The Devil You Know: The New Mandatory Provisions for LLC/PLLC Operating Agreements

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Corporate governance is not anyone’s favorite thing to think about.  I liken the governance practice to a visit to a dentist: you know you should, but you still do not want to.  And, like the dentist, proper corporate governance requires regular checkups to remain healthy.

For example, in 2018, Nevada dramatically shifted corporate governance in limited liability companies (and their professional counterparts: PLLCs) and it went mostly unnoticed.  The changes, discussed below, pose a potential problem for these entities, particularly physician owned PLLCs with more than one billing professional.  Fortunately, it is a problem with a simple solution, provided you have the authority to make the necessary amendments.

The Change

If you do not practice corporate governance, you would be forgiven to have missed what amounts to a tsunami within the industry.  In 2018, Nevada law was changed to add NRS 86.298:

NRS 86.298.  Duties of manager or managing member. The duties of a manager or managing member of a limited-liability company to the limited-liability company, to any series of the limited-liability company, to any member or to another person that is a party to or otherwise bound by the operating agreement are only:

1) The implied contractual covenant of good faith and fair dealing; and

2) Such other duties, including, without limitation, fiduciary duties, if any, as are expressly prescribed by the articles of organization or the operating agreement.

If you still missed it, the fiduciary duty that used to “automatically” exist between the members and the Manager(s) (or Managing Member(s)) of the company no longer applies without specific mention.  That is, with this change, not only can the fiduciary duty be waived, but it is also deemed waived unless it is explicitly mandated by the operating agreement.  Since this duty used to be implicitly included by statute, few (if any) of the templated forms used to create operating agreements would have explicitly provided for it.

The Trouble

If physicians are entering into an operating agreement with other physicians (e.g., group practice, private surgery center investment, etc.), attention must be paid to this provision (or absence thereof).  Physicians entering into these arrangements likely expect a Manager or Managing Member to have an explicit duty to place the members’ interests ahead of their own – and will agree to management strictures (or a lack thereof) based on that expectation.

For example, an operating agreement might provide a manager with the unilateral authority to initiate or answer a civil complaint on behalf of the company.  It is easy to imagine how this power might be abused in the instance where that manager has independent liability in the same matter.

The Solution

For new companies, physicians (and their attorneys) must review management structures with these changes in mind or ensure that the initial operating agreement is drafted to include such an explicit duty. As an unexpected consequence of this change, professionals considering multi-member LLC as a governance structure now are well advised to undertake a pre-organization discussion of what duties are expected to be owed by management to the membership.  This discussion frequently leads to greater transparency and understanding in initial governance, which is, as you might expect, the key to long-term success in partnerships.

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