Creating a Limited Liability Company (LLC) Under New Jersey Laws
Filing a Certification of Formation with the Secretary of State
An LLC is formed by filing a Certificate of Formation with the New Jersey Secretary of State. This Certificate of Formation requires certain formalities to be followed for it to be “legal”. At a minimum, it must include: (1) the LLC’s name; (2) the address of its registered office; (3) the registered agent’s name and address for service of legal notices or legal claims; (4) a statement disclosing whether the LLC has more than one member; (5) the calendar date when the LLC must be dissolved; (6) and any additional information the member(s) agree to include. New Jersey also requires that the words “Limited Liability Company” or the abbreviation “LLC” appear within the name of the company so that customers and members of the public know the kind of business entity they are dealing with.
A “member” is defined as “a person having an interest in the LLC who has been admitted to a limited liability company as a member or, in the case of a limited liability company formed in accordance with the laws of another state or foreign country under which the foregoing limited liability company is organized.” (N.J.S.A. 42:2B-2).
A “manager” is defined as “the person or legal entity named as the manager of the limited liability company who is designated as the manager pursuant to, an operating agreement (or similar instrument) under which the limited liability company is formed.” (N.J.S.A. 42:2B-2).
Introduction to New Jersey LLCs
NJ LLC Member Rights
A person becomes a member of an LLC when the LLC is formed and they join in. When a person joins an LLC, they receive several rights. Like a partnership, LLC members generally are involved in the management and operations of the company, but by agreement a member can be released from making decisions for and about the company. This voluntary lack of control over the day-to-day operations helps shield a member from personal liability thereby protecting him or her from personal liability for the debts and obligations of the LLC. Regardless of the fact a person can be shielded from liability as a passive member, all members remain at risk of losing their time and money invested in the LLC.
As a member of an LLC, your rights and obligations depend largely on the Certificate of Formation filed with the State of New Jersey, By-Laws updated by the members, contents of a written operating agreement and in the absence of a written operating agreement, the default state statutes. When evaluating your specific member rights, one should always check these documents first. If you have a well written membership/operating agreement, your rights may include:
- The right to vote on issues that affect company interests;
- Rights related to the transfer of ownership;
- Rights relating to the company assets, income and debts;
- The right to receive profits and distributions as declared by the company’s managers;
- The right to inspect the company’s records and books;
- The right to bring legal action against the company for the wrongful acts of the managing members and officers of the company.
Member Rights to Obtain Information About the LLC
A “limited liability company interest” is defined as “a member’s share of the profits and losses of a limited liability company and a member’s right to receive distributions of the limited liability company’s assets.” N.J.S.A. 42:2B-2.
Among the few non waivable rights of LLC membership under the LLC Act is the right to demand information from the Company, “subject to … reasonable standards” as established by the members (or by the manager if the members delegate their decision making process to a managing member), “each member has the right to obtain from the limited liability company the following:
(1) True and full information regarding the status of the business and [its] financial condition…; (2) … the limited liability company’s federal, state and local income tax returns for each year; (3) A current list of the name and last known business, residence or mailing address of each member and manager; (4) A copy of any written operating agreement and certificate of formation and all amendments thereto…; (5) [a full accounting of all capital contributions]; and (6) …[such] other information regarding the affairs of the limited liability company as is just and reasonable.
The member’s purpose in obtaining the information about the LLC must be “reasonably related to his/her interest as a member of the limited liability company,” and the request must be submitted in writing.
The member’s right to information is subordinate only to the right of the manager to keep confidential “any information which the manager reasonably believes to be in the nature of trade secrets or [the like].” Because the manager’s right to withhold information “can of course be the subject of abuse, especially in the context of a dispute or struggle for control,” the Act imposes a duty of “good faith” on such nondisclosure.
