LLCs became a major headline last year with the arrival of the Revised Uniform Limited Liability Act (RULLCA), which replaced the Beverly-Killea Act. It has now been over a year since California enacted RULLCA and the confusion as to how certain provisions work is still a big issue for both new and existing businesses.Under RULLCA ( codified in §17701.01 et seq. of the California Corporations Code), there are now greater protections for LLC members, and additional restrictions on the LLC, which means the people forming the LLC must be even more careful when starting their business and creating the operating agreement.
The operating agreement has become even more critical than it has been previously. The operating agreement governs the relationship between the LLC and its members and the relationship among the members; the rights and duties of a manger of an LLC, if any; and the activities of the LLC and the conduct of those activities. Previously, if there was a conflict between the articles of organization of an LLC and its operating agreement, the articles of organization would control. Under RULLCA, however, the operating agreement generally controls. Furthermore, restrictions on amending the operating agreement can prove to be detrimental to the LLC if not carefully drafted.
Another change under RULLCA concerns the management structure of the LLC. Previously, if the LLC was to be manager-managed, only the article of organization had to state this type of management structure. RULLCA, however, requires that both the articles and the operating agreement explicitly state a manager-managed structure.
Another big change concerns the rights of non-economic members. The concept of non-economic membership is new. Unlike the former law, under RULLCA an LLC can have members who have no economic interest in the LLC. This type of member does not make any capital contribution and does not have any interest in the profits, losses, or distributions of the LLC, but may have voting rights. This new type of membership opens the door for third parties to have greater control over the LLC’s operations.
Other factors that are important to consider when forming or reviewing your LLC are the fiduciary duties owed to members; members’ voting and participation rights; dissociation by members; and the transfer of membership interests. For example, the concept of dissociation has changed under RULLCA so that some events will automatically trigger a member’s dissociation. While RULLCA provides specific guidance on various issues, there are ambiguities in the act, that when not properly addressed, can lead to misunderstandings, disputes, and unintentional consequences, especially if a court has to get involved.
Finally, as with the prior law, you, the business owner, will have to think about some of the same factors; the name of the LLC; its primary purpose; who will serve as a registered agent; whether the LLC will transact business across state lines; and among other considerations, what types of assets the LLC will own.
Remember, whether you are a new or existing LLC, it is in your best interest to ensure that your governing and operating documents are properly drafted and account for the specifics that your particular business requires. To discuss your LLC in detail, please schedule your free, no-obligation consultation via our online form or by calling 818-835-1242.