The 2019 Legislative Session has been challenging to business owners. We are now seeing the beginning of the laws that are being signed by Governor Sisolak and how they will affect your business. The first of these bills is AB207 which attempts to bring Nevada’s laws relating to corporations and limited liability companies (LLCs) more in line with Delaware’s laws.
AB207 is a mixed bag of good and bad for business. Let’s start with the good:
- You can now create rules in your entity documents (Articles of Incorporation; Bylaws; and Operating Agreements) that all litigation, including by or on behalf of the company, can be brought in Nevada.
This is good because it gives you control over the court(s) deciding the fate of your business.
- For corporations, unless there is a specific law or agreement, no person other than the corporation is liable for the debts or liabilities of the corporation unless the person acts as the alter ego of the corporation. A person acts as an alter ego only if the corporation is not independent of the person; there is no meaningful separation between the person and the corporation; and maintaining the distinction between the person and the corporation would sanction fraud or promote a manifest injustice.
This is commonly known as piercing the corporate veil. The changes to Nevada law make it more difficult for the creditor of a corporation to sue the people within the corporation (whether it be an officer, director, stockholder, agent or other person).
- Unless otherwise stated in the Articles of Organization or in the Operating Agreement, a manager or managing member’s duties to an LLC are only that of the implied covenant of good faith and fair dealing – essentially that the manager/managing member will not engage in bad faith or do harm to the LLC.
This provides a simplified method of defining duties and allows greater flexibility to the originating members of the LLC to define what additional, if any, duties will be imposed upon managers or managing members
The bad of AB 207 for LLCs is something that is good for corporations. Prior to this law being implemented, there was no statutory basis for piercing the veil of an LLC. Now the legislature has codified a manner in which the managers and/or members of an LLC can be liable for the debts or liabilities of the LLC under the same standards as a corporation. For those of you who formed LLCs believing it provided absolute protection, unfortunately, that belief is no longer true.
So, what should you do now? You should make sure that the documents governing your business are updated to provide you the benefits of the new law and protect you from some of the challenges to ensure you are receiving the maximum protections afforded under Nevada law for your business.