On January 1, 2014 a new law in California was enacted that impacts new and existing limited liability companies (LLCs) alike. So what does this new law mean and does it have any effect on you? This article will explore what the new law aims to achieve and what it means to your business.
The California Revised Uniform Limited Liability Company Act (RULLCA) replaces the Beverly-Killea Limited Liability Company Act. One of the goals of the RULLCA is to put California’s LLC laws on the same page as other states. The new law also aims to provide additional flexibility and enforceability of an LLC’s operating agreement. The RULLCA sets out several default provisions that come into play when an operating agreement is silent. All of the provisions of the RULLCA are automatic and LLCs do not need to file any paperwork or do anything in order for these changes to be made. There are certain provisions of the law that cannot be changed, such as certain fiduciary duties. There are also others that can be changed or removed by way of making changes to the LLC’s operating agreement. So let’s get into what the major changes are:
The RULLCA gives the operating agreement of an LLC more fortitude in that the any provisions written in an operating agreement will now supersede any conflicting records filed with the Secretary of State. The RULLCA also gives rise to a new form of operating agreement which is the “implied operating agreement.” This is in addition to the written and oral form of the agreement.
By default, LLCs are now member-managed. In order for an LLC to be manager-managed, the Articles of Organization and the operating agreement must state so. Managers also have equal rights in managing the LLCs. There are also some courses of business that require unanimous approval by members such as a certain sales of assets, mergers, an amendment to the operating agreement, or any acts that are outside the ordinary course of business for the company. These default provisions are amongst those that can be overridden in the operating agreement.
Under the new law, any activity that is outside the ordinary course of the LLC will require the unanimous approval of all of its members. This provision may also be overridden by specific mention in the operating agreement. Also, what the LLC’s “ordinary course of business” is can be defined more broadly or narrowly in the operating agreement to help in the customization of the LLC’s business.
Another change that the RULLCA makes is that it outlines what fiduciary duties a manager owes to a member. These include the duty of loyalty, the duty of care, and the duty of good faith and fair dealing. These duties are automatic and while some can be changed by doing so in the written operating agreement, others such as the duty of loyalty and the duty of good faith and fair dealing cannot be eliminated.
The definition of “capital contributions” to the LLC has been expanded beyond money, property, or services rendered to also include “any benefit” provided by a person to the LLC.
The new law has made it mandatory for the LLC to indemnify managing members of the LLC who complies with their statutory duties. This can be overridden by stating so in the operating agreement. The RULLCA also expands indemnification to include the reimbursement of managers for payments made in the course of business, made on behalf of the LLC. Again, this reimbursement is dependent on whether they have met their statutory duties.
The RULLCA has eliminated the default provisions for tax allocations. The former law had a default rule whereby the profits and losses were proportionally divided according to the contributions of each member. Now, the operating agreement must specify the how profits and losses are to be allocated amongst the members.
The RULLCA has created certain triggers for the automatic dissociation of a member. These include the death of a member who is an individual, the appointment of a guardian or conservator of an individual, a judicial order stating that the member is incapable of performing their duties, and if a member becomes a debtor-in-bankruptcy. These triggers may also be overridden by changes to the operating agreement
So, there you have it. California’s new LLC law imposes several changes which may, or may not, have an impact on your company. While there are several other changes that the RULLCA has to the former law, these are some of the major changes which may impact your business. As always, it is best to have an attorney review your operating agreement and discuss with you whether any changes should be made in light of the changes made by the new law.