California's New Revised Uniform Limited Liability Company Act: How Will It Affect Your LLC?

November 20, 2013

On September 21, 2013, California Governor Jerry Brown signed into law the California Revised Uniform Limited Liability Company Act (commonly known as the RULLCA), codified at Cal. Corp. Code §§ 17701.01-17713.13. The law is scheduled to take effect on January 1, 2014. The RULLCA will entirely replace the Beverly-Killea Limited Liability Company Act (referred to for purposes of this article as the "old law"), which has governed California limited liability companies (LLCs) since 1994. An LLC is a hybrid legal entity that has both the characteristics of a corporation and of a partnership. An LLC provides its owners - referred to as "members" - with corporate-like protection against personal liability, but it is treated as a noncorporate business organization for tax purposes.

The RULLCA will apply to all existing LLCs and LLCs formed under the laws of California after January 1, 2014, as well as to all foreign LLCs registered with the California Secretary of State as of January 1, 2014. The law revises certain rules governing the formation and operation of LLCs in the state of California. Below, we will highlight some of the significant changes promulgated by the new law.

While much of RULLCA is similar to existing law, it includes some important changes. First, while the "operating agreement" still serves as the foundational contract between LLC members, under RULLCA, the operating agreement does not need to be in writing. Additionally, unless specifically expressed in the operating agreement, an LLC will, by default, be managed by the members; if an LLC wishes to establish management by a manager or managers, it must be expressly stated in the operating agreement.

A second change concerns a default rule for manager-managed LLCs. If an LLC is managed by a manager or managers, the consent of all members of the LLC is required to sell, lease, exchange, or otherwise dispose of all, or substantially all, of the LLC's property; approve a merger or conversion under RULLCA; undertake any other act outside the ordinary course of the LLC's activities; or, amend the operating agreement. The requirement for unanimous consent may, however, be modified by the LLC's operating agreement.

Third, under RULLCA, a new member of the LLC will be bound by the terms of operating agreement regardless of whether the new member executed or otherwise consented to the governing operating agreement.

Fourth, RULLCA has no allocation of profits and losses. This differs from the old law, which divided profits and losses in proportion to the contributions of each member, unless otherwise provided by the LLC's operating agreement.

A fifth change, and of particular focus by the new law, concerns fiduciary duties. Fiduciary duties of LLC management are now specified by RULLCA, which expands the concept of governing fiduciary duties to include a duty of loyalty, a duty of care, and "any other fiduciary duty." RULLCA expressly prohibits an operating agreement from "unreasonably reducing the duty of care;" however, it allows an LLC to specify or modify the duty of loyalty owed by its members.

Existing and new LLCs as well as foreign LLCs registered in California should become familiar with the new law and review their existing operating agreements and other documents to determine how the new law will impact them and their interests. It is possible that amendments and/or modifications are necessary. While the new law may seem intimidating, an experienced business lawyer can help to guide you through the chaos. If you or your business have questions about RULLCA and/or need assistance drafting an LLC operating agreement or revising or modifying an existing one, we can help you Don't hesitate to contact us today.