UNIFORM LIMITED LIABILITY COMPANY ACT (1996) Drafted by the NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS and by it APPROVED AND RECOMMENDED FOR ENACTMENT IN ALL THE STATES at its ANNUAL CONFERENCE MEETING IN ITS ONE-HUNDRED-AND-FIFTH YEAR SAN ANTONIO, TEXAS JULY 12 - JULY 19, 1996 WITH PREFATORY NOTE AND COMMENTS COPYRIGHT 1996 By NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS UNIFORM LIMITED LIABILITY COMPANY ACT (1996) The Committee that acted for the National Conference of Commissioners on Uniform State Laws in preparing the Uniform Limited Liability Company Act (1996) was as follows: EDWARD I. CUTLER, P.O. Box 3239, Tampa, FL 33601, Chair RICHARD E. FORD, 203 West Randolph Street, Lewisburg, WV 24901 HARRY J. HAYNSWORTH, IV, William Mitchell College of Law, 875 Summit Avenue, St. Paul, MN 55105 CHARLES G. KEPLER, P.O. Box 490, 1135 14th Street, Cody, WY 82414 WAYNE C. KREUSCHER, 1313 Merchants Bank Building, 11 South Meridian Street, Indianapolis, IN 46204 REED L. MARTINEAU, P.O. Box 45000, 10 Exchange Place, Salt Lake City, UT 84145 RICHARD F. MUTZEBAUGH, State Capitol Building, 200 East Colfax Avenue, Denver, CO 80203 GLEE S. SMITH, P.O. Box 360, 111 East 8th, Larned, KS 67550 HOWARD J. SWIBEL, Suite 1200, 120 South Riverside Plaza, Chicago, IL 60606 CARTER G. BISHOP, Suffolk University Law School, 41 Temple Street, Boston, MA 02114, Reporter EX OFFICIO RICHARD C. HITE, 200 West Douglas Avenue, Suite 600, Wichita, KS 67202, President JOHN P. BURTON, P.O. Box 1357, Suite 101, 123 East Marcy Street, Santa Fe, NM 87501, Chair, Division E EXECUTIVE DIRECTOR FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road, Norman, OK 73019, Executive Director WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus REVIEW COMMITTEE JAMES M. BUSH, Suite 2200, Two North Central Avenue, Phoenix, AZ 85004, Chair FRANCIS J. PAVETTI, P.O. Box 829, Court House Square Building, New London, CT 06320 DONALD JOE WILLIS, Suites 1600-1950, Pacwest Center, 1211 S.W. 5th Avenue, Portland, OR 97204 ADVISORS ROBERT R. KEATINGE, American Bar Association STEVEN G. FROST, American Bar Association, Section of Taxation THOMAS EARL GEU, American Bar Association, Section of Real Property, Probate and Trust Law, Probate and Trust Division JAMES W. REYNOLDS, American Bar Association, Section of Business Law SANFORD J. LIEBSCHUTZ, American Bar Association, Section of Real Property, Probate and Trust Law, Real Property Division Copies of this Act may be obtained from: NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS 676 North St. Clair Street, Suite 1700 Chicago, Illinois 60611 312/915-0195 UNIFORM LIMITED LIABILITY COMPANY ACT (1996) TABLE OF CONTENTS PREFATORY NOTE . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 1. GENERAL PROVISIONS SECTION 101. DEFINITIONS. . . . . . . . . . . . . . . 4 SECTION 102. KNOWLEDGE AND NOTICE . . . . . . . . . . 8 SECTION 103. EFFECT OF OPERATING AGREEMENT; NONWAIVABLE PROVISIONS10 SECTION 104. SUPPLEMENTAL PRINCIPLES OF LAW . . . . .12 SECTION 105. NAME . . . . . . . . . . . . . . . . . .13 SECTION 106. RESERVED NAME. . . . . . . . . . . . . .14 SECTION 107. REGISTERED NAME. . . . . . . . . . . . .15 SECTION 108. DESIGNATED OFFICE AND AGENT FOR SERVICE OF PROCESS16 SECTION 109. CHANGE OF DESIGNATED OFFICE OR AGENT FOR SERVICE OF PROCESS . . . . . . . . . . . . .17 SECTION 110. RESIGNATION OF AGENT FOR SERVICE OF PROCESS18 SECTION 111. SERVICE OF PROCESS . . . . . . . . . . .18 SECTION 112. NATURE OF BUSINESS AND POWERS. . . . . .20 ARTICLE 2. ORGANIZATION SECTION 201. LIMITED LIABILITY COMPANY AS LEGAL ENTITY23 SECTION 202. ORGANIZATION . . . . . . . . . . . . . .23 SECTION 203. ARTICLES OF ORGANIZATION . . . . . . . .24 SECTION 204. AMENDMENT OR RESTATEMENT OF ARTICLES OF ORGANIZATION27 SECTION 205. SIGNING OF RECORDS . . . . . . . . . . .28 SECTION 206. FILING IN OFFICE OF [SECRETARY OF STATE]29 SECTION 207. CORRECTING FILED RECORD. . . . . . . . .30 SECTION 208. CERTIFICATE OF EXISTENCE OR AUTHORIZATION31 SECTION 209. LIABILITY FOR FALSE STATEMENT IN FILED RECORD32 SECTION 210. FILING BY JUDICIAL ACT.. . . . . . . . .32 SECTION 211. ANNUAL REPORT FOR [SECRETARY OF STATE] .33 ARTICLE 3. RELATIONS OF MEMBERS AND MANAGERS TO PERSONS DEALING WITH LIMITED LIABILITY COMPANY SECTION 301. AGENCY OF MEMBERS AND MANAGERS . . . . .35 SECTION 302. LIMITED LIABILITY COMPANY LIABLE FOR MEMBER'S OR MANAGER'S ACTIONABLE CONDUCT . . .37 SECTION 303. LIABILITY OF MEMBERS AND MANAGERS. . . .37 ARTICLE 4. RELATIONS OF MEMBERS TO EACH OTHER AND TO LIMITED LIABILITY COMPANY SECTION 401. FORM OF CONTRIBUTION . . . . . . . . . .40 SECTION 402. MEMBER'S LIABILITY FOR CONTRIBUTIONS . .41 SECTION 403. MEMBER'S AND MANAGER'S RIGHTS TO PAYMENTS AND REIMBURSEMENT . . . . . . . . . .41 SECTION 404. MANAGEMENT OF LIMITED LIABILITY COMPANY.42 SECTION 405. SHARING OF AND RIGHT TO DISTRIBUTIONS. .45 SECTION 406. LIMITATIONS ON DISTRIBUTIONS . . . . . .46 SECTION 407. LIABILITY FOR UNLAWFUL DISTRIBUTIONS . .48 SECTION 408. MEMBER'S RIGHT TO INFORMATION. . . . . .50 SECTION 409. GENERAL STANDARDS OF MEMBER'S AND MANAGER'S CONDUCT52 SECTION 410. ACTIONS BY MEMBERS . . . . . . . . . . .55 SECTION 411. CONTINUATION OF TERM COMPANY AFTER EXPIRATION OF SPECIFIED TERM. . . . . . . . . .56 ARTICLE 5. TRANSFEREES AND CREDITORS OF MEMBER SECTION 501. MEMBER'S DISTRIBUTIONAL INTEREST . . . .58 SECTION 502. TRANSFER OF DISTRIBUTIONAL INTEREST. . .59 SECTION 503. RIGHTS OF TRANSFEREE . . . . . . . . . .59 SECTION 504. RIGHTS OF CREDITOR . . . . . . . . . . .61 ARTICLE 6. MEMBER'S DISSOCIATION SECTION 601. EVENTS CAUSING MEMBER'S DISSOCIATION . .64 SECTION 602. MEMBER'S POWER TO DISSOCIATE; WRONGFUL DISSOCIATION68 SECTION 603. EFFECT OF MEMBER'S DISSOCIATION. . . . .70 ARTICLE 7. MEMBER'S DISSOCIATION WHEN BUSINESS NOT WOUND UP SECTION 701. COMPANY PURCHASE OF DISTRIBUTIONAL INTEREST72 SECTION 702. COURT ACTION TO DETERMINE FAIR VALUE OF DISTRIBUTIONAL INTEREST . . . . .75 SECTION 703. DISSOCIATED MEMBER'S POWER TO BIND LIMITED LIABILITY COMPANY. . . . . . . . . . . . . .77 SECTION 704. STATEMENT OF DISSOCIATION. . . . . . . .78 ARTICLE 8. WINDING UP COMPANY'S BUSINESS SECTION 801. EVENTS CAUSING DISSOLUTION AND WINDING UP OF COMPANY'S BUSINESS . . . . . . . .79 SECTION 802. LIMITED LIABILITY COMPANY CONTINUES AFTER DISSOLUTION83 SECTION 803. RIGHT TO WIND UP LIMITED LIABILITY COMPANY'S BUSINESS84 SECTION 804. MEMBER'S OR MANAGER'S POWER AND LIABILITY AS AGENT AFTER DISSOLUTION . . . . . . . .84 SECTION 805. ARTICLES OF TERMINATION. . . . . . . . .85 SECTION 806. DISTRIBUTION OF ASSETS IN WINDING UP LIMITED LIABILITY COMPANY'S BUSINESS . . . . . . . .86 SECTION 807. KNOWN CLAIMS AGAINST DISSOLVED LIMITED LIABILITY COMPANY . . . . . . . . . . . . .86 SECTION 808. OTHER CLAIMS AGAINST DISSOLVED LIMITED LIABILITY COMPANY . . . . . . . . . . . . .88 SECTION 809. GROUNDS FOR ADMINISTRATIVE DISSOLUTION .90 SECTION 810. PROCEDURE FOR AND EFFECT OF ADMINISTRATIVE DISSOLUTION90 SECTION 811. REINSTATEMENT FOLLOWING ADMINISTRATIVE DISSOLUTION91 SECTION 812. APPEAL FROM DENIAL OF REINSTATEMENT. . .92 ARTICLE 9. CONVERSIONS AND MERGERS SECTION 901. DEFINITIONS. . . . . . . . . . . . . . .94 SECTION 902. CONVERSION OF PARTNERSHIP OR LIMITED PARTNERSHIP TO LIMITED LIABILITY COMPANY . . . .95 SECTION 903. EFFECT OF CONVERSION; ENTITY UNCHANGED .97 SECTION 904. MERGER OF ENTITIES . . . . . . . . . . .98 SECTION 905. ARTICLES OF MERGER . . . . . . . . . . 100 SECTION 906. EFFECT OF MERGER . . . . . . . . . . . 101 SECTION 907. [ARTICLE] NOT EXCLUSIVE. . . . . . . . 103 ARTICLE 10. FOREIGN LIMITED LIABILITY COMPANIES SECTION 1001. LAW GOVERNING FOREIGN LIMITED LIABILITY COMPANIES104 SECTION 1002. APPLICATION FOR CERTIFICATE OF AUTHORITY105 SECTION 1003. ACTIVITIES NOT CONSTITUTING TRANSACTING BUSINESS106 SECTION 1004. ISSUANCE OF CERTIFICATE OF AUTHORITY. 107 SECTION 1005. NAME OF FOREIGN LIMITED LIABILITY COMPANY108 SECTION 1006. REVOCATION OF CERTIFICATE OF AUTHORITY110 SECTION 1007. CANCELLATION OF AUTHORITY . . . . . . 111 SECTION 1008. EFFECT OF FAILURE TO OBTAIN CERTIFICATE OF AUTHORITY111 SECTION 1009. ACTION BY [ATTORNEY GENERAL]. . . . . 112 ARTICLE 11. DERIVATIVE ACTIONS SECTION 1101. RIGHT OF ACTION . . . . . . . . . . . 113 SECTION 1102. PROPER PLAINTIFF. . . . . . . . . . . 113 SECTION 1103. PLEADING. . . . . . . . . . . . . . . 114 SECTION 1104. EXPENSES. . . . . . . . . . . . . . . 114 ARTICLE 12. MISCELLANEOUS PROVISIONS SECTION 1201. UNIFORMITY OF APPLICATION AND CONSTRUCTION115 SECTION 1202. SHORT TITLE . . . . . . . . . . . . . 115 SECTION 1203. SEVERABILITY CLAUSE . . . . . . . . . 115 SECTION 1204. EFFECTIVE DATE. . . . . . . . . . . . 116 SECTION 1205. TRANSITIONAL PROVISIONS . . . . . . . 116 SECTION 1206. SAVINGS CLAUSE. . . . . . . . . . . . 117 UNIFORM LIMITED LIABILITY COMPANY ACT (1996) PREFATORY NOTE Borrowing from abroad, Wyoming initiated a national movement in 1977 by enacting this country's first limited liability company act. The movement started slowly as the Internal Revenue Service took more than ten years to announce finally that a Wyoming limited liability company would be taxed like a partnership. Since that time, every State has adopted or is considering its own distinct limited liability company act, many of which have already been amended one or more times. The allure of the limited liability company is its unique ability to bring together in a single business organization the best features of all other business forms -- properly structured, its owners obtain both a corporate-styled liability shield and the pass-through tax benefits of a partnership. General and limited partnerships do not offer their partners a corporate-styled liability shield. Corporations, including those having made a Subchapter Selection, do not offer their shareholders all the pass-through tax benefits of a partnership. All state limited liability company acts contain provisions for a liability shield and partnership tax status. Despite these two common themes, state limited liability company acts display a dazzling array of diversity. Multistate activities of businesses are widespread. Recognition of out-of-state limited liability companies varies. Unfortunately, this lack of uniformity manifests itself in basic but fundamentally important questions, such as: may a company be formed and operated by only one owner; may it be formed for purposes other than to make a profit; whether owners have the power and right to withdraw from a company and receive a distribution of the fair value of their interests; whether a member's dissociation threatens a dissolution of the company; who has the apparent authority to bind the company and the limits of that authority; what are the fiduciary duties of owners and managers to a company and each other; how are the rights to manage a company allocated among its owners and managers; do the owners have the right to sue a company and its other owners in their own right as well as derivatively on behalf of the company; may general and limited partnerships be converted to limited liability companies and may limited liability companies merge with other limited liability companies and other business organizations; what is the law governing foreign limited liability companies; and are any or all of these and other rules simply default rules that may be modified by agreement or are they nonwaivable. Practitioners and entrepreneurs struggle to understand the law governing limited liability companies organized in their own State and to understand the burgeoning law of other States. Simple questions concerning where to organize are increasingly complex. Since most state limited liability company acts are in their infancy, little if any interpretative case law exists. Even when case law develops, it will have limited precedential value because of the diversity of the state acts. Accordingly, uniform legislation in this area of the law appeared to have become urgent. After a Study Committee appointed by the National Conference of Commissioners in late 1991 recommended that a comprehensive project be undertaken, the Conference appointed a Drafting Committee which worked on a Uniform Limited Liability Company Act (ULLCA) from early 1992 until its adoption by the Conference at its Annual Meeting in August 1994. The Drafting Committee was assisted by a blue ribbon panel of national experts and other interested and affected parties and organizations. Many, if not all, of those assisting the Committee brought substantial experience from drafting limited liability company legislation in their own States. Many are also authors of leading treatises and articles in the field. Those represented in the drafting process included an American Bar Association (ABA) liaison, four advisors representing