What you need to know about New Hampshire LLCs

For the Monitor
Published: 10/24/2020 7:00:40 PM

In 2012, at the request of the New Hampshire Business and Industry Association, I formed and chaired a committee of LLC lawyers whose purpose was to revise the New Hampshire LLC Act as then in effect. The revision became effective on Jan. 1, 2013. It was radical. I want to tell you in this column what our committee viewed as its principal purposes and how we sought to implement them. I’m certain that for at least some readers, this information will be of significant practical value and may even inspire them to restructure their LLCs.

The key fact to understand about New Hampshire LLCs is that at least 80% of them are formed by business people who don’t want and often can’t afford the help of LLC lawyers. (LLCs are inherently complex, and many New Hampshire LLC lawyers charge at least $750 to form single-member LLCs and $1,600 or more for multi-member LLCs.) Our committee believed that our primary obligation was to revise the LLC Act to meet the needs of these people. We sought to meet this obligation in two main ways.

First, we knew that if questions arose among individuals who were members of either single-member or multi-member New Hampshire LLCs about their LLCs or if disputes arose among the members of multi-member LLCs, at least some of these members would look for answers in the LLC Act. But we also knew that in order for them to find and understand these answers, we would have to eliminate “legalese” and “taxese” from the LLC Act to the maximum extent possible and to rewrite the Act in plain English that non-lawyers could understand on a careful first reading. I vividly remember that on the evening before we submitted the Revised Act to the Legislature, I reviewed the entire text of the revised LLC Act word-by-word to ensure that it met this “plain-English” test. Because I’m a lawyer, I’m sure I missed a few provisions that flunked that test, but I did my best. I feel confident that no LLC act in any other state is so readily intelligible to non-lawyer readers as the revised New Hampshire LLC Act.

Second, our committee knew that soundly planned and clearly written LLC operating agreements — the agreements that define the rights and duties of LLC members — can be critical to an LLC’s success and, in particular, can provide conclusive resolutions to disputes among the members of multi-member LLCs. However, as noted, we knew that the members of very few New Hampshire LLCs are able or willing to hire lawyers to draft these agreements. So we sought to ensure that for both single-member and multi-member LLCs, the provisions of the revised LLC Act would contain “off-the-shelf” operating agreements — i.e., agreements that would address by statute all of the principal legal issues that a sound written operating agreement would identify and address. Our committee spent a great deal of time seeking to identify these issues and to determine resolutions of them that would work for more New Hampshire business people than any alternative resolutions.

Thus, for example, the revised Act contained default rules (i.e., statutory rules that the members may override but that will otherwise govern their LLCs) providing that:

-- The LLC must allocate its profits and losses among the members in proportion to their shares of contributions to the LLC;

-- The number of votes to which each member will be entitled on each LLC matter will also be based on their shares of LLC contributions;

-- LLC members and managers will be bound by strict fiduciary duties of care and loyalty, including a duty not to compete against their LLC and, if they discover business opportunities potentially valuable to the LLC, to make these opportunities available first to the LLC before seeking to exploit them on their own.

-- The LLC may admit new members only with the unanimous consent of the current members.

However, notwithstanding its plain-English prose, there are some LLC issues for which even LLC lawyers may find it difficult to locate in the revised Act. Furthermore, there is a significant number of New Hampshire LLCs for which at least some of the provisions of the off-the-shelf operating agreements in the revised LLC Act will not work. For example, the members of some New Hampshire LLCs may want each member to have one vote on each LLC matter regardless of the member’s contribution to the LLC.

Thus, the off-the-shelf operating agreements in the revised LLC Act aren’t magic bullets. But for most LLCs, they’re much better than no agreement at all.

I mentioned at the beginning of this column that our drafting committee had two main purposes. The second purpose was meant to serve not the roughly 80% of LLC members who don’t use the help of LLC lawyers to form their LLCs, but rather, the 20% who do — namely, to provide this latter group of members with maximum freedom of contract. I’ll discuss the committee’s second purpose in next week’s column.

 

 

John Cunningham is a Concord tax and businesses lawyer and estate planner. He has published Drafting Limited Liability Company Operating Agreements and Maximizing Pass-Through Deductions under Internal Revenue Code Section 199A. Both are the leading books in their fields. If you have business or tax questions you’d like addressed in this column, call John at (603) 856-7172 or e-mail him at lawjmc@comcast.net.




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