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Changes to California LLC Law

posted in Corporate formation, LLC, Startups, Taxation by

On January 1, 2014, new laws governing the formation and operation of California limited liability companies (“LLCs”) will take effect. Currently, LLCs are governed by the Beverly-Killea Limited Liability Company Act. The Beverly-Killea Limited Liability Company Act will be replaced on the first day of the new year by the California Revised Uniform Limited Liability Company Act (“CRULLCA”). By enacting the CRULLCA, California sought to bring its laws governing LLCs more in line with those other states. The changes are in part meant to make it easier for multi-state business to operate in- and outside of California.

LLCs Governed by CRULLCA

The CRULLCA applies automatically to all domestic LLCs existing on or after January 1, 2014, and to all foreign LLCs registered with the California Secretary of State on or after January 1, 2014. The CRULLCA also applies to acts, transactions, or contracts of LLCs, or their members or managers, dated on or after January 1, 2014. The old law, the Beverly-Killea Limited Liability Company Act, will govern all acts, transactions, or contracts completed prior to January 1, 2014. The CRULLCA does not create any new filing requirements with the California Secretary of State, or any other government agency, for existing LLCs upon the new law’s effectiveness.

The Formation Basics Similar

After the effectiveness of the CRULLCA, LLCs will continue to be formed by filing articles of organization with the California Secretary of State. The operating agreement will remain as the agreement between members. The distinction between manager-managed and member-managed LLCs is also maintained by the CRULLCA. Members remain free to choose between the two management structures. However, LLCs will be deemed to be member-managed unless the articles of organization and the operating agreement provide for management by managers.

Noteworthy Changes or Provisions in the CRULLCA

The CRULLCA imposes a new and more burdensome unanimous member consent requirement prior to the completion of certain LLC actions, provided no other arrangements are made in the articles of organization or written operating agreement. Under prior LLC law, in the absence of a voting provision in the articles of organization or written operating agreement, only an amendment to the articles of organization or the operating agreement required the unanimous vote of all members. (Cal. Corp. Code § 17103(a)(2)). In all other situations in which a vote was required, a majority vote of the members was sufficient. (Cal. Corp. Code § 17103(a)(3)). Under the CRULLCA, the consent of all members in a manager-managed LLC is required to do any of the following: (A) sell, lease, exchange, or otherwise dispose of all, or substantially all, of the LLC’s property, with or without the goodwill, outside the ordinary course of the LLC’s activities, (B) approve a merger or conversion, (C) undertake any other act outside the ordinary course of the LLC’s activities, or (D) amend the operating agreement.

The CRULLCA also includes detailed provisions clarifying when the LLC’s operating agreement can alter members’ or managers’ fiduciary duties. Generally, an operating agreement cannot completely eliminate the duty of loyalty, the duty of care, or any other fiduciary duty. (Cal. Corp. Code § 17701.10(c)(4)). However, while an operating agreement cannot unreasonably reduce the duty of care, a manager’s duty of loyalty to the LLC and its members can be modified in a written operating agreement with the informed consent of the members. (Cal. Corp. Code §17701.10(e)). New or existing LLCs should seek the guidance of legal counsel when evaluating or implementing changes with respect to fiduciary duties in operating agreements to ensure both procedural and substantive compliance with the CRULLCA.

The CRULLCA’s default provisions provide for indemnification of members in member-managed LLCs and managers in manger-managed LLCs, provided that members or managers, as applicable, complied with their fiduciary duties to the LLC and its members. (Cal. Corp. Code § 17704.08(a)). Operating agreements, however, can alter or eliminate the default indemnification for the LLC’s members or managers. (Cal. Corp. Code 17701.10(g)). Additionally, the CRULLCA permits operating agreements to eliminate or limit a member’s or manager’s liability to the LLC for money damages, except in circumstances such as a breach of the duty of loyalty or an intentional violation of criminal law. (Cal. Corp. Code § 17701.10(g)). The default indemnification provision discussed above will impact existing LLCs. As such, LLCs should evaluate with the assistance of counsel whether it would be beneficial to take advantage of the CRULLCA’s provisions allowing for the alteration of the default indemnification provision.

What to do?

If you are thinking about organizing a new LLC or would like to consult an experienced attorney about the CRULLCA’s impact upon your existing LLC and its foundational documents, please contact Larry Horwitz at lhorwitz@horwitzarmstrong.com.

22 Oct, 13

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