New LLC Law & Its Impact
On January 1, 2014, a new law called the California Revised Uniform Limited Liability Company Act (RULLCA) governing California Limited Liability Companies came into effect,
replacing the previous law Beverly-Killea Limited Liability Company Act. The new law could apply to actions taken by a existing LLCs after January 1, 2014, with a few exceptions. Certain provisions of the new law may effectively change or supplant existing LLC operating agreements causing serious problems between members and what they originally agreed to in their operating agreements.
In California, LLCs are often the entity of choice for closely held business, especially for real
estate related business ventures. This new law has widespread consequences for existing businesses in California operating as LLCs. The new law provides default provisions which members of an LLC can replace in their operating agreement, as well as some sections which are precluded from being overridden. Here are some significant features of the RULLCA:
Manager Managed LLCs
For manager-managed LLCs the most significant change is that the new law provides that
consent of all members is required to:
sell, lease exchange or otherwise dispose of all or substantially all of LLC’s property outside
of the ordinary course of business;
- approve a merger or conversion;
- undertake any act outside the ordinary course of business; and
- amend the operating agreement.
These default provisions may be overridden by the operating agreement. It is important to
note that existing LLCs should revisit their operating agreements to ensure they have expressly outlined when consent by all of its members is required. Further, because the new law is silent on what constitutes “ordinary course of business” members should expressly outline the matters that are outside the course of ordinary business.
Amending Operating Agreements
Further complicating matters is the new default provision regarding amending existing operating agreement. If the operating agreement is silent on the issue, the new law provides that unanimous consent by all members is required to amend an operating agreement.
The fiduciary duties of members and managers are more specifically outlined in the new law.
The most significant change is the new law drastically limits operating agreements with respect to the elimination or alteration of fiduciary duties. Modification of the fiduciary duties must be explicitly stated in the operating agreement with the informed consent of all members and members cannot unreasonably alter the duty of care.
These are only some of the new changes to California limited liability company law. Existing
LLCs should have their operating agreements reviewed to not only prevent the new law from
overriding (through its new default rules) the members’ intent, but to avoid disputes or litigation as a result of ambiguity and to take advantage of the provisions of the RULLCA related to fiduciary duties.