The new LLC Act has been effective in Washington for almost two months now. However, many business owners are focused on their finances and activities from last year as they organize documents for their CPA in hopes of meeting the April 15 deadline. While digging through paperwork, this would be a great time to dig out your LLC Operating Agreement (or figure out that you don't have one). If you are in business with others, you should have some agreements in place regarding how you will manage your company together including who is allowed to represent the company to third parties (all members or just a manager?), what happens to a member's interest if he or she dies (inherited by family or bought out by other company members?), and how voting works when it comes to company decisions (per person or based on capital contributed to company?).
Some companies rely on the default provisions under the Washington statutes, but the statute has now been updated and several important defaults have changed. Just a few important changes include:
Voting - Voting is no longer determined by capital contribution of the members ("% of ownership"), but a per-member vote. This could change the balance of power in many companies and what it means to be a minority-interest holder. One member may have contributed (and own) over 50% of the company, but will now only have the same vote as another member who contributed significantly less.
Company Management - If a company wishes to be manager-managed, the election cannot be designated in the Certificate of Formation any longer, but must be elected in the LLC Operating Agreement.
Oral Agreements - Oral agreements are now allowed between members, which sounds like it would help reduce paperwork, but may actually result in more litigation once members want to break up the company or enforce an agreement and have little evidence of those agreements.
The new LLC statute is RCW 25.15. In addition to the new LLC statute, a completely new administrative section has been created to serve as a statutory hub to the spokes of the Limited Liability Company Act, Business Corporation Act, Nonprofit Corporation Act and others. The new administrative hub is called the Uniform Business Organizations Code and is codified at RCW 23.95.
An LLC Operating Agreement can alter almost all of the default provisions to match the intent of the members. Now is the time to review your documents and the statute itself. Think about how you run your company, what agreements you assume are in place, and what you have written down. Pull out your documents, read through them, and ensure that if a disagreement should arise among the members, you have provided yourselves with a roadmap to settle the issues.
Naming your trusted child as attorney-in-fact (AIF) under your durable power of attorney does not always protect him or her from being sued after you pass away. Siblings can and do challenge the actions of the AIF and claim your estate (their inheritance) should be worth more or have more than it does because the AIF/"favored child" made gifts to themselves, spent your money inappropriately, or didn't keep adequate track of assets spent during your life.
Yesterday, a lengthy decision from the Washington State Court of Appeals (In re Estate of Lowe) illustrated this fact when an AIF son assisted his mother with her finances, giving some to himself and spending some on her expenses, at her direction and request. The case involved hiding silver coins and bars in the chimney, moving them to a new location, accounting for them, selling them, and deciding who got them after the death of both the father and mother of the family. Many legal issues were discussed and decided. However, just one useful tidbit, a distinction is made between the AIF acting under his powers as AIF and a son merely following the directions of his mother regarding her own property. There is also a distinction between the role and duty of an AIF (under a durable power of attorney) and a personal representative (under a will), especially with regard to inventory and accounting of assets.
To protect yourself and your attorney-in-fact, take the time to learn the pitfalls of the role and give clear and detailed instructions regarding your wishes. Don't brush off a power of attorney as a one-size-fits-all "boilerplate" or "form". The attorney-in-fact won in court this time, but clearly a lot of money was spent in the process and the family relationships will never be the same.
One of the most common questions regarding estate planning is, "how do I avoid probate?" However, a better question is, "should I avoid probate?" Probate horror stories abound, but the process doesn't have to be expensive or stressful if the decedent's affairs are in order with a clear, appropriate estate plan in place. Depending on a number of factors (size of estate, location of assets, whether he/she has a surviving spouse), probate may actually be a good thing, especially when it comes to making use of certain kinds of trusts to fully utilize each spouse's state and federal estate tax exemptions.
Megan M. Lewis