CA Law

How to Dissolve a California LLC

Question:  I am a member of a California LLC.  What are the legal requirements to dissolve the LLC?

Answer:  California’s Revised Uniform Limited Liability Company Act (RULLCA) provides four ways to dissolve or terminate a California limited liability company.  The four methods are:

  • The LLC’s Articles of Organization contains a provision that says the LLC must dissolve on the occurrence of one or more events set forth in the Articles of Organization.  Few California LLCs have Articles of Organization that contain this type of provision.
  • The members signed an Operating Agreement that contains a provision that says the LLC must dissolve on the occurrence of one or more events set forth in the Operating Agreement.  Many California LLCs have Operating Agreements that contain dissolution provisions.  For example, if the Operating Agreement says that the LLC will dissolve on the sale of its real property and the LLC sells its real property then the LLC must dissolve.  Cal. Corp. Code Section 17707.01(a).
  • If the LLC ceases to have a member the LLC for 90 consecutive days it must dissolve.  This happens frequently to California single member LLCs when the member is a person and that person dies.  Cal. Corp. Code Section 17707.01(c).  Automatic dissolution can create a nightmare for the heirs of the deceased.  For example, if a single member California LLC owns valuable real estate and the member dies and no member replaces the deceased member within 90 days of the death, the LLC ceases to exist and there is no owner of the real estate.  Solution: One of the reasons we recommend that people own their membership interests in California LLCs through a trust is to prevent the dissolution of the LLC if the single member dies.
  • The last method to terminate a California LLC occurs if a majority of the LLC’s members vote to dissolve the LLC.  Cal. Corp. Code Section 17707.01(b).  If the Operating Agreement requires more than a  majority vote of the members to approve a dissolution then that requirement must be met to dissolve the LLC.

How to Legally Dissolve the California Limited Liability Company

If the necessary number of members of a California LLC vote to dissolve the LLC the member(s) actually dissolve the company by doing the following:

  • The LLC must file a final current year tax return with the California Franchise Tax Board.  Check the applicable Final Return box on the first page of the return, and write “final” across the top.  The LLC must not conduct business in California after its final taxable year.  For more on this topic read the FTB Publication 1038, Guide to Dissolve, Surrender, or Cancel a Business Entity.
  • After filing the final tax return with the FTB, the members must file the California Secretary of State form called Certificate of Dissolution (Form LLC-3) to dissolve (i.e., elect to wind up) a California LLC.  To complete the cancellation process, the LLC members must also file a Certificate of Cancellation (Form LLC-4/7)Note: Form LLC-3 is not required when the vote to dissolve was made by all of the members and that fact is noted on a Certificate of Cancellation (Form LLC-4/7) filed by the members with the California Secretary of State.  Note: If the vote to dissolve was not made by all of the members, a Certificate of Dissolution (Form LLC-3) must be filed prior to or together with Form LLC-4/7.
By | 2016-12-13T21:20:06+00:00 June 30th, 2016|Categories: CA Law, FAQs, How Do I, Operating Agreements, Operating LLCs|0 Comments

California Amends Its Revised Uniform Limited Liability Company Law

On October 11, 2015, California Governor Jerry Brown signed into law Assembly Bill 506, which amends the California Revised Uniform Limited Liability Company Act that became effective on January 1, 2014.  AB 506 was primarily drafted by the Partnership and Limited Liability Companies Committee of the Business Law Section of the California State Bar to fix what were perceived as problems with the original California RULLCA.  I’ll be posting a more detailed look at the revisions to RULLCA, but at first glance the amendments reinforce my belief that ALL California LLCs should adopt an Operating Agreement that is expressly drafted to comply with RULLCA as amended by AB 506.

