In my column last week, I wrote that the first goal of the Business and Industry Association lawyers’ committee that drafted the revised NH LLC Act, which I chaired, was to meet the needs of the roughly 80% of New Hampshire businesspeople who form LLCs without the help of lawyers. The revised Act became effective on Jan. 1, 2013.

Obviously, the rights and duties of the above LLC founders as LLC members are critical to their LLCs’ success, so our committee did its best to include in the revised Act provisions that, in plain English, would clearly define all of these rights and duties in a way that would be likely to work for them better than any alternative provisions. And we tried to write these provisions in such a way as to enable non-lawyer business people to understand them on a careful first reading.

The other main goal of the BIA committee was quite different – namely, to provide maximum freedom of contract to LLC founders and their lawyers in tailoring written operating agreements to meet the founders’ unique needs and interests. The committee used two means to this end:

■First, they drafted as many provisions of the revised Act as possible in the form of “default” provisions – i.e., provisions that, by their terms, founders may validly override in their operating agreements. Most or all of these provisions begin, “unless the operating agreement provides otherwise.”

■ Second, they included in the revised Act numerous provisions that expressly provide LLC founders with maximum freedom of contract in drafting operating agreement provisions and that, in the absence of fraud or coercion, compel the courts to enforce these provisions even if they feel they are grossly one-sided or even unfair.

The two most dramatic freedom-of- contract provisions in the revised Act are as follows:

■ Section 2 provides that “it is the policy of this Act to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.”

■ Section 107 provides, in effect, that in their operating agreements, LLC members may expand, restrict or even eliminate any fiduciary or other duties of a member, manager or other party to the agreement.

The above and several other freedom-of-contract provisions in the revised Act provide LLC founders and their lawyers not only with vast freedom but also with vast creativity in planning and drafting operating agreements. In fact, the ability to take advantage of this creativity in drafting these agreements is, in my view, among the most important qualities of good LLC lawyers.

How might LLC founders take advantage of NH LLC freedom of contract? Here are two examples that have arisen in my own LLC formation experience. (I’ve changed some facts to ensure confidentiality.)

■ Mary Jones founded and operates a successful widget-manufacturing company through a New Hampshire LLC of which she is the only member and manager. Mary has three teenage children. All of them say they want to participate in her business, but she is not certain that all of them will actually like the business or be able to contribute to it. Thus, while she admits all three children as members of her LLC, she provides in its operating agreement two key freedom-of-contract provisions. The first provides that she will have no fiduciary or other duties to any of the other members. This means, among other things, that if any of her children someday turn against her (something that happens all too often in family LLCs), they will have no possible basis for making a claim against her. The second provides that she has unlimited discretion to immediately remove any member at any time for any reason or for no reason.

■ Tom Jones is a bankruptcy lawyer who, through a single-member LLC of which he is the member and manager, has two other bankruptcy lawyers who work for him as employees of the LLC. Tom appreciates the hard work of these lawyers and wants to give them the satisfaction of being members of his LLC. However, he also wants to continue to control them with the same substantial powers that employers have over employees under New Hampshire employment law. Thus, the operating agreement that admits them as members provides that Tom alone may amend the provisions of the agreement, including provisions affecting member admissions, voting rights and shares of LLC profits.

If you are a New Hampshire businessperson and the majority member of a New Hampshire multi-member LLC already in existence, the lesson of the above freedom-of-contract provisions is this: You should consider consulting with an expert LLC lawyer about possible ways to amend your operating agreements to give you full advantage of this freedom.

If you are forming a multi-member LLC, the lesson for you is the same.

 

 

“John Cunningham is a Concord, NH lawyer who is of counsel to the law firm of McLane Middleton, P.A. His practice is focused on LLCs, federal tax, estate planning and general business law.  His telephone number is (603) 856-7172.  His e-mail address is lawjmc@comcast.net.  The link to his website is www.llc199a.com.”