New LLC Law

Wed, 12/18/13
By: John G. Mackie, Managing Partner

The 2012 California Legislature adopted the Revised Uniform Limited Liability Company Act (“CRULLCA”), to be applicable to all LLCs as of January 1, 2014.

The CRULLCA was enacted, in part, to conform California’s limited liability statute more closely with the uniform limited liability statutes of other states, as well as California’s governing statutes for other types of businesses. (As noted below, however, there are still significant differences with the uniform acts of other states.)

The CRULLCA adds a number of new definitions that will apply in the absence of contrary definitions in each Operating Agreement. For example, the definition of “majority of the managers” means more than 50% of individuals who are managers. “Majority of the members” means members holding more than 50% of the membership interest in profits.

As with the current statute, but more clearly, the CRULLCA gives members the right to contract among themselves for wide variations from the “standard” provisions of the CRULLCA. The new act provides that there will be a presumption that a person who became a member assents to the Operating Agreement, and that a pre-formation agreement may become the Operating Agreement after formation of the LLC. The Operating Agreement of an LLC may be oral, written, implied, or any combination thereof. The Operating Agreement of a single-member LLC is not unenforceable by virtue of having only one member.

A few of the additional important changes from the current statute are:

  • Emphasis on the Operating Agreement as a contract between the parties thereby giving preeminence to the Operating Agreement as opposed to the Articles of Organization or, in some cases, the statute.
  • Making an important distinction between a member-managed LLC and a manager-managed LLC. There will be a presumption of an LLC being member managed unless it is specifically designated as manager managed. A manager-managed LLC imposes fiduciary duties on the managers but not the members. These duties are only waiveable under extraordinary circumstances. In a member-managed LLC, there are no such fiduciary duties (although other duties may be applied).
  • Incorporating the concept of disassociation so as to be similar to partnerships and other kinds of business entities in California. A member may be expelled or may choose to disassociate himself or herself (but not without consequence).
  • No automatic dissolution if one of the members dies or terminates his or her membership.
  • Clarification of a number of current provisions such as improper distributions, rights of members who may or may not own an economic interest, rights of third parties, violations of the Operating Agreement, etc.

LLCs will remain popular in California. The CRULLCA is more like the Delaware statute than was the case before. But the statutes of the two states are not yet identical. Some businesses elect a Delaware LLC because, among many other reasons, Delaware: (1) allows a waiver of certain fiduciary duties between the managers and among the members, or between classes of members; (2) allows serial LLCs; and (3) has a history of court decisions regarding LLCs that is much more extensive than California. None of these differences will be changed with the new California statute, but the CRULLCA does make the California LLC rules more clear.

All California LLCs, whether formed before or after the enactment of the statute, will be subject to the CRULLCA. There is no requirement or need for an election. However, lawyers will be working to figure out what amendments, if any, would be appropriate to existing Operating Agreements in order to take full advantage of the provisions of the new act.

If you have any questions with regard to LLCs, please contact John Mackie, Simon Inman, Jay Behmke or Phillip Kalsched at CMPR at (707) 526-4200.

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