Here’s the text of the Legislative Counsel’s comments on AB 506:

“Existing law, the California Revised Uniform Limited Liability Company Act, authorizes one or more persons to form a limited liability company by, among other things, signing and delivering articles of organization to the Secretary of State. The act authorizes a person, as defined, to dissociate as a member of a limited liability company at any time by withdrawing as a member by express will. The act deems a person to be dissociated from a limited liability company upon the occurrence of certain events, including, among others, an individual’s death. The act provides the effects when a person, including an individual, is dissociated from a limited liability company. Existing law limits the application of an operating agreement.

This bill would specify that upon dissociation a person’s right to vote as a member in the management and conduct of the limited liability company’s activities terminates. The bill would authorize, if a member dies, or a guardian or conservator of the estate is appointed for the member, or a member’s interest is being administered by an attorney-in-fact under a valid power of attorney, the member’s executor, administrator, guardian, conservator, attorney-in-fact, or other legal representative to exercise all of the member’s rights for the purpose of settling the member’s estate or administering the member’s property, including any power the member had under the articles of organization or an operating agreement to give a transferee the right to become a member. The bill would also modify the definition of “electronic transmission by the limited liability company” and would expand the definition of “person” under the act. The bill would modify what an operating agreement may provide, as specified. The bill would provide that specified provisions of the Labor Code, relating to consideration for employment and employment contracts, shall not apply to membership interests issued by any limited liability company or foreign limited liability company, as specified.

Existing law requires that any distributions made by a limited liability company before its dissolution and winding up be among the members in accordance with the operating agreement.This bill would further require that the profits and losses of a limited liability company be allocated among the members, and among classes of members, in the manner provided in the operating agreement, and would require that profits and losses be allocated in proportion to the value of the contributions from each member if the operating agreement does not otherwise provide.

Existing law requires the consent of all members of the limited liability company to approve a merger or conversion and to amend the operating agreement.  This bill would eliminate that requirement.
Existing law requires a limited liability company to reimburse for any payment made and indemnify for any debt, obligation, or other liability incurred by a member of a member-managed limited liability company or the manager of a manager-managed limited liability company in the course of the member’s or manager’s activities on behalf of the limited liability company, if, in making the payment or incurring the debt, obligation, or other liability, the member or manager complied with specified duties.
This bill would require the limited liability company to indemnify the agent of a limited liability company to the extent that the agent has been successful on the merits in defense or settlement of any claim, issue, or matter if the agent acted in good faith and in a manner that the agent reasonably believed to be in the best interests of the limited liability company and its members, as provided.
Under existing law, the persons who filed the certificate of dissolution are required to sign and file with the Secretary of State a certificate of cancellation of articles of organization upon the completion of the winding up of the affairs of the limited liability company, except as specified. Existing law requires the certificate of cancellation of articles of organization to include, among other things, that upon the filing of the certificate of cancellation, the limited liability company is required to be canceled and its powers, rights, and privileges are required to cease. Under existing law, a limited liability company that is dissolved continues to exist for the purpose of, among other things, winding up its affairs and prosecuting and defending actions by or against it in order to collect and discharge obligations.
This bill would instead provide that a limited liability company that has filed a certificate of cancellation continues to exist for those purposes, as specified.
This bill would limit the applicability of the act to acts or transactions by a limited liability company or by the members or managers of the limited liability company occurring, or an operating agreement or other contracts entered into by the limited liability company or by the members or managers of the limited liability company, on or after January 1, 2014.
This bill would incorporate additional changes to Section 17710.06 of the Corporations Code made by this bill and AB 1471 to take effect if both bills are chaptered and this bill is chaptered last.
This bill would incorporate additional changes to Section 17713.12 of the Corporations Code made by this bill and AB 1517 to take effect if both bills are chaptered and this bill is chaptered last.”
By | 2016-12-13T21:20:06+00:00 October 14th, 2015|Categories: CA Law, CA LLC Statutes, Operating LLCs|0 Comments

California Court of Appeal Rules RULLCA Does Not Apply to LLC Lawsuit Filed before 1/1/14

The California Court of Appeal held in Kennedy v Kennedy, 235 CA4th 1474 (2015), that the California Revised Uniform Limited Liability Company Act (RULLCA) did not apply to a dispute among members of a California limited liability company because their lawsuit was filed before January 1, 2014, the RULLCA effective date.  The court based its ruling on California Corporations Code Section 17713.03 which states,

This title does not affect an action commenced, proceeding brought, or right accrued or accruing before this title takes effect.

