California Revised Uniform Limited Liability Company Act
California Revised Uniform Limited Liability Company Act
On January 1, 2014, the Beverly-Killea Limited Liability Company Act (Prior Act) was replaced with the California Revised Uniform Limited Liability Company Act (RULLCA). The RULLCA are the default rules that govern limited liability companies (LLC). The Prior Act will continue to govern agreements entered into by an LLC prior to January 1, 2014; however, RULLCA will govern any act taken by an LLC after January 1, 2014.
The RUCLLA comprises the default rules for LLC. An LLC may opt out of the default rules by drafting and signing an operating agreement. An operating agreement is an agreement among the LLC members. The operating agreement governs the members’ rights, duties, managerial processes, and most other items relating to the operations of the LLC.
The default rules of RUCLLA raise several new concerns and reiterate the importance of a properly drafted operating agreement. Below, our business attorneys discuss a few of the concerns relating to the new rules. However, not every change has been discussed and the new rules should be reviewed individually.
Membership Voting Rights
The RUCCLA requires a unanimous consent for certain actions. The Prior Act required only a majority in interest of the members for approval. For example, RUCCLA section 17704.07(b)(4) states, “An act outside the ordinary course of the activities of the limited liability company may be undertaken only with the consent of all members.” Section 17704.07(b)(5) specifically provides that an amendment to the operating agreement requires the consent of all members.
Actions that require unanimous consent per section 17704.07(c)(4):
- Sell, lease, exchange, or otherwise dispose of all, or substantially all, of the limited liability company’s property, with or without the goodwill, outside the ordinary course of the limited liability company’s activities;
- Approve a merger or conversion;
- Undertake any other act outside the ordinary course of the limited liability company’s activities; and,
- Amend the operating agreement.
Concerns with Unanimous Consent
Requiring unanimous consent for acts outside the ordinary course of business could have devastating effects on businesses. For example, an LLC with 10 members wants to merge with another company or update their operating agreement. The LLC would need all 10 members to consent in writing before the action could take place. Therefore, one uninvolved minority LLC member could stop the LLC from merging or amending the operating agreement.
Avoiding Unanimous Consent
A written operating agreement may change the default rules of RUCCLA. However, the operating agreement must specifically address these matters. Since January 1, 2014, operating agreements may be outdated and not specifically opt out of the unanimous consent portions of the RUCCLA. If you’re concerned or interested in amending your operating agreement, contact Sacramento’s business attorneys.
Implied Operating Agreements
Section 17701.02(s) of the RUCCLA defines operating agreement to mean, “the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company.” The key term in this new definition is “implied.”
Concerns with Implied Operating Agreements
A limited liability company may have an operating agreement and not even know it existed. Moreover, new members to a limited liability company are deemed to assent to the operating agreement. In essence, members might not even be aware they’ve agreed to an operating agreement because it was implied. Alternatively, members in a dispute could argue for provisions not written in an operating agreement because they could arguably have been implied based on prior communications.
Avoiding Implied Operating Agreements
Written operating agreements are a method of opting out of the RUCCLA default rules and reducing any potential confusion with an implied agreement. If you’re interested in having your operating agreement drafted to avoid any confusion, contact Sacramento’s business attorneys.
Mandatory Reimbursement of Expenses
Section 17704.08(a) of the RUCCLA provides for a mandatory reimbursement of payments made for LLC “debt, obligation or other liability incurred by a member” of the LLC. The Prior Act allowed for reimbursement, but it certainly was not mandatory.
Concerns with Mandatory Reimbursement of Expenses
Creating a mandatory provision for reimbursement is too expansive and provides too much leeway. The debt must have been incurred properly and not in violation of their fiduciary duties, but any mandatory provision in a contract has a tendency to create problems down the road.
Avoiding Mandatory Reimbursement of Expenses
Written operating agreements will solve your problems. An operating agreement signed by all members will opt the LLC out of the RUCCLA default rules. If you’re interested in having your operating agreement drafted or amended to avoid any mandatory reimbursement of expenses, contact Sacramento’s business attorneys.
Section 17704.07(a) of the RUCCLA provides, “A limited liability company is a member-managed liability company unless the articles of organization and the operating agreement” expressly provide otherwise or include “words of similar import.” Generally, LLCs will stated on the Articles of Organization that the company will be “manager-managed,” “managed by managers,” or “vested in managers.” However, this language is not frequently included in the operating agreement as well.
Concerns with Member-Managed LLC
A limited liability company that intended on being managed by elected managers will now be managed by all of the members. For example, members of the LLC will have authority to decide day-to-day operations. Failure to specify the management of the LLC in both documents could now result in disputes amongst the members, increased liability, and any number of other problems.
Avoiding Member-Managed LLC
Specify the LLC’s intentions clearly in a written operating agreement. If you’re interested in having your operating agreement drafted or amended to avoid any confusion with member-managed or manager-managed provisions, contact Sacramento’s business attorneys.
Contact Sacrament’s Business Attorneys
There are several differences between the Prior Act and the California Revised Uniform Limited Liability Company Act. We listed a few of the important changes, but we did not list all of the changes. If you’re interested in having your operating agreement reviewed, revised, or having a new agreement drafted, feel free to contact Sacramento’s Business Attorneys to set up an initial consultation.
By: Trevor Carson Google+
*The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact us for a consultation. Sacramento Business Attorneys California Revised Uniform Limited Liability Company Act.