New California LLC Act

Effective January 1, 2014, California adopted a new law governing limited liability companies known as the “Revised Uniform Limited Liability Company Act,” or “RULLCA.”

Business owners should be aware that the RULLCA may affect Members’ rights under existing LLCs, and in some cases may be inconsistent with the terms of their current Operating Agreements.  A summary of the changes are as follows:

Noneconomic Members — A new default rule under the RULLCA allows a person to have voting rights, or other non-economic rights, without requiring that person to hold an economic interest in the entity.  One effect of this new default rule is that a full LLC member may transfer his economic interest in the LLC while maintaining his voting rights and status as a member.  This is different from existing LLC law, which equates LLC membership with the holding of the economic rights associated with it.  Therefore, existing LLCs should decide whether or not they agree with this default rule and, if not, amend their Operating Agreements accordingly.

Disassociation — 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.  Business owners should consider the effect of this provision and may wish to amend their Operating Agreements to provide for alternative governance procedures regarding the removal of members.

Scope of Fiduciary Duties — Whereas existing LLC law is unclear on the concept of fiduciary duties, the new RULLCA specifies that the manager or member(s) in control of the LLC owe a “duty of loyalty” and a “duty of care” to the non-controlling member(s). The duty of loyalty under the new law is limited to specifically enumerated activities, and the duty of care is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.  In addition, all LLC members owe a “duty of good faith and fair dealing” to each other. These duties may be expanded upon in the Operating Agreement, but the duty of care, the duty of loyalty, and the contractual duty of good faith and fair dealing may not be eliminated.  In addition, the duty of care may not be “unreasonably reduced.”  Although the default provisions are acceptable for most LLCs, in certain cases the members may wish to modify the managers and members’ fiduciary duties and standards to the extent permitted under the RULLCA through appropriate amendments to their Operating Agreement.

Death of a Sole Member — Under existing LLC law, if the sole member of an LLC dies — leaving no remaining LLC members — the LLC is automatically dissolved.  Under the new RULLCA, however, if the sole member in an LLC dies, his/her heirs may be admitted as substitute members, thus allowing the LLC to remain in existence.

Conflicts in Governing Documents – Under existing LLC law, in any conflict between the LLC’s articles of incorporation and its operating agreement, the terms of the articles shall govern.  Under the new RULLCA, however, it is the opposite — that is, the operating agreement governs in any conflict between that agreement and the LLC’s articles.  The only exception under the new law is for third parties who reasonably rely on the articles.  Therefore, any existing LLC that has been relying on a statement in its articles must amend its operating agreement prior to January 2014 to eliminate any conflicting provisions.

This post is only intended to cover a few of the highlights of the new law.

The full text of the new law can be found here.

We would be happy to review the new law with you and answer any questions you may have.