The defendants argued that RULLCA applied because they wanted to be able to use the mandatory disgruntled member buy-out scheme set forth in Corporations Code Section 17707.03(c)(1) which states:

In any suit for judicial dissolution, the other members may avoid the dissolution of the limited liability company by purchasing for cash the membership interests owned by the members so initiating the proceeding, the “moving parties,” at their fair market value.

Subsections (c)(2) – (6) set forth a procedure for consummating the buy out.  Subsection (c)(6) states,

A dismissal of any suit for judicial dissolution by a manager, member, or members shall not affect the other members’ rights to avoid dissolution pursuant to this section.

The defendants wanted RULLCA to apply so they could carry out a buy out under Section 17707.03(c) despite the fact the plaintiff had dismissed the claim for judicial dissolution.  There is no mandatory buy out under California’s LLC law before January 1, 2014.

By | 2016-12-13T21:20:06+00:00 July 3rd, 2015|Categories: CA Law, CA LLC Statutes, Lawsuits, Member Disputes|0 Comments

Sending Copies of LLC Tax Returns to Members of a California LLC

Question:  I am a member of a California LLC, am I entitled to get a copy of my LLC’s federal income tax return?

Answer:  It depends.  If the LLC has 35 or fewer members California Corporations Code Section 17704.10(e) requires that all members be given copies of the LLC’s federal, state and local income tax return for the year.  Section 17704.10(e) states:

The limited liability company shall send or cause information to be sent in writing to each member or holder of a transferable interest within 90 days after the end of each taxable year the information necessary to complete federal and state income tax or information returns and, in the case of a limited liability company with 35 or fewer members, a copy of the limited liability company’s federal, state, and local income tax or information returns for the year.

By | 2016-12-13T21:20:06+00:00 May 3rd, 2015|Categories: CA Law, CA LLC Statutes, FAQs, Operating LLCs, Tax Issues|0 Comments

Conditions to Amending an Operating Agreement

Question:  Can the Operating Agreement of a California limited liability contain one or more provisions that create a condition that must be satisfied before the Operating Agreement can be modified?

Answer:  Yes.  RULLCA Section 17701.12(a).  Here are some common conditions members of a California LLC could put into the LLC’s Operating Agreement that must be satisfied before the Operating Agreement can be modfied:

  • The amendment must be approved by a person or entity that is not a member of the LLC.  For example, Homer Simpson’s three children have a CA LLC with an Operating Agreement that says the Operating Agreement cannot be modified unless their father Homer Simpson approve the change.
  • The Operating Agreement cannot be amended unless until after a specified date.
  • The Operating Agreement cannot be modified unless at least two thirds of the members approve the change.
By | 2016-12-13T21:20:13+00:00 March 23rd, 2015|Categories: CA Law, FAQs, Operating Agreements, Operating LLCs|0 Comments

Creditor of California LLC Wins Judgment Against LLC Members

Question:  If a California LLC distributes all of its assets to its members and dissolves without paying a creditor, can the creditor collect the unpaid debt from the former members?

Answer:  Yes, but only to the extent of the value the member received.  The California Court of Appeals case of CB Richard Ellis, Inc. v. Terra Nostra Consultants, 178 Cal.Rptr.3d 640 (Cal. Ct. App. Oct. 7, 2014) confirmed this concept.

