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Changes Affecting Iowa LLCs

by Jeremy B. P. Hagan, Attorney

April 2010 -- A new state law governing LLCs in Iowa – Iowa Code Chapter 489 – took effect on January 1, 2009. This change in law means the members and managers of every Iowa LLC formed under the prior statute (before 1/1/09) must carefully review their operating agreements for potential amendment prior to January 1, 2011, when the prior statute will no longer apply. Similarly, LLCs without operating agreements will be advised to adopt an operating agreement to avoid potentially serious adverse consequences. (If you formed your LLC with us after January 1, 2009, your LLC should already comply with the new statute.)

The impact of the change in law on a particular LLC will depend on specific facts and circumstances, so it is not possible to recite all of the potential consequences of the new law. However, some of the most important changes that you should be aware of are set forth below.

Written Operating Agreement

Under the prior law, operating agreements must be in writing unless otherwise provided in the articles of organization of the LLC. Under the new law, operating agreements may be oral, and even a written operating agreement may be modified orally or based on member conduct.

Because the new law permits oral or implied operating agreements that could cause misunderstandings, we advise that every LLC have an operating agreement in writing with a provision stating that all amendments must be written and signed by all parties.

Management

The new LLC law provides some rules that are mandatory for all LLCs and some rules that are flexible and may be modified in the operating agreement. The rules that apply unless they are modified in the operating agreement are referred to as "default rules." Unless the operating agreement provides a different approach, LLCs subject to the new law will face a new set of default rules, many of which may be undesirable to company members. The new default rules include the following:

1. Voting power is one-member, one-vote. This is the opposite of the existing default rule that member voting power is based on capital contributions.
2. Decisions as to such matters as a sale of all or substantially all the assets, amending the operating agreement, or a merger require the unanimous consent of the members of a member-managed LLC and a manager-managed LLC.
3. Profits are divided equally among the members, while the default rule under the prior act provided that profits and losses were divided based on the capital contributed by each member.

Fiduciary Duties

The new law expressly imposes fiduciary duties upon members both to the LLC and to the other members. This is a deviation from prior law and potentially imposes new risks on members of member-managed companies. In addition, under the statutory default rules, the duty of loyalty and the duty of care have been reformulated. Each duty may be modified in the operating agreement. The potential for new liability and the flexibility to deviate from the default rules creates opportunities for members to negotiate a custom set of rules for each business venture. However, at the same time, the default rules set a trap for members of an LLC that do not invest attention in the operating agreement.

Dissociation of a Member

Under the old LLC law, unless otherwise provided in the articles of organization or the operating agreement, a member could not resign or withdraw from an LLC prior to the dissolution and winding-up of an LLC. By contrast, under the new law, an operating agreement may not eliminate the power of a member to "dissociate." Dissociation is the withdrawal of a member from an LLC.

Conclusion

Overall, the change in law means that the members and managers of every Iowa LLC should undertake a careful review of their existing documentation. In nearly all cases, LLCs without operating agreements will need to consider adopting an operating agreement immediately. Additionally, for LLCs with an existing operating agreement, amendments will very likely be appropriate before January 1, 2011.

Jeremy Hagan, Bill McCartan and Brad Hart are available to answer your questions regarding issues related to the new Iowa LLC Act.