A Guide To Real Estate Investment in So. Fla.: Part 2January 21, 2014 – Articles Law360
The Florida Legislature recently performed a complete rewrite of the Florida limited liability company statute (the new act). The new act makes a number of important changes that account for the way in which LLCs are used today.
In Part 1 of this article, we recognized the general rule that real estate investors should own investment properties though individual limited liability companies to protect themselves against liability. Part 2 of this guide explores some of the more important changes and nuances found in the new act.
The new act became effective on Jan. 1, 2014. The new act is effective for all Florida LLCs organized after that date. Additionally, for a period of one year, LLCs organized before Jan. 1, 2014, may elect to be governed by the new act rather than the former statute. However, as of Jan. 15, 2015, all Florida LLCs will be governed by the new act. As such, it is important to understand the changes that will effect governance of all Florida LLCs in the coming year.
LLCs are managed through two types of management systems: “member management” or “manager management.” Under the previous iteration of the statute, Florida employed the concept of the “managing member.” The new act eliminates the concept of the “managing member” and essentially maintains statutory apparent authority for members of the LLC to act on behalf of the LLC.
While this is only a nominal change from Florida’s former statute, it directly contravenes the Revised Uniform Limited Liability Company Act on which the Florida statute is based. The RULLCA sought to eliminate any statutory apparent authority because most modern LLCs are manager-managed, and it was unclear to third parties that had authority to bind an LLC. The Florida Legislature chose to retain statutory authority but added the provisions regarding statements of authority discussed below.
The continued inclusion of statutory apparent authority for members allows any one member of an LLC to be able to bind it to an agreement with a third party even without the majority vote of the membership of the LLC. As such, a third party may be able to prevail in an action for breach or even in obtaining specific performance of a contract against an LLC where an individual member of the LLC did not have actual authority to bind the LLC but did so anyway.
The Statement of Authority
The new act provides a tool to prevent the problems that can arise from the apparent authority of all members outlined above. Specifically, Florida law allows an LLC to file a “statement of authority” with the Department of State. The statement of authority designates the limits of each member’s individual authority.
The statement of authority serves as constructive notice to third parties regarding who may bind the LLC and in what ways. Real estate investors who regularly transact business through a multiple member LLC would be smart to draft and file statements of authority that prevent any confusion as to the power and authority of each member to bind the LLC with third parties.
The new act modifies default management and voting rules for manager-managed LLCs. Specifically, unless the operating agreement modifies voting rules, a majority of the interested members must approve any act outside of the ordinary course of the LLC’s business even in manager-managed LLCs.
The new act removes blanket prohibition preventing LLCs from amending their articles to provide that a vote of less than a majority of interest is acceptable on dissolution and mergers.
Where real estate investors utilize manager-managed LLCs to own different properties, the new act provides some added flexibility to allow managers to take significant LLC action without a vote of the entire membership.
If a member of manager can establish one of the following, the member or manager can seek a judicial dissolution of the LLC:
- the LLC’s activities are illegal or unlawful;
- persons in control of the company are acting illegally or fraudulently;
- it is not reasonably practicable to carry on the activities of the limited liability company in accordance with its operating agreement;
- the assets are being misappropriated or wasted causing injury to the limited liability company or its members;
Like the prior version of the act, the new act allows judicial dissolution in the event of a deadlock between the managers or members where (1) the managers or members cannot break the deadlock, and (2) the deadlock is causing or threatening to cause irreparable injury to the limited liability company. The new act allows for “deadlock sale” provisions in operating agreements to deal with deadlocks as an alternative to judicial dissolution.
Unlike the prior statute, the new act allows a member to dissociate from the LLC at any time for any reason by withdrawing by “express will.” Under the prior version of the statute, members could only accomplish dissociation if expressly authorized by the articles of organization.
The new act also includes new provisions relating to “wrongful dissociation” where a member dissociates in violation of the articles of organization. If dissociation is wrongful, the LLC may be entitled to damages against the wrongfully dissociated member.
The new act contains provisions relating to the winding up of the affairs of an LLC. Specifically, the new act allows a member, manager or legal representative to conduct up. Additionally, the member, manager or legal representative may seek judicial supervision of the winding up process. The new act allows a creditor with good cause to seek judicial appointment of a receiver or trustee to oversee the winding up process as well.
In sum, the new act changes Florida’s LLC environment in several significant ways. Due to the common practice of owning investment property through an LLC, investors should be familiar with the new act and the changes that will affect all LLCs in the coming years.
Originally published in the January 21, 2014 edition of Law360. (c) 2013, Portfolio Media, Inc. Further duplication without permission is prohibited. All rights reserved.