Hawaii Limited Liability Company: How an Operating Agreement Can Avoid Hawaii Legal Rules

Under the Hawaii Uniform Limited Liability Company Act, there are default rules that apply in the event your Hawaii limited liability company does not have an operating agreement in Hawaii in effect. Some of those default rules may prevent the company from taking meaningful action due to strict unanimity requirements, especially if the company has many members. This is why it is important to have an operating agreement that has rules tailored to your needs rather than being bound by Hawaii’s default rules.

For example, Section 428-404(c) of the Hawaii Revised Statutes specifically states that certain business matters of a limited liability company require the consent of all members. Some of those matters include the following:

(1) amendments to the operating agreement;

(2) amendments to the articles of organization;

(3) admission of a new member;

(4) make interim distributions;

(5) use of company property to redeem an interest subject to a collection order;

(6) compromise between members, the obligation of a member to make a contribution or return money or other property paid or distributed in violation of this chapter;

(7) merge the business with another entity;

(8) consent to dissolve the company; Y

(9) Selling, leasing, bartering, or otherwise disposing of all or substantially all of the company’s property with or without goodwill.

An operating agreement can be used to override such default rules so that only the consent of the majority of the members is required for the aforementioned matters instead of unanimity. If you have three or more members, you probably need agreement because getting unanimous is easier said than done. Also, each Hawaii limited liability company’s situation may be different, so the agreement must be carefully crafted for each circumstance.

Finally, it should be noted that despite the flexibility that an operating agreement can provide your business, Section 428-103(b) of the Hawaii Revised Statutes places some limitations on what the agreement can do. An operating agreement cannot:

(1) unreasonably restrict the right to information or access to records;

(2) eliminate the duty of loyalty;

(3) unreasonably reduce the duty of care; Y

(4) remove the obligation of good faith and fair dealing, but the operating agreement may determine the standards by which compliance with the obligation will be measured, if the standards are not manifestly unreasonable.

However, even with respect to the aforementioned provisions, the agreement may establish limitations and rules.

Therefore, you should seek a consultation with an experienced Hawaii corporate law attorney so that you can obtain an operating agreement structured for your company’s needs.