from use of
the LLC's property, or from the appropriation of an LLC opportunity; 2) to refrain

from dealing with the LLC, in the conduct or winding up of the LLC's business,
adversely or on behalf of a person having an adverse interest; and 3) to refrain from
competing with the LLC in the conduct of the LLC's business. However, all the
members of an LLC may authorize or ratify, after disclosure of all material facts, a
specific act or transaction that otherwise would violate the duty of loyalty. Also, it
is a defense to a claim of dealing adversely with the LLC (item 2, above) that the
transaction was fair to the LLC.

Under the bill, a member of a member-managed LLC, or a manager of a
manager-managed LLC, also owes a duty of care, in the conduct or winding up of the
LLC's business, to refrain from 1) willfully failing to deal fairly with the LLC or its
members when the person has a material conflict of interest; 2) violating the criminal
law; 3) engaging in a transaction in which the person derives an improper personal
profit; or 4) engaging in willful misconduct.

Under the bill, the operating agreement may not alter or eliminate, or restrict
the remedies for breach of, the duty of loyalty or the duty of care, except as described
below; eliminate, or restrict remedies for the breach of, the contractual obligation of
good faith and fair dealing, but a written operating agreement may prescribe
standards, if not manifestly unreasonable, by which performance of the obligation
is measured; or relieve a person from liability for conduct that violates the duty of
care described in items 1) to 4) in the immediately preceding paragraph. However,
the operating agreement may specify the method by which an act or transaction that
would otherwise violate the duty of loyalty may be authorized or ratified after the
disclosure of all material facts. In a member-managed LLC, a written operating
agreement may also eliminate or limit a member's fiduciary duty if it also relieves
the member of a responsibility and imposes it on another member. A written
operating agreement may also alter or eliminate, or restrict remedies with respect
to, certain aspects of the duty of loyalty; identify specific types or categories of
activities that do not violate the duty of loyalty or the contractual obligation of good
faith and fair dealing; alter the duty of care, if it does not authorize the conduct
described in items 1) to 4) in the immediately preceding paragraph; or alter or
eliminate any other fiduciary duty.

This bill makes changes to the information that must be contained in an LLC's
annual report. Under current law, if a domestic LLC or registered foreign LLC is
manager-managed, its annual report must contain the name and business address
of each manager. The annual report of a registered foreign LLC must also contain
the name and business address of each LLC member. A domestic LLC is one
organized under this state's law, and a registered foreign LLC is one organized under
the law of another state or jurisdiction and authorized to do business in this state.

Under this bill, the annual report of a domestic LLC or registered foreign LLC
must include the name of at least one member if it is member-managed or the name
of at least one manager if it is manager-managed.

This bill makes some changes with respect to the records that an LLC must
keep at its office. As under current law, the bill provides members with certain rights
to, on request, inspect and copy records maintained by the LLC, and requires the

LLC to provide records and information, although the details of these requirements
in the bill differ from current law. Under the bill, managers have these rights in a
manager-managed LLC. In addition, the bill requires an LLC, without request, to
furnish each member in a member-managed LLC, or each manager in a
manager-managed LLC, with any information concerning the LLC's activities,
affairs, financial condition, and other circumstances that the LLC knows and is
material to the proper exercise of the member's or manager's rights and duties,
unless the member or manager already knows the information. In a
manager-managed LLC, the LLC must, without request, provide members with all
known, material information before the member is required to vote on or give or
withhold consent to a matter. In addition to the LLC's duty, each member in a
member-managed LLC, or each manager in a manager-managed LLC, has a duty
to furnish information known by the member or manager. The bill also contains
provisions relating to the rights to information after a person dissociates as a
member. The bill allows an LLC to impose reasonable restrictions and conditions on
access to and use of information furnished by the LLC.

Current law includes provisions relating to when notice to, or knowledge of, a
member or manager is imputed to an LLC.

This bill eliminates these provisions and creates new provisions as to when a
person is considered to have notice or knowledge of a fact. The bill also specifies when
a person is considered to have given another person notice of a fact.

The bill also allows DFI to provide written notice to an LLC solely by e-mail to
its registered agent.

As under current law, this bill specifies circumstances under which a member
of an LLC dissociates from the LLC, including voluntary dissociation. Under the bill,
a person may dissociate as a member at any time, rightfully or wrongfully, by
withdrawing as a member by express will. A person's dissociation as a member is
wrongful if, among other things, the dissociation is in violation of a written operating
agreement. The bill provides more specific information, in comparison with current
law, about the effects of a member's dissociation from an LLC. Among these effects,
a person dissociated as a member has no right to participate in the management and
conduct of the LLC's business and the person's right to distributions takes on the
status of the right of a transferee. Upon dissociation, certain obligations of the
person terminate as to future events but continue to apply to past events.

Under current law, if a member withdraws from an LLC and the withdrawal
occurs as a result of the member's wrongful conduct, the LLC may recover from the
withdrawing member damages as a result of the wrongful conduct.

Under this bill, a member that wrongfully dissociates from an LLC is liable for
damages caused by the dissociation and the liability is to both the LLC and to any
other member if the other member shows that its injury is not solely the result of
injury suffered by the LLC.

Under current law, a member who dissociates from an LLC has a right to a
distribution in complete redemption of the fair value of the member's interest at the
time of dissociation, unless the operating agreement provides otherwise.

Under this bill, unless the operating agreement provides otherwise, a
distribution to a person who dissociates as a member of an LLC is discretionary with
the LLC, and the person has no right to a distribution. The bill also specifies that
an LLC's obligations to a person dissociated as a member are governed by the
operating agreement, but an amendment to the operating agreement after the
person has dissociated as a member cannot impose a new obligation on the person.

This bill expands on provisions of current law under which a creditor of an
LLC's member may seek from a court a charging order against the member's interest
in the LLC to satisfy the unpaid amount of the creditor's judgment. Under the bill,
a charging order is available against the interest (right to receive distributions) of
either a member or a person to whom the member's interest has been transferred
(transferee). A charging order constitutes a lien on the member's or transferee's
interest and requires the LLC to pay over to the creditor any distribution that
otherwise would be paid to the member or transferee. Under certain circumstances,
the court may foreclose the lien and order the sale of the member's or transferee's
interest in the LLC. The purchaser of the interest at the foreclosure sale obtains only
the interest and does not thereby become a member or gain any right to participate
in the business of the LLC. The bill includes specific provisions applicable when a
court orders foreclosure of a charging order lien against a single-member LLC.