the three separate ABA Sections of Business Law, Taxation, and Real Property, Trust and Probate, the United States Treasury Department, the Internal Revenue Service, and many observers representing several other organizations, including the California Bar Association, the New York City Bar Association, the American College of Real Estate Lawyers, the National Association of Certified Public Accountants, the National Association of Secretaries of State, the Chicago and Lawyers Title Companies, the American Land Title Association, and several university law and business school faculty members. The Committee met nine times and engaged in numerous national telephonic conferences to discuss policies, review over fifteen drafts, evaluate legal developments and consider comments by our many knowledgeable advisers and observers, as well as an ABA subcommittee's earlier work on a prototype. In examining virtually every aspect of each state limited liability company act, the Committee maintained a single policy vision -- to draft a flexible act with a comprehensive set of default rules designed to substitute as the essence of the bargain for small entrepreneurs and others. This Act is flexible in the sense that the vast majority of its provisions may be modified by the owners in a private agreement. Only limited and specific fundamental matters may not be altered by private agreement. To simplify, those nonwaivable provisions are set forth in a single subsection. Helped thereby, sophisticated parties will negotiate their own deal with the benefit of counsel. The Committee also recognized that small entrepreneurs without the benefit of counsel should also have access to the Act. To that end, the great bulk of the Act sets forth default rules designed to operate a limited liability company without sophisticated agreements and to recognize that members may also modify the default rules by oral agreements defined in part by their own conduct. Uniquely, the Act combines two simple default structures which depend upon the presence of designations in the articles of organization. All default rules under the Act flow from these two designations. First, unless the articles reflect that a limited liability company is a term company and the duration of that term, the company will be an at-will company. Generally, the owners of an at-will company may demand a payment of the fair value of their interests at any time. Owners of a term company must generally wait until the expiration of the term to obtain the value of their interests. Secondly, unless the articles reflect that a company will be managed by managers, the company will be managed by its members. This designation controls whether the members or managers have apparent agency authority, management authority, and the nature of fiduciary duties in the company. In January of 1995 the Executive Committee of the Conference adopted an amendment to harmonize the Act with new and important Internal Revenue Service announcements, and the amendment was ratified by the National Conference at its Annual Meeting in August of 1995. Those Internal Revenue Service announcements generally provide that a limited liability company will not be taxed like a corporation regardless of its organizational structure. Freed from the old tax classification restraints, the amendment modifies the Act's dissolution provision by eliminating member dissociation as a dissolution event. This important amendment significantly increases the stability of a limited liability company and places greater emphasis on a limited liability company's required purchase of a dissociated member's interest. The adoption of ULLCA will provide much needed consistency among the States, with flexible default rules, and multistate recognition of limited liability on the part of company owners. It will also promote the development of precedential case law. UNIFORM LIMITED LIABILITY COMPANY ACT (1996) [ARTICLE] 1 GENERAL PROVISIONS Section 101. Definitions. Section 102. Knowledge and Notice. Section 103. Effect of Operating Agreement; Nonwaivable Provisions. Section 104. Supplemental Principles of Law. Section 105. Name. Section 106. Reserved Name. Section 107. Registered Name. Section 108. Designated Office and Agent for Service of Process. Section 109. Change of Designated Office or Agent for Service of Process. Section 110. Resignation of Agent for Service of Process. Section 111. Service of Process. Section 112. Nature of Business and Powers. SECTION 101. DEFINITIONS. In this [Act]: (1) "Articles of organization" means initial, amended, and restated articles of organization and articles of merger. In the case of a foreign limited liability company, the term includes all records serving a similar function required to be filed in the office of the [Secretary of State] or other official having custody of company records in the State or country under whose law it is organized. (2) "At-will company" means a limited liability company other than a term company. (3) "Business" includes every trade, occupation, profession, and other lawful purpose, whether or not carried on for profit. (4) "Debtor in bankruptcy" means a person who is the subject of an order for relief under Title 11 of the United States Code or a comparable order under a successor statute of general application or a comparable order under federal, state, or foreign law governing insolvency. (5) "Distribution" means a transfer of money, property, or other benefit from a limited liability company to a member in the member's capacity as a member or to a transferee of the member's distributional interest. (6) "Distributional interest" means all of a member's interest in distributions by the limited liability company. (7) "Entity" means a person other than an individual. (8) "Foreign limited liability company" means an unincorporated entity organized under laws other than the laws of this State which afford limited liability to its owners comparable to the liability under Section 303 and is not required to obtain a certificate of authority to transact business under any law of this State other than this [Act]. (9) "Limited liability company" means a limited liability company organized under this [Act]. (10) "Manager" means a person, whether or not a member of a manager- managed company, who is vested with authority under Section 301. (11) "Manager-managed company" means a limited liability company which is so designated in its articles of organization. (12) "Member-managed company" means a limited liability company other than a manager-managed company. (13) "Operating agreement" means the agreement under Section 103 concerning the relations among the members, managers, and limited liability company. The term includes amendments to the agreement. (14) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity. (15) "Principal office" means the office, whether or not in this State, where the principal executive office of a domestic or foreign limited liability company is located. (16) "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. (17) "Sign" means to identify a record by means of a signature, mark, or other symbol, with intent to authenticate it. (18) "State" means a State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or insular possession subject to the jurisdiction of the United States. (19) "Term company" means a limited liability company in which its members have agreed to remain members until the expiration of a term specified in the articles of organization. (20) "Transfer" includes an assignment, conveyance, deed, bill of sale, lease, mortgage, security interest, encumbrance, and gift. Comment Uniform Limited Liability Company Act ("ULLCA") definitions, like the rest of the Act, are a blend of terms and concepts derived from the Uniform Partnership Act ("UPA"), the Uniform Partnership Act (1994) ("UPA 1994", also previously known as the Revised Uniform Partnership Act or "RUPA"), the Revised Uniform Limited Partnership Act ("RULPA"), the Uniform Commercial Code ("UCC"), and the Model Business Corporation Act ("MBCA"), or their revisions from time to time; some are tailored specially for this Act. "Business." A limited liability company may be organized to engage in an activity either for or not for profit. The extent to which contributions to a nonprofit company may be deductible for Federal income tax purposes is determined by federal law. Other state law determines the extent of exemptions from state and local income and property taxes. "Debtor in bankruptcy." The filing of a voluntary petition operates immediately as an "order for relief." See Sections 601(7)(i) and 602(b)(2)(iii). "Distribution." This term includes all sources of a member's distributions including the member's capital contributions, undistributed profits, and residual interest in the assets of the company after all claims, including those of third parties and debts to members, have been paid. "Distributional interest." The term does not include a member's broader rights to participate in the management of the company. See Comments to Article 5. "Foreign limited liability company." The term is not restricted to companies formed in the United States. "Manager." The rules of agency apply to limited liability companies. Therefore, managers may designate agents with whatever titles, qualifications, and responsibilities they desire. For example, managers may designate an agent as "President." "Manager-managed company." The term includes only a company designated as such in the articles of organization. In a manager-managed company agency authority is vested exclusively in one or more managers and not in the members. See Sections 101(10) (manager), 203(a)(6) (articles designation), and 301(b) (agency authority of members and managers). "Member-managed limited liability company." The term includes every company not designated as "manager-managed" under Section 203(a)(6) in its articles of organization. "Operating agreement." This agreement may be oral. Members may agree upon the extent to which their relationships are to be governed by writings. "Principal office." The address of the principal office must be set forth in the annual report required under Section 211(a)(3). "Record." This Act is the first Uniform Act promulgated with a definition of this term. The definition brings this Act in conformity with the present state of technology and accommodates prospective future technology in the communication and storage of information other than by human memory. Modern methods of communicating and storing information employed in commercial practices are no longer confined to physical documents. The term includes any writing. A record need not be permanent or indestructible, but an oral or other unwritten communication must be stored or preserved on some medium to qualify as a record. Information that has not been retained other than through human memory does not qualify as a record. A record may be signed or may be created without the knowledge or intent of a particular person. Other law must be consulted to determine admissibility in evidence, the applicability of statute of frauds, and other questions regarding the use of records. Under Section 206(a), electronic filings may be permitted and even encouraged. SECTION 102. KNOWLEDGE AND NOTICE. (a) A person knows a fact if the person has actual knowledge of it. (b) A person has notice of a fact if the person: (1) knows the fact; (2) has received a notification of the fact; or (3) has reason to know the fact exists from all of the facts known to the person at the time in question. (c) A person notifies or gives a notification of a fact to another by taking steps reasonably required to inform the other person in ordinary course, whether or not the other person knows the fact. (d) A person receives a notification when the notification: (1) comes to the person's attention; or (2) is duly delivered at the person's place of business or at any other place held out by the person as a place for receiving communications. (e) An entity knows, has notice, or receives a notification of a fact for purposes of a particular transaction when the individual conducting the transaction for the entity knows, has notice, or receives a notification of the fact, or in any event when the fact would have been brought to the individual's attention had the entity exercised reasonable diligence. An entity exercises reasonable diligence if it maintains reasonable routines for communicating significant information to the individual conducting the transaction for the entity and there is reasonable compliance with the routines. Reasonable diligence does not require an individual acting for the entity to communicate information unless the communication