Legal Current Events: California Revised Uniform Limited Liability Company Act

On September 21, 2012, Governor Jerry Brown signed into law Senate Bill 323. Specifically, section 20 of the Bill replaced the Beverly-Killea Limited Liability Company Act (Beverly-Killea) with the California Revised Uniform Limited Liability Company Act (RULLCA) to govern the formation and operation of limited liability companies (LLCs). Under the new legislation, LLCs are not required to file any documents with the Secretary of State as the new law will automatically apply without any “opt in” or “opt out” procedure to all existing California and foreign LLCs when it takes effect on January 1, 2014.

Reason for the Change

RULLCA is based on the Revised Uniform Limited Liability Company Act (the “Uniform Act”), except for certain California-specific provisions which have been preserved. It is intended to coordinate California’s corporate laws with other states in order to make it easier for LLCs to operate at a multi-state level.

In 1994, the National Conference of Commissioners on Uniform State Laws adopted the Uniform Act. However, by that time nearly every state had adopted their own LLC legislation, and those laws varied considerably in form and substance. Currently, Idaho, Iowa, Nebraska and Wyoming have already adopted the Uniform Act, and Alabama, Arkansas, Minnesota, Montana, New Jersey, South Carolina and the Virgin Islands are expected to do so next year. Nonetheless, RULLCA has been slow to catch on. However, its recent adoption into their corporate laws by California and New Jersey, which are major commercial states, may encourage other states to follow.

Lastly, RULLCA is meant to reflect developments in LLC law over the last 20 years and shed light on many of the issues that exist under the present law.

Notable Substantive Changes

In order to preserve some provisions unique to California much of the substance of RULLCA is similar to that of the current law. However, there are a number of notable changes as well. Some of the significant features of RULLCA include:

  • Includes a more thorough set of default rules which apply when an LLC operating agreement is silent.
  • Adds detailed provisions indicating which if the RULLCA sections cannot be overridden by provision in the operating agreement.
  • Goes into more detail regarding when an LLC member may dissociate from the LLC and the resulting consequences of dissociation.
  • Unless stated otherwise in the operating agreement, the RULLCA states that LLCs will be presumed to be member-managed (as opposed to manager-managed).
  • Clarifies the extent to which the operating agreement can define, alter, or eliminate aspects of fiduciary duty of members and managers. However, the gross negligence standard for duty of care remains the same.
  • While it authorizes the operating agreement to relieve members and managers from liability in certain situations for money damages arising from breach of duty, RULLCA establishes limitations and restrictions with regard to the indemnification procedure.
  • Allows for members to transfer their interest in the LLC and details the effect on that member’s status with the LLC.

All of the provisions in the current legislation which impact the California Secretary of State or the provisions which govern mergers and conversions of LLCs remain substantially the same under RULLCA.

While this is not an exhaustive list of the changes, it does highlight some important provisions. LLC members and managers, as well as their counsel, should have a clear understanding of how the RULLCA will impact California’s corporate laws and the governance of LLCs after January 1, 2014.