This year marked the beginning of a new era for the California LLC Law (limited liability company). On January 1, 2014, the California Revised Uniform Limited Liability Company Act (“RULLCA”) was enacted to “recast provisions governing the formation and operation of limited liability companies.” RULLCA repealed the Beverly-Killea Limited Liability Company Act, which had determined California LLC law for two decades.
Who is affected by RULLCA?
Countless entities and individuals have formed LLCs in the State of California, and many will be affected by RULLCA. Most clearly, RULLCA will govern all California LLCs organized on or after January 1, 2014.
In addition, many acts taken by California LLCs, their members and managers on or after January 1, 2014, will be governed by RULLCA rather than its predecessor. As a result, RULLCA may materially change the rights and obligations of many members and managers of preexisting California LLCs by subjecting their post-2013 actions to new requirements.
Forming your California LLC
RULLCA made a number of changes to the filing requirements for new or expanding business owners hoping to form LLCs in California after January 1, 2014. Attempting to navigate the formation of a California LLC without guidance can be a chore, and one new RULLCA provision in particular should concern newcomers to the process.
Under California Corporations Code section 17702.07, members, managers and other parties to an LLC formation may now be held liable under certain circumstances when the information provided to the California Secretary of State is inaccurate. Filers are held to the highest standards of accuracy: “An individual who signs a record authorized or required to be filed under [RULLCA] affirms under penalty of perjury that the information stated in the record is accurate.”
New business owners should be particularly cautious and make sure that they understand the steps involved when creating their California LLC. Especially considering that, of some 112,000 LLC documents filed each year, over one-quarter are rejected for problems like clerical errors. And the LLC’s operating agreement, not filed with the Secretary of State, is far more complex than the documents that are filed.
New rules for old operating agreements?
RULLCA highlights the importance of California LLCs’ operating agreements. As its name suggests, an LLC’s operating agreement governs the inner workings of the company, specifying the terms under which the LLC will operate. A well-drafted operating agreement can be tailored to the needs and preferences of the company and its members.
RULLCA contains a variety of provisions that will govern LLCs in the absence of a clear and thorough operating agreement, including some that differ from prior law and may catch LLC members and managers by surprise, including:
- The presumptive right of members of manager-managed LLCs to vote on certain matters, including the requirement of a unanimous vote of the members to sell, lease, exchange, or otherwise dispose of all, or substantially all, of the LLC’s property, to take any act outside the ordinary course of business, to approve a merger or conversion, or to amend the operating agreement;
- The governance of an LLC by its members, even if the Articles of Organization specify management by one or more managers; and
- The applicable law for interpreting and enforcing the operating agreement.
The good news is that, under newly enacted section 17701 of the Corporations Code, California will give “maximum effect to the principles of freedom of contract and to the enforceability of operating agreements.” Section 17701 enumerates a laundry list of governing principles that LLC members may alter or, in some cases, eliminate with properly drafted operating agreements. But in order to take advantage of this flexibility, operating agreements must be carefully drafted and it is further recommended that all pre-2014 operating agreements be reviewed and updated in light of the new Act.
Current and prospective managers and members of LLCs should prepare for and protect themselves from the revisions that RULLCA has brought in 2014 to provisions governing the formation and operation of LLCs in the Golden State—California doth suffer a (LL)C-change, into something rich and strange.
Contributing Authors: Matt Klegon and Danielle Imbemba