is part of the individual's regular duties or the individual has reason to know of the transaction and that the transaction would be materially affected by the information. Comment Knowledge requires cognitive awareness of a fact, whereas notice is based on a lesser degree of awareness. The Act imposes constructive knowledge under limited circumstances. See Comments to Sections 301(c), 703, and 704. SECTION 103. EFFECT OF OPERATING AGREEMENT; NONWAIVABLE PROVISIONS. (a) Except as otherwise provided in subsection (b), all members of a limited liability company may enter into an operating agreement, which need not be in writing, to regulate the affairs of the company and the conduct of its business, and to govern relations among the members, managers, and company. To the extent the operating agreement does not otherwise provide, this [Act] governs relations among the members, managers, and company. (b) The operating agreement may not: (1) unreasonably restrict a right to information or access to records under Section 408; (2) eliminate the duty of loyalty under Section 409(b) or 603(b)(3), but the agreement may: (i) identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; and (ii) specify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty; (3) unreasonably reduce the duty of care under Section 409(c) or 603(b)(3); (4) eliminate the obligation of good faith and fair dealing under Section 409(d), but the operating agreement may determine the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable; (5) vary the right to expel a member in an event specified in Section 601(6); (6) vary the requirement to wind up the limited liability company's business in a case specified in Section 801(3) or (4); or (7) restrict rights of a person, other than a manager, member, and transferee of a member's distributional interest, under this [Act]. Comment The operating agreement is the essential contract that governs the affairs of a limited liability company. Since it is binding on all members, amendments must be approved by all members unless otherwise provided in the agreement. Although many agreements will be in writing, the agreement and any amendments may be oral or may be in the form of a record. Course of dealing, course of performance and usage of trade are relevant to determine the meaning of the agreement unless the agreement provides that all amendments must be in writing. This section makes clear that the only matters an operating agreement may not control are specified in subsection (b). Accordingly, an operating agreement may modify or eliminate any rule specified in any section of this Act except matters specified in subsection (b). To the extent not otherwise mentioned in subsection (b), every section of this Act is simply a default rule, regardless of whether the language of the section appears to be otherwise mandatory. This approach eliminates the necessity of repeating the phrase "unless otherwise agreed" in each section and its commentary. Under subsection (b)(1), an operating agreement may not unreasonably restrict the right to information or access to any records under Section 408. This does not create an independent obligation beyond Section 408 to maintain any specific records. Under subsections (b)(2) to (4), an irreducible core of fiduciary responsibilities survive any contrary provision in the operating agreement. Subsection (b)(2)(i) authorizes an operating agreement to modify, but not eliminate, the three specific duties of loyalty set forth in Section 409(b)(1) to (3) provided the modification itself is not manifestly unreasonable, a question of fact. Subsection (b)(2)(ii) preserves the common law right of the members to authorize future or ratify past violations of the duty of loyalty provided there has been a full disclosure of all material facts. The authorization or ratification must be unanimous unless otherwise provided in an operating agreement, because the authorization or ratification itself constitutes an amendment to the agreement. The authorization or ratification of specific past or future conduct may sanction conduct that would have been manifestly unreasonable under subsection (b)(2)(i). SECTION 104. SUPPLEMENTAL PRINCIPLES OF LAW. (a) Unless displaced by particular provisions of this [Act], the principles of law and equity supplement this [Act]. (b) If an obligation to pay interest arises under this [Act] and the rate is not specified, the rate is that specified in [applicable statute]. Comment Supplementary principles include, but are not limited to, the law of agency, estoppel, law merchant, and all other principles listed in UCC Section 1-103, including the law relative to the capacity to contract, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating and invalidating clauses. Other principles such as those mentioned in UCC Section 1-205 (Course of Dealing and Usage of Trade) apply as well as course of performance. As with UPA 1994 Section 104, upon which this provision is based, no substantive change from either the UPA or the UCC is intended. Section 104(b) establishes the applicable rate of interest in the absence of an agreement among the members. SECTION 105. NAME. (a) The name of a limited liability company must contain "limited liability company" or "limited company" or the abbreviation "L.L.C.", "LLC", "L.C.", or "LC". "Limited" may be abbreviated as "Ltd.", and "company" may be abbreviated as "Co.". (b) Except as authorized by subsections (c) and (d), the name of a limited liability company must be distinguishable upon the records of the [Secretary of State] from: (1) the name of any corporation, limited partnership, or company incorporated, organized or authorized to transact business, in this State; (2) a name reserved or registered under Section 106 or 107; (3) a fictitious name approved under Section 1005 for a foreign company authorized to transact business in this State because its real name is unavailable. (c) A limited liability company may apply to the [Secretary of State] for authorization to use a name that is not distinguishable upon the records of the [Secretary of State] from one or more of the names described in subsection (b). The [Secretary of State] shall authorize use of the name applied for if: (1) the present user, registrant, or owner of a reserved name consents to the use in a record and submits an undertaking in form satisfactory to the [Secretary of State] to change the name to a name that is distinguishable upon the records of the [Secretary of State] from the name applied for; or (2) the applicant delivers to the [Secretary of State] a certified copy of the final judgment of a court of competent jurisdiction establishing the applicant's right to use the name applied for in this State. (d) A limited liability company may use the name, including a fictitious name, of another domestic or foreign company which is used in this State if the other company is organized or authorized to transact business in this State and the company proposing to use the name has: (1) merged with the other company; (2) been formed by reorganization with the other company; or (3) acquired substantially all of the assets, including the name, of the other company. SECTION 106. RESERVED NAME. (a) A person may reserve the exclusive use of the name of a limited liability company, including a fictitious name for a foreign company whose name is not available, by delivering an application to the [Secretary of State] for filing. The application must set forth the name and address of the applicant and the name proposed to be reserved. If the [Secretary of State] finds that the name applied for is available, it must be reserved for the applicant's exclusive use for a nonrenewable 120-day period. (b) The owner of a name reserved for a limited liability company may transfer the reservation to another person by delivering to the [Secretary of State] a signed notice of the transfer which states the name and address of the transferee. Comment A foreign limited liability company that is not presently authorized to transact business in the State may reserve a fictitious name for a nonrenewable 120-day period. When its actual name is available, a company will generally register that name under Section 107 because the registration is valid for a year and may be extended indefinitely. SECTION 107. REGISTERED NAME. (a) A foreign limited liability company may register its name subject to the requirements of Section 1005, if the name is distinguishable upon the records of the [Secretary of State] from names that are not available under Section 105(b). (b) A foreign limited liability company registers its name, or its name with any addition required by Section 1005, by delivering to the [Secretary of State] for filing an application: (1) setting forth its name, or its name with any addition required by Section 1005, the State or country and date of its organization, and a brief description of the nature of the business in which it is engaged; and (2) accompanied by a certificate of existence, or a record of similar import, from the State or country of organization. (c) A foreign limited liability company whose registration is effective may renew it for successive years by delivering for filing in the office of the [Secretary of State] a renewal application complying with subsection (b) between October 1 and December 31 of the preceding year. The renewal application renews the registration for the following calendar year. (d) A foreign limited liability company whose registration is effective may qualify as a foreign company under its name or consent in writing to the use of its name by a limited liability company later organized under this [Act] or by another foreign company later authorized to transact business in this State. The registered name terminates when the limited liability company is organized or the foreign company qualifies or consents to the qualification of another foreign company under the registered name. SECTION 108. DESIGNATED OFFICE AND AGENT FOR SERVICE OF PROCESS. (a) A limited liability company and a foreign limited liability company authorized to do business in this State shall designate and continuously maintain in this State: (1) an office, which need not be a place of its business in this State; and (2) an agent and street address of the agent for service of process on the company. (b) An agent must be an individual resident of this State, a domestic corporation, another limited liability company, or a foreign corporation or foreign company authorized to do business in this State. Comment Limited liability companies organized under Section 202 or authorized to transact business under Section 1004 are required to designate and continuously maintain an office in the State. Although the designated office need not be a place of business, it most often will be the only place of business of the company. The company must also designate an agent for service of process within the State and the agent's street address. The agent's address need not be the same as the company's designated office address. The initial office and agent designations must be set forth in the articles of organization, including the address of the designated office. See Section 203(a)(2) to (3). The current office and agent designations must be set forth in the company's annual report. See Section 211(a)(2). See also Section 109 (procedure for changing the office or agent designations), Section 110 (procedure for an agent to resign), and Section 111(b) (the filing officer is the service agent for the company if it fails to maintain its own service agent). SECTION 109. CHANGE OF DESIGNATED OFFICE OR AGENT FOR SERVICE OF PROCESS. A limited liability company may change its designated office or agent for service of process by delivering to the [Secretary of State] for filing a statement of change which sets forth: (1) the name of the company; (2) the street address of its current designated office; (3) if the current designated office is to be changed, the street address of the new designated office; (4) the name and address of its current agent for service of process; and (5) if the current agent for service of process or street address of that agent is to be changed, the new address or the name and street address of the new agent for service of process. SECTION 110. RESIGNATION OF AGENT FOR SERVICE OF PROCESS. (a) An agent for service of process of a limited liability company may resign by delivering to the [Secretary of State] for filing a record of the statement of resignation. (b) After filing a statement of resignation, the [Secretary of State] shall mail a copy to the designated office and another copy to the limited liability company at its principal office. (c) An