Jefferson 38, LLC, a California limited liability company, signed a listing agreement in 2004 with real estate broker CB Richard Ellis, Inc. (“CBRE”) to sell its land.  The LLC sold it land for $11,800,000, but CBRE was not paid anything.  In 2006 CBRE exercised a clause in the listing agreement to arbitrate the dispute over the commission.  CBRE won an arbitration award of $960,649.30.  The arbitration award was confirmed and judgment entered in the amount of $985,439.80 by the Los Angeles Superior Court.  The judgment was affirmed on appeal.

When the real estate was sold in 2005, the net proceeds of the sale were distributed to the members of the LLC shortly thereafter and the LLC ceased to engage in business.  On February 27, 2006, Jefferson 38, LLC, filed a certificate of cancellation with the California Secretary of State indicating that all of its members voted for the dissolution.

At this point in time the members of the LLC had caused the LLC to distribute all of the LLC’s assets to its members and legally dissolved the LLC while an outstanding claim was pending.  This is a scenario California LLC law attempts to prevent and that is disfavored by the courts.

Because the events that gave rise to this case occurred before January 1, 2014, the effective date of the California Revised Uniform LLC Act, the California Court of Appeals applied prior California LLC law to the case.    Former Section 17355(a)(1) provided:

“Causes of action against a dissolved limited liability company, whether arising before or after the dissolution of the limited liability company, may be enforced against any of the following:

(A) Against the dissolved limited liability company, to the extent of its undistributed assets. . . .

(B) If any of the assets of the dissolved limited liability company have been distributed to members, against members of the dissolved limited liability company to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.”

The defendants argued that they should not be liable for the debt owed by the LLC to CBRE because they were paid long before the actual dissolution of the LLC.  The Court of Appeals rejected this argument because if that were the law LLC members could easily distribute assets to members rather than creditors and avoid personal liability simply by making the distributions long before the technical dissolution of the LLC.

Current California LLC law with respect to California LLCs making distributions to members is stated in Cal. Corp. Code § 17704.05, which states:

(a) A limited liability company shall not make a distribution if after the distribution either of the following applies:

(1) The limited liability company would not be able to pay its debts as they become due in the ordinary course of the limited liability company’s activities.

(2) The limited liability company’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the limited liability company were to be dissolved, wound up, and terminated at the time of the distribution, to satisfy the preferential rights upon dissolution, winding up, and termination of members whose preferential rights are superior to those of persons receiving the distribution.

Warning to Members of California LLCs:  Do not clean out your LLC’s assets and leave any unpaid creditors.  The general rule of prior and current LLC law that members of a California LLC are not liable for the debts, obligations, or other liabilities of the limited liability company does not apply when the members are paid before the LLC’s creditors.

By | 2016-12-13T21:20:14+00:00 October 26th, 2014|Categories: Asset Protection, CA Law, CA LLC Statutes, FAQs, Lawsuits|0 Comments

California LLC Naming Rules

Question:  What are the rules / statutory requirements for naming a new California limited liability company?

Answer:  The name of a CA LLC:

(1) must not be a name that is “likely to mislead the public” and must be distinguishable in the records of the California Secretary of State from the name of an existing LLC or an LLC name that has been reserved by another party.  Note: Names are not considered distinguishable if the only difference is a limited liability company ending;

(2) must include the words Limited Liability Company, or the abbreviations LLC or L.L.C. The words Limited and Company may be abbreviated to Ltd. and Co., respectively;

(3) may not contain the words bank, trust, trustee, incorporated, inc., corporation, or corp.; and

(4) must not contain the words insurer or insurance company or any other words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks.

If the Articles of Organization for a new LLC has a name that does not satisfy all of the above CA LLC naming requirements the California Secretary of State will reject the Articles of Organization.

See California Corporations Code Section 17701.08 and 17708.05.  An LLC name is reserved pursuant to California Corporations Code Section 17701.09 using the Secretary of State’s Name Reservation form.

