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California's New LLC Act

June 23, 2014

Starting a business in California can be complicated. You have to figure out a business plan, find investors, find real estate, and depending on the business, maybe even find employees. On top of all of that, you also have to figure out what kind of business entity you want to set up for your business. The decision to go with a corporation, an LLC, or a partnership will affect your business for years to come. Ultimately it's a decision that should be made with an experienced business attorney at your side.

New Rules Regarding LLCs in California

With that being said, we would like to provide you with a little information about a change in California law regarding LLCs, or limited liability companies. This information is important both for those considering forming LLCs and for those who have already formed them. On January 1, 2014, a new law called the California Revised Uniform Limited Liability Company Act (RULLCA) went into effect. The law it replaces can be found here. The new law will affect any operating agreements that are entered into after its effective date. However, it will also affect any act taken by an LLC or its members after January 1, 2014, even if the LLC was formed before that date. There are five main changes to the law.

The first has to do with manager-managed LLCs exclusively. From now on when forming manager-managed LLCs, a written statement designating the LLC as such will be required as part of the operating agreement and the articles of organization. Such a statement was only required to be part of the articles of incorporation.

The second change has to do with fiduciary duties. The old law was fairly generic when it came to fiduciary duties of members and managers. However, the new law is very specific that the fiduciary duties include the duty of loyalty and the duty of care, plus any other fiduciary duty. The new law also sets out very specific requirements about how an LLC can modify these duties, and what steps must be taken to do so.

The third change has to do with amending operating agreements. Under the old law, if an LLC agreement was silent on the matter, a majority was enough to change the agreement. However, if an LLC is governed by the new law instead of the old (for example, new LLCs), amending operating agreements requires unanimous consent of the LLC interests.

The fourth change has to do with the scope of managerial powers. Managers' authority to take certain actions without the approval of all of the members has been limited by the new law. These actions include selling or leasing the company's assets, as well as any action outside of the ordinary course of the company's business. These rules can be overridden by an operating agreement, but amending the operating agreement now may require unanimous consent.

The fifth change has to do with foreign LLCs. It is still somewhat unclear what these changes will mean, as the law seems on its face to contradict itself. In one part it says all of the provisions of RULLCA will apply to foreign LLCs as well as domestic LLCs. But another portion of the law says the internal affairs of foreign LLCs are to be governed by their own state laws. This conflict could mean that RULLCA applies to foreign LLCs, but where RULLCA is silent, the internal affairs of foreign LLCs are to be governed by their own state laws.

RULLCA is a complex piece of legislation, and it will take some time for all of its effects and implications to become clear. The takeaway lesson here is that if you have (or plan to have) an LLC, you should speak with your attorney about how RULLCA will affect your business, and what steps you need to take to minimize any negative effects.

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