Key Takeaways

  • The Washington Limited Liability Company Act (originally enacted in 1995 and overhauled in 2016) governs LLC formation, operation, and dissolution in Washington.
  • The Act introduced flexibility in operating agreements, allowing written, oral, or implied agreements, though written agreements are still strongly advised.
  • Management structures can now include boards or committees, not just individuals, giving LLCs corporate-like governance options.
  • Default voting is one member, one vote, but operating agreements can tie voting rights to ownership percentages.
  • Members are granted strong rights to inspect company records, similar to corporate shareholder rights.
  • Recent amendments (2022 and beyond) address fiduciary duties, derivative actions, and clarify statutory provisions.
  • LLCs in Washington must obtain a Unified Business Identifier (UBI) and comply with Secretary of State filing requirements.
  • Foreign LLCs must register before transacting business in Washington, with penalties for failing to do so.

Washington Limited Liability Company Act is a piece of legislation regulating the creation of limited liability companies (LLCs) in Washington state that was implemented in 1995. Several changes were made to an updated version of the act, which came into force on January 1, 2016.

How the Act Works

Legislators who redrafted the state's LLC act wanted to get rid of parts of the act that were unclear and adopt laws that apply to businesses in Washington in the same way.

Enforcement of LLC laws is overseen by the secretary of state's office. As well as the LLC act, the secretary of state's office also relies on the Washington Administrative Code, which includes procedures for dealing with LLCs.

To do business in Washington with the secretary of state's office, your LLC has to have a unified business identifier (UBI). You'll need this to file documents and contact the corporate division of the secretary of state's office. The corporate division will issue you with a UBI when you establish your LLC.

Registration and Formation Requirements

To operate legally under the Washington Limited Liability Company Act, every LLC must file a Certificate of Formation with the Washington Secretary of State. This filing creates the LLC as a recognized legal entity. In addition:

  • Unified Business Identifier (UBI): All LLCs receive a UBI, which is required for tax filings, licensing, and correspondence with state agencies.
  • Foreign LLCs: Out-of-state LLCs must apply for a Certificate of Authority before conducting business in Washington. Without registration, a foreign LLC cannot bring lawsuits in state courts and may face fines and back taxes.
  • Annual Report: Each LLC must file an annual report to remain in good standing. Failure to do so may result in administrative dissolution.

Operating Agreements

The new act includes procedures for operating agreements that are likely to have a significant effect on many LLCs. One of the most important changes is that your company no longer needs to adopt an operating agreement in writing. Instead, you can now reach an implied or oral company agreement.

As a result, LLCs can start their operations with an informal agreement between their owners. Even so, you would be well advised to file a written agreement to guard against potential disputes at a later date, particularly since an oral agreement can easily be interpreted differently by different people. If serious disagreements between LLC members arise, the lack of a written agreement could lead to costly court action to resolve the matter.

Your LLC's operating agreement can change some of the default procedures in the law. However, the agreement cannot:

  • Choose another state's laws to govern an LLC
  • Alter the LLC's ability to be sued or sue under its name
  • Modify the requirements imposed by the secretary of state's office for filing documents
  • Unreasonably prevent the members from examining the LLC's records
  • Adopt new requirements for winding up the operations of an LLC

Fiduciary Duties and Member Protections

The Act establishes clear fiduciary duties for LLC members and managers:

  • Duty of Loyalty: Members and managers must act in the best interests of the LLC and avoid self-dealing.
  • Duty of Care: Members and managers must exercise reasonable care when making decisions on behalf of the LLC.
  • Good Faith and Fair Dealing: Every operating agreement carries an implied covenant of good faith.

The 2022 amendments to the Washington LLC Act also expanded members’ rights to bring derivative actions—lawsuits brought by members on behalf of the LLC when managers or majority owners act against the company’s interests.

Management Structure

Under the new act, you have the option of running your LLC with a board of directors. Lawmakers made this change by creating a new definition of manager in the act. While the previous act stipulated that a manager had to be a person, the revised version states that manager can also mean a committee or group.

In a related change, the new law no longer requires you to say whether your LLC is member-managed or manager-managed in its certificate of formation. Instead, you can record this decision in your LLC's operating agreement, which means you have more flexibility.

Flexibility in Governance

Under the Washington Limited Liability Company Act, governance can be highly customized:

  • Committees or Boards: The Act allows for boards or committees to serve as managers, mirroring corporate structures.
  • Manager-Managed or Member-Managed: While the certificate of formation no longer needs to declare the structure, operating agreements should specify governance.
  • Corporate-Style Options: Larger LLCs often adopt corporate-like governance for clarity and efficiency, while small businesses may prefer member management.

This flexibility makes LLCs attractive for both small partnerships and larger ventures seeking corporate-style oversight.

Voting Rights

Under the act's default regulations, voting within an LLC takes place according to a system of one member, one vote. In practice, this means that if one member owns 90 percent of a five-member LLC, they could be outvoted if the other four members united against them.

Part of the thinking behind this provision is that it allows people who invest their time instead of their money in the LLC to have a say. However, LLC members can decide to use a voting system in line with ownership share by making this preference clear in their operational agreement.

Default vs. Customized Voting Systems

The Act’s default one-member, one-vote system may not fit businesses with unequal ownership contributions. To address this, operating agreements can:

  • Allocate votes based on ownership percentages.
  • Create supermajority requirements for major decisions, such as mergers or dissolutions.
  • Establish tiered voting rights for certain classes of members.

These provisions allow LLCs to balance the interests of capital investors with members who contribute expertise or labor.

Access to Information

The Washington Limited Liability Company Act gives LLC members strong rights to access company records. As a result of recent changes, LLC members have roughly the same rights to access company records as shareholders do for corporate records.

A list of the records members can inspect is provided. It includes:

  • The certificate of formation, including all amendments
  • A version of the operating agreement and any amendments
  • The company's three latest state, federal, and local tax filings
  • The three most recent annual reports

Further documents can be requested by LLC members, but the LLC has the power to accept or reject such requests. These records include:

  • LLC accounting records
  • Records of any LLC meetings involving managers or members
  • A list of the names and mailing addresses of members and managers

Amendments and Recent Updates

The Washington legislature continues to refine the LLC Act to resolve ambiguities and align with modern business needs. Key amendments include:

  • Clarification of Fiduciary Duties: Members cannot eliminate the duty of loyalty but can define permissible activities in the operating agreement.
  • Derivative Actions: Members now have clearer standing to sue on behalf of the LLC in cases of mismanagement.
  • Records Access: The scope of records members may access has been expanded, and courts can enforce compliance.

These updates emphasize transparency and accountability, ensuring that Washington LLCs remain flexible yet fair to all stakeholders.

Frequently Asked Questions

  1. What is the Washington Limited Liability Company Act?
    It is the law that governs how LLCs are formed, managed, and dissolved in Washington State, originally enacted in 1995 and overhauled in 2016.
  2. Do I need an operating agreement for my Washington LLC?
    No, the Act allows oral or implied agreements, but a written operating agreement is highly recommended to avoid disputes.
  3. How are voting rights determined under the Act?
    By default, each member has one vote, but operating agreements can tie voting power to ownership percentages.
  4. What records are LLC members entitled to see?
    Members may inspect the certificate of formation, operating agreement, tax filings, annual reports, and in many cases, financial and meeting records.
  5. What happens if a foreign LLC does business in Washington without registering?
    It cannot sue in Washington courts and may face fines, penalties, and back taxes until properly registered.

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