Another Reason Not To Like California’s New LLC Act


Suppose Bob asks his lawyer, Paul, to form an LLC under California’s new Revised Limited Liability Company Act.  Paul’s paralegal, Natalie, signs the Form LLC-1 as the organizer.

Natalie then quits work and claims that the LLC was to have a single member – herself.  Bob agrees that the LLC was to have one member on formation but that was to be he.  Natalie counters that she never met Bob (which is true) and had no agreement with him.  Meanwhile, Carol and her friends Ted and Alice appear claiming that on formation the LLC was to have multiple members – themselves.  Who’s right?

Corporations Code Section 17704.01 tries to provide a solution.  Subdivision (a) states that if the LLC “is to have only one member upon formation, the person becomes a member as agreed by that person and the organizer of the limited liability company”.  But who decides whether the LLC is to have one member – the organizer or “the person”?  And who exactly is “the person”?  Natalie is clearly the organizer, as defined in Section 17701.02(u), but what if Bob only spoke to Paul?  Can Natalie have an agreement with Bob?  Moreover, how do we know if Bob is the “the person” referred to in the statute?

Subdivision (b) applies when the LLC “is to have more than one member upon formation”.  Again, we aren’t told how this state of affairs is to be determined.  Assuming that there is to be multiple members, then “those persons become members as agreed by the persons before the formation of the limited liability company”.  Now, this is a complete mystery.  Who are “those persons”?  Carol, Ted and Alice will claim to be “those persons”, but how do we know that is the case?  Natalie, moreover, seems to have no say on who “those persons” might be because the statute refers only to an agreement among “those persons”.

The clash of Bob, Ted, Carol and Alice (and, not to forget, Natalie and Paul) is just one more reason not to like the new California Revised Uniform Limited Liability Company Act.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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