Iowa New LLC Act - An Overview for Small Businesses by Katie Mitchell

Katie Mitchell is an associate at Tindal Law Office, PLC in Washington, Iowa. She attended the University of Iowa College of Law graduating in May of 2007. She is engaged in the general practice of law, including the areas of real estate, probate, family law, business associations, and criminal defense. She can be contacted at ktmitch@gmail.com.

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As you may be aware, last year the Iowa Legislature approved and the Governor signed a new LLC Act (Chapter 489 of the Iowa Code). The new LLC Act went into effect on January 1, 2009, and it governs all LLCs formed on or after that date. For LLCs created before that date, until January 1, 2011, they will continue be governed under the previous LLC Act (Chapter 490A of the Iowa Code). It is important to note that on January 1, 2011, all LLCs, whether created before or after January 1, 2009, will be governed by this new Act. As such, members and managers of Iowa LLCs should become familiar with the provisions of the new LLC Act.

The new Act operates as a "default" statute. That is to say, unless an LLC's operating agreement provides differently, the provisions of the new Act set forth the rights and responsibilities of members and managers, both in respect to the relationship to each other and their relationship to third parties. The purpose of this blog post is to provide a brief overview of some of the changes to the law as it relates to Iowa LLCs. This overview should not be considered a substitute for consulting with your own attorney about how the changes in Iowa's new LLC Act will impact your business.

From Articles of Organization to Certificate of Organization and Statement of Authority

Under the previous LLC Act, to form an LLC an organizer was required to file articles of organization with the Iowa Secretary of State. The Articles set forth the management style of the LLC (member-managed or manager-managed). Unless the Articles stated that the LLC was manager-managed, "every member [was] an agent of the limited liability company for the purpose of its business and affairs." Iowa Code §490A.702(2). So, if the LLC was member-managed, members could, in the ordinary course of business, act on behalf of the LLC and bind the LLC. Only a disclosure in the articles of organization that the LLC was manager-managed could eliminate the authority of all members to bind the LLC.

The new LLC Act has replaced the articles of organization with a certificate of organization. The certificate of organization does not have to include a statement that the LLC is manager-managed. That is to be done in the operating agreement. Not only does this change emphasize the limited function of the filing of the certificate of organization it, more importantly, cuts off the apparent authority of members to act on behalf of the LLC in their capacity as members. What does this mean for companies doing business with Iowa LLCs governed by the new Act? It means, that you cannot rely on a person's title in the LLC to give them authority to enter into a contract on behalf of the LLC. Instead, you should ask to either review the LLC's operating agreement or a statement of authority. Understandably, members and managers of LLCs may be unwilling to provide business associates with the entirety of the operating agreement. The new LLC Act allows LLCs to file a statement of authority with the Iowa Secretary of State's Office. The statement of authority may state the authority or limitations on the authority, of persons holding a position to execute real estate transactions or to enter into transactions on behalf of the company or to otherwise bind the LLC.

Operating Agreements

The operating agreement governs (a) relations among the members as members and between the members and the LLC; (b) the rights and duties under the new Act of a person in the capacity of manager; (c) the activities of the company and the conduct of those activities; and (d) the means and conditions for amending the operating agreement. Like the previous LLC act, there is no requirement that an LLC have operating agreement under the new Act. Unlike the previous Act, however, the new Act allows for an operating agreement that is either oral, written, or a combination of the two. This means that once members have an agreement regarding the matters listed above, there is an operating agreement (whether or not it is in writing). Obviously, an oral operating agreement could create innumerable problems for both those inside and outside of the LLC and it is not advisable.

An interesting aspect of the new Act is that it allows an operating agreement to specify that its amendment requires the approval of a person that is not a party to the operating agreement or the satisfaction of a condition; and any amendment that does not so comply is ineffective. Not only is this likely to be attractive to lenders, but it also can offer protection to non-member managers, dissociated members, and transferees. For a further analysis of what protections can be provided in this manner and their applicability to your situation, you should consult an attorney.

Dissolution/Winding Up

All good things must come to an end. When an LLC dissolves, the new LLC Act differs from the previous Act in the way that distributions are made. Under the previous Act, distributions would be made on a per capita basis, unless otherwise provided in the operating agreement. Under the new LLC, and unless the operating agreement states otherwise, all members will receive equal distributions upon dissolution, regardless of their capital contributions. This is certainly a default provision that, in many instances, members of an LLC will desire to alter.

The new LLC Act changes many of the important default provisions concerning the governing of Iowa LLCs. If you are a member or manager of an LLC formed before January 1, 2009, this is a good time to review your operating agreement to ensure that your operating agreement varies from possibly undesirable default rules that will go into effect on January 1, 2011. If you intend to form an LLC in Iowa in the future, you should consult with an attorney to tailor your operating agreement to the needs and desires of your members.

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