agency is terminated on the 31st day after the statement is filed in the office of the [Secretary of State]. SECTION 111. SERVICE OF PROCESS. (a) An agent for service of process appointed by a limited liability company or a foreign limited liability company is an agent of the company for service of any process, notice, or demand required or permitted by law to be served upon the company. (b) If a limited liability company or foreign limited liability company fails to appoint or maintain an agent for service of process in this State or the agent for service of process cannot with reasonable diligence be found at the agent's address, the [Secretary of State] is an agent of the company upon whom process, notice, or demand may be served. (c) Service of any process, notice, or demand on the [Secretary of State] may be made by delivering to and leaving with the [Secretary of State], the [Assistant Secretary of State], or clerk having charge of the limited liability company department of the [Secretary of State's] office duplicate copies of the process, notice, or demand. If the process, notice, or demand is served on the [Secretary of State], the [Secretary of State] shall forward one of the copies by registered or certified mail, return receipt requested, to the company at its designated office. Service is effected under this subsection at the earliest of: (1) the date the company receives the process, notice, or demand; (2) the date shown on the return receipt, if signed on behalf of the company; or (3) five days after its deposit in the mail, if mailed postpaid and correctly addressed. (d) The [Secretary of State] shall keep a record of all processes, notices, and demands served pursuant to this section and record the time of and the action taken regarding the service. (e) This section does not affect the right to serve process, notice, or demand in any manner otherwise provided by law. Comment Service of process on a limited liability company and a foreign company authorized to transact business in the State must be made on the company's agent for service of process whose name and address should be on file with the filing office. If for any reason a company fails to appoint or maintain an agent for service of process or the agent cannot be found with reasonable diligence at the agent's address, the filing officer will be deemed the proper agent. SECTION 112. NATURE OF BUSINESS AND POWERS. (a) A limited liability company may be organized under this [Act] for any lawful purpose, subject to any law of this State governing or regulating business. (b) Unless its articles of organization provide otherwise, a limited liability company has the same powers as an individual to do all things necessary or convenient to carry on its business or affairs, including power to: (1) sue and be sued, and defend in its name; (2) purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with real or personal property, or any legal or equitable interest in property, wherever located; (3) sell, convey, mortgage, grant a security interest in, lease, exchange, and otherwise encumber or dispose of all or any part of its property; (4) purchase, receive, subscribe for, or otherwise acquire, own, hold, vote, use, sell, mortgage, lend, grant a security interest in, or otherwise dispose of and deal in and with, shares or other interests in or obligations of any other entity; (5) make contracts and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other obligations, which may be convertible into or include the option to purchase other securities of the limited liability company, and secure any of its obligations by a mortgage on or a security interest in any of its property, franchises, or income; (6) lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment; (7) be a promoter, partner, member, associate, or manager of any partnership, joint venture, trust, or other entity; (8) conduct its business, locate offices, and exercise the powers granted by this [Act] within or without this State; (9) elect managers and appoint officers, employees, and agents of the limited liability company, define their duties, fix their compensation, and lend them money and credit; (10) pay pensions and establish pension plans, pension trusts, profit sharing plans, bonus plans, option plans, and benefit or incentive plans for any or all of its current or former members, managers, officers, employees, and agents; (11) make donations for the public welfare or for charitable, scientific, or educational purposes; and (12) make payments or donations, or do any other act, not inconsistent with law, that furthers the business of the limited liability company. Comment A limited liability company may be organized for any lawful purpose unless the State has specifically prohibited a company from engaging in a specific activity. For example, many States require that certain regulated industries, such as banking and insurance, be conducted only by organizations that meet the special requirements. Also, many States impose restrictions on activities in which a limited liability company may engage. For example, the practice of certain professionals is often subject to special conditions. A limited liability company has the power to engage in and perform important and necessary acts related to its operation and function. A company's power to enter into a transaction is distinguishable from the authority of an agent to enter into the transaction. See Section 301 (agency rules). [ARTICLE] 2 ORGANIZATION Section 201. Limited Liability Company as Legal Entity. Section 202. Organization. Section 203. Articles of Organization. Section 204. Amendment or Restatement of Articles of Organization. Section 205. Signing of Records. Section 206. Filing in Office of [Secretary of State]. Section 207. Correcting Filed Record. Section 208. Certificate of Existence or Authorization. Section 209. Liability for False Statement in Filed Record. Section 210. Filing By Judicial Act. Section 211. Annual Report for [Secretary of State]. SECTION 201. LIMITED LIABILITY COMPANY AS LEGAL ENTITY. A limited liability company is a legal entity distinct from its members. Comment A limited liability company is legally distinct from its members who are not normally liable for the debts, obligations, and liabilities of the company. See Section 303. Accordingly, members are not proper parties to suits against the company unless an object of the proceeding is to enforce members' rights against the company or to enforce their liability to the company. SECTION 202. ORGANIZATION. (a) One or more persons may organize a limited liability company, consisting of one or more members, by delivering articles of organization to the office of the [Secretary of State] for filing. (b) Unless a delayed effective date is specified, the existence of a limited liability company begins when the articles of organization are filed. (c) The filing of the articles of organization by the [Secretary of State] is conclusive proof that the organizers satisfied all conditions precedent to the creation of a limited liability company. Comment Any person may organize a limited liability company by performing the ministerial act of signing and filing the articles of organization. The person need not be a member. As a matter of flexibility, a company may be organized and operated with only one member to enable sole proprietors to obtain the benefit of a liability shield. New and important Internal Revenue Service announcements clarify that a one-member limited liability company will not be taxed like a corporation. Nor will it be taxed like a partnership since it lacks at least two members. Rather, a one-member limited liability company is disregarded for Federal tax purposes and its operations are reported on the return of its single owner. The existence of a company begins when the articles are filed. Therefore, the filing of the articles of organization is conclusive as to the existence of the limited liability shield for persons who enter into transactions on behalf of the company. Until the articles are filed, a firm is not organized under this Act and is not a "limited liability company" as defined in Section 101(9). In that case, the parties' relationships are not governed by this Act unless they have expressed a contractual intent to be bound by the provisions of the Act. Third parties would also not be governed by the provisions of this Act unless they have expressed a contractual intent to extend a limited liability shield to the members of the would- be limited liability company. SECTION 203. ARTICLES OF ORGANIZATION. (a) Articles of organization of a limited liability company must set forth: (1) the name of the company; (2) the address of the initial designated office; (3) the name and street address of the initial agent for service of process; (4) the name and address of each organizer; (5) whether the company is to be a term company and, if so, the term specified; (6) whether the company is to be manager-managed, and, if so, the name and address of each initial manager; and (7) whether one or more of the members of the company are to be liable for its debts and obligations under Section 303(c). (b) Articles of organization of a limited liability company may set forth: (1) provisions permitted to be set forth in an operating agreement; or (2) other matters not inconsistent with law. (c) Articles of organization of a limited liability company may not vary the nonwaivable provisions of Section 103(b). As to all other matters, if any provision of an operating agreement is inconsistent with the articles of organization: (1) the operating agreement controls as to managers, members, and members' transferees; and (2) the articles of organization control as to persons, other than managers, members and their transferees, who reasonably rely on the articles to their detriment. Comment The articles serve primarily a notice function and generally do not reflect the substantive agreement of the members regarding the business affairs of the company. Those matters are generally reserved for an operating agreement which may be unwritten. Under Section 203(b), the articles may contain provisions permitted to be set forth in an operating agreement. Where the articles and operating agreement conflict, the operating agreement controls as to members but the articles control as to third parties. The articles may also contain any other matter not inconsistent with law. The most important is a Section 301(c) limitation on the authority of a member or manager to transfer interests in the company's real property. A company will be at-will unless it is designated as a term company and the duration of its term is specified in its articles under Section 203(a)(5). The duration of a term company may be specified in any manner which sets forth a specific and final date for the dissolution of the company. For example, the period specified may be in the form of "50 years from the date of filing of the articles" or "the period ending on January 1, 2020." Mere specification of a particular undertaking of an uncertain business duration is not sufficient unless the particular undertaking is within a longer fixed period. An example of this type of designation would include "2020 or until the building is completed, whichever occurs first." When the specified period is incorrectly specified, the company will be an at-will company. Notwithstanding the correct specification of a term in the articles, a company will be an at-will company among the members under Section 203(c)(1) if an operating agreement so provides. A term company that continues after the expiration of its term specified in its articles will also be an at-will company. A term company possesses several important default rule characteristics that differentiate it from an at-will company. An operating agreement may alter any of these rules. Generally, a member of an at-will company may rightfully dissociate at any time whereas a dissociation from a term company prior to the expiration of the specified term is wrongful. See Comments to Section 602(b). Accordingly, a dissociated member of an at-will company is entitled to have the company purchase that member's interest for its fair value determined as of the date of the member's dissociation. A dissociated member of a term company must generally await the expiration of the agreed term to withdraw the fair value of the interest determined at as of the date of the expiration of the agreed term. Thus, a dissociated member in an at-will company receives the fair value of their interest sooner than in a term compnay and also does not bear the risk of valuation changes for the remainder of the specified term. See Comments to Section 701(a). A