New Law Will Change the Way Limited Liability Companies Form and Operate

by Best Best & Krieger LLP
Contact

BB&K's George Reyes Examines How the California Law Will Impact Existing and Future Businesses

OCTOBER 9, 2013 - The Press-Enterprise

The rules that govern businesses formed as limited liability companies, or LLCs, in California are about to get their first major overhaul in 20 years with a new law that takes effect on Jan. 1.

Known as the California Revised Uniform Limited Liability Company Act, the new law significantly changes the way such companies form and operate. LLCs, popular with small businesses, are legally structured hybrid business entities that share certain characteristics of both a corporation and a partnership. Like a corporation, an LLC provides limited liability to the owners who are referred to as “members,” but it also offers the tax efficiencies and operational flexibility of a partnership.

The new law will completely replace the current Beverly-Killea Limited Liability Company Act, which has governed LLCs in California since 1994, when limited liability companies were first permitted in the state. It will regulate new LLCs formed on or after Jan. 1 and applies to all actions taken by existing LLCs on or after that date. Beverly-Killea will continue to govern LLCs operating agreements entered into prior to Jan. 1. However, there is uncertainty whether amending a portion of an existing operating agreement will make the entire operating agreement subject to the new law.

Here are some of the key changes with the new law:

Operating agreements: LLCs are commonly subject to a written operating agreement among the members regarding items such as member voting, division of profits and transferability of membership interests. The new law does not require a written agreement; it only requires a record, or even an implication of an agreement. This broad definition highlights the need to create a well-drafted operating agreement that limits the agreement solely to the written document. Otherwise, emails among the members, phone calls and even perceptions may find their way into what the court considers the agreement made among the parties.

New Members: Under the new law, any newly admitted member of the LLC will be bound by the terms of the operating agreement, even if the new member did not actually sign or otherwise consent to the agreement.

Profits and Losses: While Beverly-Killea divided profits and losses in proportion to the contributions of each member, unless it was specified otherwise in the operating agreement, the new law does not appear to have a default allocation of profits and losses. This makes it all the more important to determine and state the allocation agreed upon by the members in a written operating agreement.

Fiduciary Duties: Under Beverly-Killea, the duty of loyalty a manager or managing member owes to the LLC and to the members of the LLC is the same open-ended list of duties a partner owes to the partnership and to the other partners. The new law, however, limits the duties to those expressly listed in the statute and allows members, through an operating agreement, to both specify certain activities that will not violate fiduciary duties and set standards to determine good faith — as long as they are not unreasonable.

Default Rules: Under the new law, an LLC will be managed by the members unless a company’s articles of organization and operating agreement expressly state that management is by one or more managers. If a limited liability company is relying on a statement in its articles of organization that it is managed by a manager but does not have a formal operating agreement or its operating agreement is silent on the matter, it may unintentionally become a member-managed entity, and vest management obligations, rights and fiduciary duties in the members.

Mergers: The new law includes a default provision that an LLC managed by a manager requires unanimous member consent to approve a merger. This may be modified through an operating agreement, but if not expressly addressed, then unanimous consent is required.

In light of these notable changes, members of limited liability companies should evaluate how the new framework will impact their interests and the interests of their clients before the new law takes effect at the beginning of next year.

* This column was first published in The Press-Enterprise on Sunday, Oct. 5, 2013. Republished with permission.

Written by:

Best Best & Krieger LLP
Contact
more
less

Best Best & Krieger LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.