Changes to Washington Business Law in 2016
Amy E. Geerhart
Published in the Sussman Shank LLP Newsletter and the Daily Journal of Commerce
Washington adopted meaningful changes to its business laws effective January 1, 2016, substantially modifying legal requirements for Washington limited liability companies and filing obligations for all forms of business entities. These changes were codified in the revised Washington Limited Liability Company Act (the "Revised Act") and in changes to the Uniform Business Organizations Code, which changes are commonly referred to by the bill name that carried them into law ("Hub Bill").
REVISED WASHINGTON LIMITED LIABILITY COMPANY ACT
One of the more notable changes in the Revised Act changes the default rules regarding voting rights of members. Under the prior LLC Act, as is the case with most other types of entities, member votes are based on the percentage of ownership, meaning that a member owning, for example, 60 percent of the ownership interests can always out-vote a member owning the remaining 40 percent. Under the Revised Act, each member gets one vote, unless the limited liability company agreement states otherwise. This means a majority owner can be out-voted by minority owners. Members may opt out of this default voting scheme by defining alternate voting rights under an LLC Operating Agreement.
LLC Operating Agreements
Previously, all LLCs were required to adopt a written agreement to govern the operation of the LLC, including but not limited to providing for the voting rights of the members, the duties of the members or managers, the transfer of ownership interests, distributions, and the liquidation or winding up of the LLC. It is critical to document these rights, obligations, and restrictions in order to minimize the potential for disputes between members and managers. Under the Revised Act, as a default rule, the limited liability company agreement and any amendment to the agreement may be oral instead of written. Although this new provision permits more flexibility, it raises concerns that people may enter into and change binding terms of operation with a mere conversation, which could more easily result in misunderstandings, ambiguities, and costly disputes among members. The Revised Act does allow all members to prohibit such oral agreements by entering into a written operating agreement that requires that all amendments be in writing.
Fiduciary Duties of Managers
Washington LLCs historically relied on the courts to delineate the fiduciary duties of managers, as they were not specifically described under the statute. Such case law can create inconsistent or incomplete guidance. These fiduciary duties are now defined under the Revised Act, which allows most duties to be expanded or limited in the LLC's operating agreement.
Under the Revised Act, managers owe a limited duty of loyalty to the LLC and to any other managers and must: (i) report and hold on behalf of the LLC any benefits derived from use of the LLC's property or from appropriating a company opportunity while the LLC is operating or winding up its affairs, (ii) not compete with the LLC, and (iii) not engage in transactions with the LLC where the manager has a conflict of interest. Managers also owe a duty of care, which generally will be violated by a manager who is grossly negligent or reckless, who intentionally operates against the LLC's best interests or who knowingly violates the law in operating the LLC or winding up its affairs.
The Hub Bill
The Hub Bill focused on consolidating certain legal requirements, such that it is clear that the same requirements apply to each form of business entity. The changes generally address filing obligations with the Washington Office of the Secretary of the State and do not affect the day-to-day operations of Washington entities or foreign entities registered to do business in Washington.
General Filing Requirements
Some filing requirements were streamlined by authorizing the creation of a single form that can be used by any type of entity. In the future, such forms should simplify the filing process by reducing the time necessary to identify the appropriate forms. In addition, the Secretary of State's Office has introduced several new forms.
One such new form is a Statement of Withdrawal of Filed Record Before Effective, which (as the name suggests) permits a business to withdraw a filed form entirely so long as the effective date has not yet passed. For example, John has two operating companies, each in a separate corporation. John decides to merge the companies effective as of January 1, 2017. John's lawyer will likely file the Articles of Merger in the fall of 2016, stating an effective date of January 1, 2017. Normally, once the Articles of Merger is filed, the matter is final. However, with the recent changes to the Hub Bill, if John determines that he does not wish to merge his companies for any number of reasons, this form can be filed in advance of that effective date, and the transaction will not take effect.
Another helpful form that is now available is the Statement of Correction, which permits a business to rectify an inaccurate statement or defect in execution in a previously filed record. Say, for example, that John filed Articles of Merger only to later realize that the number of shares, the number of shareholders, or the listed officers is incorrect. With the newly available Statement of Correction form, such an error can be easily fixed instead of going through a more arduous process as required in the past.
Foreign Business Entities
If your business is organized or incorporated in another state, Oregon for example, but conducts business in Washington, it likely filed a Certificate of Authority authorizing it to do business in the state of Washington. Per the Hub Bill, a business no longer files a Certificate of Authority, but now completes and files a Foreign Registration Statement. This single form may be used for any form of entity. The Hub Bill also provides for the transfer of a foreign registration. Let's say John's companies are Oregon corporations, and only one has a Foreign Registration Statement. This new form permits the registered corporation to transfer the foreign registration to the corporation that survives the merger.
Administrative Dissolution and Reinstatement
The Hub Bill also modifies the grounds, procedure, and effect of administrative dissolution, as well as the reinstatement process. The State may administratively dissolve an entity for failure to pay a fee or penalty to the Secretary of State when due, for failure to deliver an annual report within 120 days after it is due, failure to name a registered agent for a period of 30 consecutive days, or if an entity was formed for a limited duration rather than for perpetual existence. Entities that are administratively dissolved for less than 5 years may file a reinstatement. The grounds and processes regarding administrative dissolution and reinstatement were not substantially changed. Instead, the Hub Bill makes clear that these processes apply to all forms of business entities, including LLCs, corporations, nonprofits, and limited partnerships.
Additionally, an entity may be administratively dissolved or terminated if the name of the entity is not distinguishable from the name of a governmental entity. Any county, city, town, district, or other political subdivision of the state, or any agency thereof, may apply to the Secretary of State for such dissolution if it deems the company name indistinguishable. When selecting the name of an entity, be cautious of how the name of a city or county is included in such name.
The changes above are only some of the modifications in Washington business law that became effective as of January 1, 2016. If you have any questions about how these laws may affect your business, please contact Amy E. Geerhart at email@example.com or 503-227-1111.
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