company will be member-managed unless it is designated as manager- managed under Section 203(a)(6). Absent further designation in the articles, a company will be a member-managed at-will company. The designation of a limited liability company as either member- or manager-managed is important because it defines who are agents and have the apparent authority to bind the company under Section 301. In a member-managed company, the members have the agency authority to bind the company. In a manager-managed company only the managers have that authority. New and important Internal Revenue Service announcements clarify that the agency structure of a limited liability company will not cause it to be taxed like a corporation. The agency designation relates only to agency and does not preclude members of a manager-managed company from participating in the actual management of company business. See Comments to Section 404(b). SECTION 204. AMENDMENT OR RESTATEMENT OF ARTICLES OF ORGANIZATION. (a) Articles of organization of a limited liability company may be amended at any time by delivering articles of amendment to the [Secretary of State] for filing. The articles of amendment must set forth the: (1) name of the limited liability company; (2) date of filing of the articles of organization; and (3) amendment to the articles. (b) A limited liability company may restate its articles of organization at any time. Restated articles of organization must be signed and filed in the same manner as articles of amendment. Restated articles of organization must be designated as such in the heading and state in the heading or in an introductory paragraph the limited liability company's present name and, if it has been changed, all of its former names and the date of the filing of its initial articles of organization. Comment An amendment to the articles requires the consent of all the members unless an operating agreement provides for a lesser number. See Section 404(c)(3). SECTION 205. SIGNING OF RECORDS. (a) Except as otherwise provided in this [Act], a record to be filed by or on behalf of a limited liability company in the office of the [Secretary of State] must be signed in the name of the company by a: (1) manager of a manager-managed company; (2) member of a member-managed company; (3) person organizing the company, if the company has not been formed; or (4) fiduciary, if the company is in the hands of a receiver, trustee, or other court-appointed fiduciary. (b) A record signed under subsection (a) must state adjacent to the signature the name and capacity of the signer. (c) Any person may sign a record to be filed under subsection (a) by an attorney-in-fact. Powers of attorney relating to the signing of records to be filed under subsection (a) by an attorney-in-fact need not be filed in the office of the [Secretary of State] as evidence of authority by the person filing but must be retained by the company. Comment Both a writing and a record may be signed. An electronic record is signed when a person adds a name to the record with the intention to authenticate the record. See Sections 101(16) ("record" definition) and 101(17) ("signed" definition). Other provisions of this Act also provide for the filing of records with the filing office but do not require signing by the persons specified in clauses (1) to (3). Those specific sections prevail. SECTION 206. FILING IN OFFICE OF [SECRETARY OF STATE]. (a) Articles of organization or any other record authorized to be filed under this [Act] must be in a medium permitted by the [Secretary of State] and must be delivered to the office of the [Secretary of State]. Unless the [Secretary of State] determines that a record fails to comply as to form with the filing requirements of this [Act], and if all filing fees have been paid, the [Secretary of State] shall file the record and send a receipt for the record and the fees to the limited liability company or its representative. (b) Upon request and payment of a fee, the [Secretary of State] shall send to the requester a certified copy of the requested record. (c) Except as otherwise provided in subsection (d) and Section 207(c), a record accepted for filing by the [Secretary of State] is effective: (1) at the time of filing on the date it is filed, as evidenced by the [Secretary of State's] date and time endorsement on the original record; or (2) at the time specified in the record as its effective time on the date it is filed. (d) A record may specify a delayed effective time and date, and if it does so the record becomes effective at the time and date specified. If a delayed effective date but no time is specified, the record is effective at the close of business on that date. If a delayed effective date is later than the 90th day after the record is filed, the record is effective on the 90th day. Comment The definition and use of the term "record" permits filings with the filing office under this Act to conform to technological advances that have been adopted by the filing office. However, since Section 206(a) provides that the filing "must be in a medium permitted by the [Secretary of State]", the Act simply conforms to filing changes as they are adopted. SECTION 207. CORRECTING FILED RECORD. (a) A limited liability company or foreign limited liability company may correct a record filed by the [Secretary of State] if the record contains a false or erroneous statement or was defectively signed. (b) A record is corrected: (1) by preparing articles of correction that: (i) describe the record, including its filing date, or attach a copy of it to the articles of correction; (ii) specify the incorrect statement and the reason it is incorrect or the manner in which the signing was defective; and (iii) correct the incorrect statement or defective signing; and (2) by delivering the corrected record to the [Secretary of State] for filing. (c) Articles of correction are effective retroactively on the effective date of the record they correct except as to persons relying on the uncorrected record and adversely affected by the correction. As to those persons, articles of correction are effective when filed. SECTION 208. CERTIFICATE OF EXISTENCE OR AUTHORIZATION. (a) A person may request the [Secretary of State] to furnish a certificate of existence for a limited liability company or a certificate of authorization for a foreign limited liability company. (b) A certificate of existence for a limited liability company must set forth: (1) the company's name; (2) that it is duly organized under the laws of this State, the date of organization, whether its duration is at-will or for a specified term, and, if the latter, the period specified; (3) if payment is reflected in the records of the [Secretary of State] and if nonpayment affects the existence of the company, that all fees, taxes, and penalties owed to this State have been paid; (4) whether its most recent annual report required by Section 211 has been filed with the [Secretary of State]; (5) that articles of termination have not been filed; and (6) other facts of record in the office of the [Secretary of State] which may be requested by the applicant. (c) A certificate of authorization for a foreign limited liability company must set forth: (1) the company's name used in this State; (2) that it is authorized to transact business in this State; (3) if payment is reflected in the records of the [Secretary of State] and if nonpayment affects the authorization of the company, that all fees, taxes, and penalties owed to this State have been paid; (4) whether its most recent annual report required by Section 211 has been filed with the [Secretary of State]; (5) that a certificate of cancellation has not been filed; and (6) other facts of record in the office of the [Secretary of State] which may be requested by the applicant. (d) Subject to any qualification stated in the certificate, a certificate of existence or authorization issued by the [Secretary of State] may be relied upon as conclusive evidence that the domestic or foreign limited liability company is in existence or is authorized to transact business in this State. SECTION 209. LIABILITY FOR FALSE STATEMENT IN FILED RECORD. If a record authorized or required to be filed under this [Act] contains a false statement, one who suffers loss by reliance on the statement may recover damages for the loss from a person who signed the record or caused another to sign it on the person's behalf and knew the statement to be false at the time the record was signed. SECTION 210. FILING BY JUDICIAL ACT. If a person required by Section 205 to sign any record fails or refuses to do so, any other person who is adversely affected by the failure or refusal may petition the [designate the appropriate court] to direct the signing of the record. If the court finds that it is proper for the record to be signed and that a person so designated has failed or refused to sign the record, it shall order the [Secretary of State] to sign and file an appropriate record. SECTION 211. ANNUAL REPORT FOR [SECRETARY OF STATE]. (a) A limited liability company, and a foreign limited liability company authorized to transact business in this State, shall deliver to the [Secretary of State] for filing an annual report that sets forth: (1) the name of the company and the State or country under whose law it is organized; (2) the address of its designated office and the name and address of its agent for service of process in this State; (3) the address of its principal office; and (4) the names and business addresses of any managers. (b) Information in an annual report must be current as of the date the annual report is signed on behalf of the limited liability company. (c) The first annual report must be delivered to the [Secretary of State] between [January 1 and April 1] of the year following the calendar year in which a limited liability company was organized or a foreign company was authorized to transact business. Subsequent annual reports must be delivered to the [Secretary of State] between [January 1 and April 1] of the ensuing calendar years. (d) If an annual report does not contain the information required in subsection (a), the [Secretary of State] shall promptly notify the reporting limited liability company or foreign limited liability company and return the report to it for correction. If the report is corrected to contain the information required in subsection (a) and delivered to the [Secretary of State] within 30 days after the effective date of the notice, it is timely filed. Comment Failure to deliver the annual report within 60 days after its due date is a primary ground for administrative dissolution of the company under Section 809. See Comments to Sections 809 to 812. [ARTICLE] 3 RELATIONS OF MEMBERS AND MANAGERS TO PERSONS DEALING WITH LIMITED LIABILITY COMPANY Section 301. Agency of Members and Managers. Section 302. Limited Liability Company Liable for Member's or Manager's Actionable Conduct. Section 303. Liability of Members and Managers. SECTION 301. AGENCY OF MEMBERS AND MANAGERS. (a) Subject to subsections (b) and (c): (1) Each member is an agent of the limited liability company for the purpose of its business, and an act of a member, including the signing of an instrument in the company's name, for apparently carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company, unless the member had no authority to act for the company in the particular matter and the person with whom the member was dealing knew or had notice that the member lacked authority. (2) An act of a member which is not apparently for carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company only if the act was authorized by the other members. (b) Subject to subsection (c), in a manager-managed company: (1) A member is not an agent of the company for the purpose of its business solely by reason of being a member. Each manager is an agent of the company for the purpose of its business, and an act of a manager, including the signing of an instrument in the company's name, for apparently carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company, unless the manager had no authority to act for the company in the particular matter and the person with whom the manager was dealing knew or had notice that the manager lacked authority. (2) An act of a manager which is not apparently for carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company only if the act was authorized under Section 404. (c) Unless the articles of organization limit their authority, any member of a member-managed company or manager of a manager-managed company may sign and deliver any instrument transferring or affecting the company's interest in real property. The instrument is