Corporate Communicator - Spring 2013: California’s New LLC Act Adds Confusion and Effects Little Change

Explore:  RULLCA

On January 1, 2014, the California Revised Uniform Limited Liability Company Act (the RULLCA) will take effect. The RULLCA replaces the Beverly-Killea Limited Liability Company Act, California’s current law governing limited liability companies.

The RULLCA was crafted based on the Revised Uniform Limited Liability Company Act (the Uniform Act), which was first promulgated by the National Conference of Commissioners on Uniform State Laws in 2006. The purpose of the Uniform Act is to bring consistency to the rules and procedures among states to make it easier for LLCs to operate in multiple states.

Substantively, the RULLCA does not change much in the way of how LLCs are formed and operated in California; however, the RULLCA contains a noteworthy ambiguity that could prove problematic. By its terms, the RULLCA will apply to all domestic LLCs existing on January 1, 2014 and to all actions taken by the managers or members of an LLC on or after that date. However, the RULLCA also states that it will apply only to contracts entered into by the limited liability company or by the members or managers after January 1, 2014, and that Beverly-Killea will continue to apply to contracts entered into by the limited liability company or by the members or managers prior to January 1, 2014. The RULLCA is, therefore, seemingly unclear as to which law will apply to operating agreements adopted prior to January 1, 2014, but amended after that date. While the impact of this ambiguity will not be known in the foreseeable future, managers and members of LLCs formed prior to January 1, 2014 will want to consult with legal counsel to understand the risks and benefits of making even a seemingly minor amendment to an operating agreement in light of the uncertainty.

It is also worth noting that the RULLCA leaves in place a statutory scheme with certain attributes that suggest that a California limited liability company is not the right fit among a variety of other flow-through entity choices that are available (e.g., S-corporation, Delaware LLC, etc.). For example,

  • The RULLCA does not change the fact that a California LLC may not perform a professional service that requires a license, registration or certification under the California Business and Professions Code (such as a legal or medical practice).
  • California LLCs will continue to be subject to a gross receipts tax on income from all California sources. California S-corporations, another popular flow through entity, are not subject to the gross receipts tax.
  • Unlike the case with LLC statutes in some other states (most notably, Delaware), the RULLCA will continue to provide that members of a California LLC cannot agree to eliminate the duty of loyalty.

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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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