Under the Revised LLC Act, member’s rights to information depend on whether the LLC is member-managed or manager-managed. A member-managed LLC is required to furnish to each member”(a) without demand, any information concerning the company’s activities, financial condition, and other circumstances which the company knowns and is material to the proper exercise of the member’s rights and duties under the operating agreement or [the Revised LLC Act], except to the extent the company can establish that it reasonably believes the member already knows the information; and (b) on demand, any other information concerning the company’s activities, financial condition, and other circumstances, except to the extent the demand or information demanded is unreasonable or otherwise improper under the circumstances.” In addition, “on reasonable notice, a member may inspect and copy during regular business hours, at a reasonable location specified by the company, any record maintained by the company regarding the company’s activities, financial condition, and other circumstances, to the extent the information is material to the member’s rights and duties under the operating agreement or the Revised LLC Act.”
Member Meetings and Voting Rights
One of the most important rights members have is the right to hold meetings and elect directors/managing members of the company. These meetings are typically held on an annual basis but can be scheduled throughout the year as dictated by the by-laws and/or operating agreement. Members may also call for special meetings at different times throughout the year as provided for in the operating agreement or state statute. These meetings are typically called only when certain matters require immediate action. A Notice of Special Meeting is given to the members and indicates the matters to be voted on. The members present at the meeting can only vote on issues indicated in the notice.
What Do Members Get to Vote On?
As previously stated, the issues that members vote on are often listed in the by-laws or operating agreement. The following are some of the typical and more significant decisions that members have the right to vote on within their companies:
- Approval and disapproval of proposed changes to the articles of formation;
- Approval and disapproval of a potential merger with other companies;
- Approval and disapproval of the sale of significant company assets;
- Approval and disapproval of any transaction involving a managing member that has a conflict of interest with the transaction;
- Approval and disapproval of a potential dissolution of the company;
- Approval and disapproval of amendments to the by-laws or written agreement of the company;
- Approval to issue additional shares;
- Recommendations to the officers/managers of the company about running the business;
- Admission of new members (typically in smaller companies).
What Issues Don’t Members Have the Right to Vote On?
The articles of formation, by-laws, and/or operating agreement dictate exclusively what rights members do and don’t have. Typically, members do not have the right to vote on the day-to-day operations of the company, unless they are managing co-members or the operating agreement permits it. By electing officers or managing members, members are essentially granting them the power to run the business as they deem fit if this is in the best interests of the company. In most cases, the members cannot compel the officers of the company to act, if the action is one within the ordinary course of business.
Generally, a quorum of all members must be present. A standard quorum consists of a majority (more than half) of the shares of the company represented at the meeting. Depending on the company’s by-laws, the percentage of shares may be more or less than a standard quorum.
In most companies, members can vote by proxy to represent them and cast a vote in their place.
Members may also make decisions on behalf of the company without conducting a meeting if they all vote by Unanimous Consent, meaning ALL members agree on the decision. This usually occurs in smaller companies with fewer members.
Creating Equity, Funding and Cash Flow
One of the ways a company creates funding to establish cash flow is by offering an ownership interest in the form of equity or debt financing. Equity financing involves the LLC offering investors the option to purchase certificates in the company. By doing so, the investor becomes an LLC member. They then own an interest in the company determined by the value of the certificate that they own. There are two basic types of certificates in an LLC issued by a company, Common Certificate and Preferred Certificate. Both have comparable meaning and purpose as in a traditional “C” and “S” corporation.
The other way that companies typically create cash flow is called Debt Financing. This involves an investor or bank loaning money to a company in exchange for a promise to repay. Creditors and lenders do not have the rights of members and lack voting rights, the right to participate in management decisions, and other rights that company owners enjoy.
Fredrick P. Niemann Esq.
If you have any questions regarding member rights in a NJ Limited Liability Company (LLC), please don’t hesitate to contact Fredrick P. Niemann, Esq. He can be reached toll-free at (855) 376-5291 or by email at fniemann@hnlawfirm.com. Mr. Niemann will be more than happy to assist you.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey LLC Law Attorney