conclusive in favor of a person who gives value without knowledge of the lack of the authority of the person signing and delivering the instrument. Comment Members of a member-managed and managers of manager-managed company, as agents of the firm, have the apparent authority to bind a company to third parties. Members of a manager-managed company are not as such agents of the firm and do not have the apparent authority, as members, to bind a company. Members and managers with apparent authority possess actual authority by implication unless the actual authority is restricted in an operating agreement. Apparent authority extends to acts for carrying on in the ordinary course the company's business and business of the kind carried on by the company. Acts beyond this scope bind the company only where supported by actual authority created before the act or ratified after the act. Ordinarily, restrictions on authority in an operating agreement do not affect the apparent authority of members and managers to bind the company to third parties without notice of the restriction. However, the restriction may make a member or manager's conduct wrongful and create liability to the company for the breach. This rule is subject to three important exceptions. First, under Section 301(c), a limitation reflected in the articles of organization on the authority of any member or manager to sign and deliver an instrument affecting an interest in company real property is effective when filed, even to persons without knowledge of the agent's lack of authority. New and important Internal Revenue Service announcements clarify that the agency structure of a limited liability company will not cause it to be taxed like a corporation. Secondly, under Section 703, a dissociated member's apparent authority terminates two years after dissociation, even to persons without knowledge of the dissociation. Thirdly, under Section 704, a dissociated member's apparent authority may be terminated earlier than the two years by filing a statement of dissociation. The statement is effective 90 days after filing, even to persons without knowledge of the filing. Together, these three provisions provide constructive knowledge to the world of the lack of apparent authority of an agent to bind the company. SECTION 302. LIMITED LIABILITY COMPANY LIABLE FOR MEMBER'S OR MANAGER'S ACTIONABLE CONDUCT. A limited liability company is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a member or manager acting in the ordinary course of business of the company or with authority of the company. Comment Since a member of a manager-managed company is not as such an agent, the acts of the member are not imputed to the company unless the member is acting under actual or apparent authority created by circumstances other than membership status. SECTION 303. LIABILITY OF MEMBERS AND MANAGERS. (a) Except as otherwise provided in subsection (c), the debts, obligations, and liabilities of a limited liability company, whether arising in contract, tort, or otherwise, are solely the debts, obligations, and liabilities of the company. A member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager. (b) The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company. (c) All or specified members of a limited liability company are liable in their capacity as members for all or specified debts, obligations, or liabilities of the company if: (1) a provision to that effect is contained in the articles of organization; and (2) a member so liable has consented in writing to the adoption of the provision or to be bound by the provision. Comment A member or manager, as an agent of the company, is not liable for the debts, obligations, and liabilities of the company simply because of the agency. A member or manager is responsible for acts or omissions to the extent those acts or omissions would be actionable in contract or tort against the member or manager if that person were acting in an individual capacity. Where a member or manager delegates or assigns the authority or duty to exercise appropriate company functions, the member or manager is ordinarily not personally liable for the acts or omissions of the officer, employee, or agent if the member or manager has complied with the duty of care set forth in Section 409(c). Under Section 303(c), the usual liability shield may be waived, in whole or in part, provided the waiver is reflected in the articles of organization and the member has consented in writing to be bound by the waiver. The importance and unusual nature of the waiver consent requires that the consent be evidenced by a writing and not merely an unwritten record. See Comments to Section 205. New and important Internal Revenue Service annuouncements clarify that the owner liability structure of a limited liability company (other than a foreign limited liability company formed outside the United States) will not cause it to be taxed like a corporation. [ARTICLE] 4 RELATIONS OF MEMBERS TO EACH OTHER AND TO LIMITED LIABILITY COMPANY Section 401. Form of Contribution. Section 402. Member's Liability for Contributions. Section 403. Member's and Manager's Rights to Payments and Reimbursement. Section 404. Management of Limited Liability Company. Section 405. Sharing of and Right to Distributions. Section 406. Limitations on Distributions. Section 407. Liability for Unlawful Distributions. Section 408. Member's Right to Information. Section 409. General Standards of Member's and Manager's Conduct. Section 410. Actions by Members. Section 411. Continuation of Term Company After Expiration of Specified Term. SECTION 401. FORM OF CONTRIBUTION. A contribution of a member of a limited liability company may consist of tangible or intangible property or other benefit to the company, including money, promissory notes, services performed, or other agreements to contribute cash or property, or contracts for services to be performed. Comment Unless otherwise provided in an operating agreement, admission of a member and the nature and valuation of a would-be member's contribution are matters requiring the consent of all of the other members. See Section 404(c)(7). An agreement to contribute to a company is controlled by the operating agreement and therefore may not be created or modified without amending that agreement through the unanimous consent of all the members, including the member to be bound by the new contribution terms. See 404(c)(1). SECTION 402. MEMBER'S LIABILITY FOR CONTRIBUTIONS. (a) A member's obligation to contribute money, property, or other benefit to, or to perform services for, a limited liability company is not excused by the member's death, disability, or other inability to perform personally. If a member does not make the required contribution of property or services, the member is obligated at the option of the company to contribute money equal to the value of that portion of the stated contribution which has not been made. (b) A creditor of a limited liability company who extends credit or otherwise acts in reliance on an obligation described in subsection (a), and without notice of any compromise under Section 404(c)(5), may enforce the original obligation. Comment An obligation need not be in writing to be enforceable. Given the informality of some companies, a writing requirement may frustrate reasonable expectations of members based on a clear oral agreement. Obligations may be compromised with the consent of all of the members under Section 404(c)(5), but the compromise is generally effective only among the consenting members. Company creditors are bound by the compromise only as provided in Section 402(b). SECTION 403. MEMBER'S AND MANAGER'S RIGHTS TO PAYMENTS AND REIMBURSEMENT. (a) A limited liability company shall reimburse a member or manager for payments made and indemnify a member or manager for liabilities incurred by the member or manager in the ordinary course of the business of the company or for the preservation of its business or property. (b) A limited liability company shall reimburse a member for an advance to the company beyond the amount of contribution the member agreed to make. (c) A payment or advance made by a member which gives rise to an obligation of a limited liability company under subsection (a) or (b) constitutes a loan to the company upon which interest accrues from the date of the payment or advance. (d) A member is not entitled to remuneration for services performed for a limited liability company, except for reasonable compensation for services rendered in winding up the business of the company. Comment The presence of a liability shield will ordinarily prevent a member or manager from incurring personal liability on behalf of the company in the ordinary course of the company's business. Where a member of a member-managed or a manager of a manager-managed company incurs such liabilities, Section 403(a) provides that the company must indemnify the member or manager where that person acted in the ordinary course of the company's business or the preservation of its property. A member or manager is therefore entitled to indemnification only if the act was within the member or manager's actual authority. A member or manager is therefore not entitled to indemnification for conduct that violates the duty of care set forth in Section 409(c) or for tortious conduct against a third party. Since members of a manager-managed company do not possess the apparent authority to bind the company, it would be more unusual for such a member to incur a liability for indemnification in the ordinary course of the company's business. SECTION 404. MANAGEMENT OF LIMITED LIABILITY COMPANY. (a) In a member-managed company: (1) each member has equal rights in the management and conduct of the company's business; and (2) except as otherwise provided in subsection (c), any matter relating to the business of the company may be decided by a majority of the members. (b) In a manager-managed company: (1) each manager has equal rights in the management and conduct of the company's business; (2) except as otherwise provided in subsection (c), any matter relating to the business of the company may be exclusively decided by the manager or, if there is more than one manager, by a majority of the managers; and (3) a manager: (i) must be designated, appointed, elected, removed, or replaced by a vote, approval, or consent of a majority of the members; and (ii) holds office until a successor has been elected and qualified, unless the manager sooner resigns or is removed. (c) The only matters of a member or manager-managed company's business requiring the consent of all of the members are: (1) the amendment of the operating agreement under Section 103; (2) the authorization or ratification of acts or transactions under Section 103(b)(2)(ii) which would otherwise violate the duty of loyalty; (3) an amendment to the articles of organization under Section 204; (4) the compromise of an obligation to make a contribution under Section 402(b); (5) the compromise, as among members, of an obligation of a member to make a contribution or return money or other property paid or distributed in violation of this [Act]; (6) the making of interim distributions under Section 405(a), including the redemption of an interest; (7) the admission of a new member; (8) the use of the company's property to redeem an interest subject to a charging order; (9) the consent to dissolve the company under Section 801(b)(2); (10) a waiver of the right to have the company's business wound up and the company terminated under Section 802(b); (11) the consent of members to merge with another entity under Section 904(c)(1); and (12) the sale, lease, exchange, or other disposal of all, or substantially all, of the company's property with or without goodwill. (d) Action requiring the consent of members or managers under this [Act] may be taken without a meeting. (e) A member or manager may appoint a proxy to vote or otherwise act for the member or manager by signing an appointment instrument, either personally or by the member's or manager's attorney-in-fact. Comment In a member-managed company, each member has equal rights in the management and conduct of the company's business unless otherwise provided in an operating agreement. For example, an operating agreement may allocate voting rights based upon capital contributions rather than the subsection (a) per capita rule. Also, member disputes as to any matter relating to the company's business may be resolved by a majority of the members unless the matter relates to a matter specified in subsection (c) (unanimous consent required). Regardless of how the members allocate management rights, each member is an agent of the company with the