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New California LLC Regs Coming January 1, 2014

In September, 2012 Governor Brown signed SB 323 which represents the Revised Uniform Limited Liability Act for California (“RULLCA”) which will replace the current Beverly-Killea Limited Liability Company Act (“Current Regs”). The RULLCA was intended to align California’s LLC regulation more closely with a “Uniform LLC Act” drafted by the National Conference of Commissioners on Uniform State Laws. RULLCA will take effect in January 1, 2014 at which time all existing and future California LLC’s will be subject to RULLCA.

The good news is that RULLCA makes very few substantive changes and significant revisions to existing operating agreements should not be necessary nor does RULLCA, in and of itself, require amendments to existing operating agreements. For example, the types of LLC’s, their formation and the current forms used by the California Secretary of State will not change. Similarly, the Dissolution process, mergers and conversions and Manager fiduciary duties also remain unchanged.

A few things will change however.

  1. RULLCA will emphasize the need for a written operating agreement and the importance and enforceability of the terms of such operating agreement on the managers and members of an LLC. Furthermore, RULLCA will provide that members of an LLC will be deemed to assent to the terms of an operating agreement even if a member did not physically sign the operating agreement. This change should be helpful when dealing with new or substitute members who don’t sign the operating agreement and later seek to disavow its terms as binding to them.
  2. RULLCA will allow a person to become a member of the LLC without having an economic or transferable interest in the LLC. This in essence is the flip-side of the Current Regs which allow a person to own an economic interest in an LLC but not necessarily be a member of the LLC. Under RULLCA a person can be a member (ie right to vote and participate) but not necessarily own an economic interest in an LLC.
  3. RULLCA will allow for third party consents to amend the operating agreement. For example, lenders or an investor, while not a member, may be given the right to approve any change to the operating agreement before such change can become effective. Current Regs allow only managers and/or members to have such a right.
  4. RULLCA introduces new rules of “disassociation” whereby a member may be expelled from the LLC for certain specified reasons upon the unanimous consent of the other members.
  5. Current Regs prohibit an LLC from making improper distributions, namely distributions which cause the LLC to be unable to pay its debts as they become due or cause its total assets to be less than its liabilities. Current Regs also provide that any manager or member who consented to such distribution will be held personally liable for such improper distribution. Consequently, under Current Regs only a non-consenting member or manager would avoid personal liability. RULLCA makes a change by adding any member or manager who was not allowed to vote on the distribution will also be absolved from personal liability for such improper distribution.

As we get closer to the end of 2013, I will review the operating agreements I have prepared for clients and recommend what changes, if any, might be required.

Article by Roger D. Linn © Barnett & Linn

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