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Bar News - October 19, 2012


Another ‘Election’ Decision Awaits Existing NH LLCs

By:

Should old New Hampshire LLCs elect into New Hampshire’s new LLC Act?"

As many readers will know, on June 18, 2012, Gov. Lynch signed into law the Revised New Hampshire Limited Liability Company Act (the "New Act"). Under New Act, Section 5:
  • The New Act will become effective on Jan. 1, 2013, with respect to New Hampshire LLCs formed on or after that date.
     
  • In general, it will become effective on Jan. 1, 2014, with respect to New Hampshire LLCs formed before Janu. 1, 2013 ("Old Act LLCs").
     
  • However, Old Act LLCs can elect to be covered by the New Act during calendar year 2013 by unanimous written vote of their members.
There are presently about 42,000 Old Act LLCs and, by January 1, 2013, there may be as many as 45,000. What factors should the members of these LLCs consider in deciding whether to make a Section 5 election?

As the chair of the Business and Industry Association committee that drafted the New Act, I’m biased; but I think that the biggest single factor is that the New Act provides numerous key business organization law benefits to most New Hampshire LLCs and their members that the Old Act doesn’t provide. This strongly supports a Section 5 election.

To illustrate these benefits:
  • There are serious ambiguities in the "charging order" and "pick-your-partner" provisions of the Old Act (the provisions in that act that are intended to protect the management rights and basic economic rights of LLC members from third-party claims). The New Act removes these ambiguities and provides far stronger protections.
     
  • The fiduciary provisions of the Old Act are few and highly ambiguous. Those of the New Act are comprehensive and crystal-clear.
     
  • The provisions of the Old Act provide an inadequate statutory basis for structuring LLCs to protect members from New Hampshire interest and dividends tax liability and, in statutory conversions of corporations to LLCs, from liability for the real estate transfer tax. The provisions of the New Act provide a far stronger basis for these protections.
What does all this mean for members of Old Act LLCs who are trying to decide whether to make Section 5 elections? In my view, the answer depends on whether the Old Act LLC in question is a "low-stakes" or a "high-stakes" LLC.

Low-stakes LLCs might include, for example, those with gross revenue of $75,000 or less. My guess is that more than half of all New Hampshire LLCs fit in this "low-stakes" category. The rest are high-stakes LLCs.

In deciding whether to make Section 5 elections, members of low-stakes LLCs should, in my view, follow a rule of "leap before you look." In other words, to obtain the above and numerous other statutory benefits provided by the New Act but not by the Old Act, they should simply close their eyes and make the election. They should not bother retaining a lawyer to advise them about the election, because:
  • Reviewing the entire New Act to determine whether a Section 5 election may trigger significant business organization law disadvantages for a given LLC is a complex and costly process. Among other things, it requires the lawyer advising about the determination review, by my count, some 300 relevant New Act definitional, default, mandatory, non-self-enabling permissive and self-enabling permissive provisions.
     
  • There is little likelihood that, on the basis of the above review, the lawyer will find significant statutory disadvantages for the low-stakes LLC in question.
     
  • As noted, that LLC will in any event be subject to the New Act, with or without an election, on and after January 1, 2014.
By contrast, I think high-stakes LLCs should follow an opposite rule — namely, "look before you leap." The members of most or all high-stakes LLCs should make Section 5 elections; but before they do so, they should, through their lawyers, identify all possible provisions of the New Act that may be disadvantageous to them and should expressly override these provisions in written operating agreements. Following this process will require at least a few hours of careful legal analysis. The process won’t be cheap.

John Cunningham is of counsel to McLane, Graf, Raulerson & Middleton, Professional Association. His practice is focused on LLC formations and conversions, and he has written and taught extensively about LLC law, tax and practice in New Hampshire and nationally. He chaired the committee that drafted the Revised New Hampshire Limited Liability Company Act.

John Cunningham was a panelist on the NHBA•CLE program on the new NH LLC Act held in September. That program is now available online at nhbar.org/nhbacle.


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