apparent authority to bind the company in the ordinary course of its business. See Comments to Section 301(a). A member's right to participate in management terminates upon dissociation. See Section 603(b)(1). In a manager-managed company, the members, unless also managers, have no rights in the management and conduct of the company's business unless otherwise provided in an operating agreement. If there is more than one manager, manager disputes as to any matter relating to the company's business may be resolved by a majority of the managers unless the matter relates to a matter specified in subsection (c) (unanimous member consent required). Managers must be designated, appointed, or elected by a majority of the members. A manager need not be a member and is an agent of the company with the apparent authority to bind the company in the ordinary course of its business. See Sections 101(10) and 301(b). To promote clarity and certainty, subsection (c) specifies those exclusive matters requiring the unanimous consent of the members, whether the company is member- or manager-managed. For example, interim distributions, including redemptions, may not be made without the unanimous consent of all the members. Unless otherwise agreed, all other company matters are to be determined under the majority of members or managers rules of subsections (a) and (b). SECTION 405. SHARING OF AND RIGHT TO DISTRIBUTIONS. (a) Any distributions made by a limited liability company before its dissolution and winding up must be in equal shares. (b) A member has no right to receive, and may not be required to accept, a distribution in kind. (c) If a member becomes entitled to receive a distribution, the member has the status of, and is entitled to all remedies available to, a creditor of the limited liability company with respect to the distribution. Comment Recognizing the informality of many limited liability companies, this section creates a simple default rule regarding interim distributions. Any interim distributions made must be in equal shares and approved by all members. See Section 404(c)(6). The rule assumes that: profits will be shared equally; some distributions will constitute a return of contributions that should be shared equally rather than a distribution of profits; and property contributors should have the right to veto any distribution that threatens their return of contributions on liquidation. In the simple case where the members make equal contributions of property or equal contributions of services, those assumptions avoid the necessity of maintaining a complex capital account or determining profits. Where some members contribute services and others property, the unanimous vote necessary to approve interim distributions protects against unwanted distributions of contributions to service contributors. Consistently, Section 408(a) does not require the company to maintain a separate account for each member, the Act does not contain a default rule for allocating profits and losses, and Section 806(b) requires that liquidating distributions to members be made in equal shares after the return of contributions not previously returned. See Comments to Section 806(b). Section 405(c) governs distributions declared or made when the company was solvent. Section 406 governs distributions declared or made when the company is insolvent. SECTION 406. LIMITATIONS ON DISTRIBUTIONS. (a) A distribution may not be made if: (1) the limited liability company would not be able to pay its debts as they become due in the ordinary course of business; or (2) the company's total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the company were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those receiving the distribution. (b) A limited liability company may base a determination that a distribution is not prohibited under subsection (a) on financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable in the circumstances. (c) Except as otherwise provided in subsection (e), the effect of a distribution under subsection (a) is measured: (1) in the case of distribution by purchase, redemption, or other acquisition of a distributional interest in a limited liability company, as of the date money or other property is transferred or debt incurred by the company; and (2) in all other cases, as of the date the: (i) distribution is authorized if the payment occurs within 120 days after the date of authorization; or (ii) payment is made if it occurs more than 120 days after the date of authorization. (d) A limited liability company's indebtedness to a member incurred by reason of a distribution made in accordance with this section is at parity with the company's indebtedness to its general, unsecured creditors. (e) Indebtedness of a limited liability company, including indebtedness issued in connection with or as part of a distribution, is not considered a liability for purposes of determinations under subsection (a) if its terms provide that payment of principal and interest are made only if and to the extent that payment of a distribution to members could then be made under this section. If the indebtedness is issued as a distribution, each payment of principal or interest on the indebtedness is treated as a distribution, the effect of which is measured on the date the payment is made. Comment This section establishes the validity of company distributions, which in turn determines the potential liability of members and managers for improper distributions under Section 407. Distributions are improper if the company is insolvent under subsection (a) at the time the distribution is measured under subsection (c). In recognition of the informality of many limited liability companies, the solvency determination under subsection (b) may be made on the basis of a fair valuation or other method reasonable under the circumstances. The application of the equity insolvency and balance sheet tests present special problems in the context of the purchase, redemption, or other acquisition of a company's distributional interests. Special rules establish the time of measurement of such transfers. Under Section 406(c)(1), the time for measuring the effect of a distribution to purchase a distributional interest is the date of payment. The company may make payment either by transferring property or incurring a debt to transfer property in the future. In the latter case, subsection (c)(1) establishes a clear rule that the legality of the distribution is tested when the debt is actually incurred, not later when the debt is actually paid. Under Section 406(e), indebtedness is not considered a liability for purposes of subsection (a) if the terms of the indebtedness itself provide that payments can be made only if and to the extent that a payment of a distribution could then be made under this section. The effect makes the holder of the indebtedness junior to all other creditors but senior to members in their capacity as members. SECTION 407. LIABILITY FOR UNLAWFUL DISTRIBUTIONS. (a) A member of a member-managed company or a member or manager of a manager-managed company who votes for or assents to a distribution made in violation of Section 406, the articles of organization, or the operating agreement is personally liable to the company for the amount of the distribution which exceeds the amount that could have been distributed without violating Section 406, the articles of organization, or the operating agreement if it is established that the member or manager did not perform the member's or manager's duties in compliance with Section 409. (b) A member of a manager-managed company who knew a distribution was made in violation of Section 406, the articles of organization, or the operating agreement is personally liable to the company, but only to the extent that the distribution received by the member exceeded the amount that could have been properly paid under Section 406. (c) A member or manager against whom an action is brought under this section may implead in the action all: (1) other members or managers who voted for or assented to the distribution in violation of subsection (a) and may compel contribution from them; and (2) members who received a distribution in violation of subsection (b) and may compel contribution from the member in the amount received in violation of subsection (b). (d) A proceeding under this section is barred unless it is commenced within two years after the distribution. Comment Whenever members or managers fail to meet the standards of conduct of Section 409 and vote for or assent to an unlawful distribution, they are personally liable to the company for the portion of the distribution that exceeds the maximum amount that could have been lawfully distributed. The recovery remedy under this section extends only to the company, not the company's creditors. Under subsection (a), members and managers are not liable for an unlawful distribution provided their vote in favor of the distribution satisfies the duty of care of Section 409(c). Subsection (a) creates personal liability in favor of the company against members or managers who approve an unlawful distribution for the entire amount of a distribution that could not be lawfully distributed. Subsection (b) creates personal liability against only members who knowingly received the unlawful distribution, but only in the amount measured by the portion of the actual distribution received that was not lawfully made. Members who both vote for or assent to an unlawful distribution and receive a portion or all of the distribution will be liable, at the election of the company, under either but not both subsections. A member or manager who is liable under subsection (a) may seek contribution under subsection (c)(1) from other members and managers who also voted for or assented to the same distribution and may also seek recoupment under subsection (c)(2) from members who received the distribution, but only if they accepted the payments knowing they were unlawful. The two-year statute of limitations of subsection (d) is measured from the date of the distribution. The date of the distribution is determined under Section 406(c). SECTION 408. MEMBER'S RIGHT TO INFORMATION. (a) A limited liability company shall provide members and their agents and attorneys access to its records, if any, at the company's principal office or other reasonable locations specified in the operating agreement. The company shall provide former members and their agents and attorneys access for proper purposes to records pertaining to the period during which they were members. The right of access provides the opportunity to inspect and copy records during ordinary business hours. The company may impose a reasonable charge, limited to the costs of labor and material, for copies of records furnished. (b) A limited liability company shall furnish to a member, and to the legal representative of a deceased member or member under legal disability: (1) without demand, information concerning the company's business or affairs reasonably required for the proper exercise of the member's rights and performance of the member's duties under the operating agreement or this [Act]; and (2) on demand, other information concerning the company's business or affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances. (c) A member has the right upon written demand given to the limited liability company to obtain at the company's expense a copy of any written operating agreement. Comment Recognizing the informality of many limited liability companies, subsection (a) does not require a company to maintain any records. In general, a company should maintain records necessary to enable members to determine their share of profits and losses and their rights on dissociation. If inadequate records are maintained to determine those and other critical rights, a member may maintain an action for an accounting under Section 410(a). Normally, a company will maintain at least records required by state or federal authorities regarding tax and other filings. The obligation to furnish access includes the obligation to insure that all records, if any, are accessible in intelligible form. For example, a company that switches computer systems has an obligation either to convert the records from the old system or retain at least one computer capable of accessing the records from the old system. The right to inspect and copy records maintained is not conditioned on a member or former member's purpose or motive. However, an abuse of the access and copy right may create a remedy in favor of the other members as a violation of the requesting member or former member's obligation of good faith and fair dealing. See Section 409(d). Although a