Single Member’s Death Could Cause Dissolution of LLC

Some states require that a limited liability company (LLC) have at least two members.  Many states, including California, allow for single member LLCs.  Another jurisdiction that permits a single member LLC is Alabama.  The LLC law of California and Alabama provide that when the single member dies, the LLC must be dissolved, subject to two exceptions.  First, the single member LLC can continue if the operating agreement provides for the continuation and a method for determining the successor(s) to the deceased member.  Second, the LLC can continue if the assignee(s) of the interest of the deceased members elect to continue the business within 90 days of the death.  Recently, in L.B. Whitfield III, Family LLC v. Whitfield, the Supreme Court of Alabama dealt with the dissolution of the single member LLC.

In this case, the single member of an Alabama LLC died, and left his interest in the LLC to his four children.  There was no vote to continue the LLC, and no special provisions in the operating agreement.  Still, the children operated the business for 10 years after their father’s death.  The four children began to have business disputes and one child (the manager) filed a lawsuit against the other three children.  The three defendants discovered the Alabama law that dissolves a single member LLC unless the majority of the heirs agree to continue the business within 90 days.  The three children then sued for a court order that the LLC distribute its assets to the members because the LLC was statutorily dissolved 90 days after the father’s death.

Despite the defenses offered by the plaintiff, the court held that the three children were correct, and that the LLC was dissolved when the children failed to continue the business within 90 days after the father’s death.  The Supreme Court of Alabama said it did not matter that the LLC continued to operate for 10 years.  The court highlighted that the fundamental principles of an LLC include membership admission through a written agreement that is signed.  Since this new agreement was never established, the LLC was dissolved.

Caution:  If a California resident dies his or her membership interest may be subject to an expensive and time-consuming California probate.  To learn about nasty California probates and how to avoid a California probate and save your loved ones mega-bucks read “Trusts Should Own Valuable LLCs to Avoid Probate.”

For more on this topic see “What Happens If the Sole Member of a CA LLC Dies?

By | 2016-12-13T21:20:15+00:00 June 22nd, 2014|Categories: CA Law, Lawsuits, Member Disputes|0 Comments

California’s LLC Law Lists Events that Do Not Cause a Foreign LLC to Do Business in CA

California’s Revised Uniform Limited Liability Company Act Section 17708-03(b) expressly states that none of the following activities of an LLC formed outside California do not constitute doing business in California:

1. Suing or defending a lawsuit, being a party of an arbitration or an or an administrative proceeding or settling a dispute or claim.

2. Conducting internal affairs activities such as holding meetings of managers or members.

3. Having a bank account or investment account in a California institution.

4. Having an office or agency in California for the purpose of transferring, exchanging and registering the LLC’s securities.

5. Selling products or services using independent contractors located in California.

6. Soliciting orders from customers inside California by electronic methods, by mail, by agents or employees if the order must be accepted outside California before the order become a legally binding contract.

7.  Incurring a debt, acquiring a debt or evidence of indebtedness or obtaining a lien, security interest or mortgage in personal property or real property.

8. Collecting a debt, enforcing a lien or mortgage and holding property acquired from a foreclosure.

9. Consummating a one-time transaction within 180 days that is not part of a series of transactions of a similar nature.

10. Engaging in interstate commerce business.

California RULLCA Section 17708-03(d) states that you are not transacting business in California merely because you are a member or manager of a California limited liability company or a foreign LLC that is registered to do business in California.

By | 2016-12-13T21:20:15+00:00 June 15th, 2014|Categories: CA Law, CA LLC Statutes, Miscellaneous|0 Comments

Pre-2014 California LLCs & RULLCA

Question:  I formed my California limited liability before January 1, 2014, the date on which the new California Revised Uniform Limited Liability Company Act (“RULLCA”) became effective.  Does my LLC have to file any document with the California Secretary of State as a result of the new law?

Answer:  No.  California LLCs created before January 1, 2014, do not have to file an amended Articles of Organization or any other document as a result of the new California RULLCA.

By | 2015-04-30T19:17:34+00:00 January 1st, 2014|Categories: CA Law, FAQs, Operating LLCs|0 Comments