company is not required to maintain any records under subsection (a), it is nevertheless subject to a disclosure duty to furnish specified information under subsection (b)(1). A company must therefore furnish to members, without demand, information reasonably needed for members to exercise their rights and duties as members. A member's exercise of these duties justifies an unqualified right of access to the company's records. The member's right to company records may not be unreasonably restricted by the operating agreement. See Section 103(b)(1). SECTION 409. GENERAL STANDARDS OF MEMBER'S AND MANAGER'S CONDUCT. (a) The only fiduciary duties a member owes to a member-managed company and its other members are the duty of loyalty and the duty of care imposed by subsections (b) and (c). (b) A member's duty of loyalty to a member-managed company and its other members is limited to the following: (1) to account to the company and to hold as trustee for it any property, profit, or benefit derived by the member in the conduct or winding up of the company's business or derived from a use by the member of the company's property, including the appropriation of a company's opportunity; (2) to refrain from dealing with the company in the conduct or winding up of the company's business as or on behalf of a party having an interest adverse to the company; and (3) to refrain from competing with the company in the conduct of the company's business before the dissolution of the company. (c) A member's duty of care to a member-managed company and its other members in the conduct of and winding up of the company's business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. (d) A member shall discharge the duties to a member-managed company and its other members under this [Act] or under the operating agreement and exercise any rights consistently with the obligation of good faith and fair dealing. (e) A member of a member-managed company does not violate a duty or obligation under this [Act] or under the operating agreement merely because the member's conduct furthers the member's own interest. (f) A member of a member-managed company may lend money to and transact other business with the company. As to each loan or transaction, the rights and obligations of the member are the same as those of a person who is not a member, subject to other applicable law. (g) This section applies to a person winding up the limited liability company's business as the personal or legal representative of the last surviving member as if the person were a member. (h) In a manager-managed company: (1) a member who is not also a manager owes no duties to the company or to the other members solely by reason of being a member; (2) a manager is held to the same standards of conduct prescribed for members in subsections (b) through (f); (3) a member who pursuant to the operating agreement exercises some or all of the rights of a manager in the management and conduct of the company's business is held to the standards of conduct in subsections (b) through (f) to the extent that the member exercises the managerial authority vested in a manager by this [Act]; and (4) a manager is relieved of liability imposed by law for violation of the standards prescribed by subsections (b) through (f) to the extent of the managerial authority delegated to the members by the operating agreement. Comment Under subsections (a), (c), and (h), members and managers, and their delegatees, owe to the company and to the other members and managers only the fiduciary duties of loyalty and care set forth in subsections (b) and (c) and the obligation of good faith and fair dealing set forth in subsection (d). An operating agreement may not waive or eliminate the duties or obligation, but may, if not manifestly unreasonable, identify activities and determine standards for measuring the performance of them. See Section 103(b)(2) to (4). Upon a member's dissociation, the duty to account for personal profits under subsection (b)(1), the duty to refrain from acting as or representing adverse interests under subsection (b)(2), and the duty of care under subsection (c) are limited to those derived from matters arising or events occurring before the dissociation unless the member participates in winding up the company's business. Also, the duty not to compete terminates upon dissociation. See Section 603(b)(3) and (b)(2). However, a dissociated member is not free to use confidential company information after dissociation. For example, a dissociated member of a company may immediately compete with the company for new clients but must exercise care in completing on-going client transactions and must account to the company for any fees from the old clients on account of those transactions. Subsection (c) adopts a gross negligence standard for the duty of care, the standard actually used in most partnerships and corporations. Subsection (b)(2) prohibits a member from acting adversely or representing an adverse party to the company. The rule is based on agency principles and seeks to avoid the conflict of opposing interests in the mind of the member agent whose duty is to act for the benefit of the principal company. As reflected in subsection (f), the rule does not prohibit the member from dealing with the company other than as an adversary. A member may generally deal with the company under subsection (f) when the transaction is approved by the company. Subsection (e) makes clear that a member does not violate the obligation of good faith under subsection (d) merely because the member's conduct furthers that member's own interest. For example, a member's refusal to vote for an interim distribution because of negative tax implications to that member does not violate that member's obligation of good faith to the other members. Likewise, a member may vote against a proposal by the company to open a shopping center that would directly compete with another shopping center in which the member owns an interest. SECTION 410. ACTIONS BY MEMBERS. (a) A member may maintain an action against a limited liability company or another member for legal or equitable relief, with or without an accounting as to the company's business, to enforce: (1) the member's rights under the operating agreement; (2) the member's rights under this [Act]; and (3) the rights and otherwise protect the interests of the member, including rights and interests arising independently of the member's relationship to the company. (b) The accrual, and any time limited for the assertion, of a right of action for a remedy under this section is governed by other law. A right to an accounting upon a dissolution and winding up does not revive a claim barred by law. Comment During the existence of the company, members have under this section access to the courts to resolve claims against the company and other members, leaving broad judicial discretion to fashion appropriate legal remedies. A member pursues only that member's claim against the company or another member under this section. Article 11 governs a member's derivative pursuit of a claim on behalf of the company. A member may recover against the company and the other members under subsection (a)(3) for personal injuries or damage to the member's property caused by another member. One member's negligence is therefore not imputed to bar another member's action. SECTION 411. CONTINUATION OF TERM COMPANY AFTER EXPIRATION OF SPECIFIED TERM. (a) If a term company is continued after the expiration of the specified term, the rights and duties of the members and managers remain the same as they were at the expiration of the term except to the extent inconsistent with rights and duties of members and managers of an at-will company. (b) If the members in a member-managed company or the managers in a manager-managed company continue the business without any winding up of the business of the company, it continues as an at-will company. Comment A term company will generally dissolve upon the expiration of its term unless either its articles are amended before the expiration of the original specified term to provide for an additional specified term or the members or managers simply continue the company as an at-will company under this section. Amendment of the articles specifying an additional term requires the unanimous consent of the members. See Section 404(c)(3). Therefore, any member has the right to block the amendment. Absent an amendment to the articles, a company may only be continued under subsection (b) as an at-will company. The decision to continue a term company as an at-will company does not require the unanimous consent of the members and is treated as an ordinary business matter with disputes resolved by a simple majority vote of either the members or managers. See Section 404. In that case, subsection (b) provides that the members' conduct amends or becomes part of an operating agreement to "continue" the company as an at-will company. The amendment to the operating agreement does not alter the rights of creditors who suffer detrimental reliance because the company does not liquidate after the expiration of its specified term. See Section 203(c)(2). Preexisting operating-agreement provisions continue to control the relationship of the members under subsection (a) except to the extent inconsistent with the rights and duties of members of an at-will company with an operating agreement containing the same provisions. However, the members could agree in advance that, if the company's business continues after the expiration of its specified term, the company continues as a company with a new specified term or that the provisions of its operating agreement survive the expiration of the specified term. [ARTICLE] 5 TRANSFEREES AND CREDITORS OF MEMBER Section 501. Member's Distributional Interest. Section 502. Transfer of Distributional Interest. Section 503. Rights of Transferee. Section 504. Rights of Creditor. SECTION 501. MEMBER'S DISTRIBUTIONAL INTEREST. (a) A member is not a co-owner of, and has no transferable interest in, property of a limited liability company. (b) A distributional interest in a limited liability company is personal property and, subject to Sections 502 and 503, may be transferred in whole or in part. (c) An operating agreement may provide that a distributional interest may be evidenced by a certificate of the interest issued by the limited liability company and, subject to Section 503, may also provide for the transfer of any interest represented by the certificate. Comment Members have no property interest in property owned by a limited liability company. A distributional interest is personal property and is defined under Section 101(6) as a member's interest in distributions only and does not include the member's broader rights to participate in management under Section 404 and to inspect company records under Section 408. Under Section 405(a), distributions are allocated in equal shares unless otherwise provided in an operating agreement. Whenever it is desirable to allocate distributions in proportion to contributions rather than per capita, certification may be useful to reduce valuation issues. New and important Internal Revenue Service announcements clarify that certification of a limited liability company will not cause it to be taxed like a corporation. SECTION 502. TRANSFER OF DISTRIBUTIONAL INTEREST. A transfer of a distributional interest does not entitle the transferee to become or to exercise any rights of a member. A transfer entitles the transferee to receive, to the extent transferred, only the distributions to which the transferor would be entitled. Comment Under Sections 501(b) and 502, the only interest a member may freely transfer is that member's distributional interest. A member's transfer of all of a distributional interest constitutes an event of dissociation. See Section 601(3). A transfer of less than all of a member's distributional interest is not an event of dissociation. A member ceases to be a member upon the transfer of all that member's distributional interest and that transfer is also an event of dissociation under Section 601(3). Relating the event of dissociation to the member's transfer of all of the member's distributional interest avoids the need for the company to track potential future dissociation events associated with a member no longer financially interested in the company. Also, all the remaining members may expel a member upon the transfer of "substantially all" the member's distributional interest. The expulsion is an event of dissociation under Section 601(5)(ii). SECTION 503. RIGHTS OF TRANSFEREE. (a) A transferee of a distributional interest may become a member of a limited liability company