New California LLC Law Effective January 1, 2014

New California LLC Law Effective January 1, 2014 2016-12-13T21:19:52+00:00

by LLC attorneys Richard C. Keyt, JD, MS (accounting), and Richard Keyt, JD, LL.M. (federal tax law)

On January 1, 2014, the California Revised Uniform Limited Liability Company Act (the “New LLC Law”) became effective.  The New LLC Law threw out and completely replaced California’s prior LLC law entitled the Beverly-Killea Limited Liability Company Act (“Former LLC Law”).  This article explains the major changes the New LLC Law made to the Former LLC Law.

Major Changes Caused by the New LLC Law

The standard for naming California LLCs changed on January 1, 2014.  California Revised Uniform Limited Liability Company Act Section 17701.08 provides:

“the name of a limited liability company shall not be a name that the Secretary of State determines is likely to mislead the public and shall be distinguishable in the records of the Secretary of State from all of the following:

(1) The name of any limited liability company or foreign limited liability company authorized to transact business in this state.

(2) Each name reserved under Section 17701.09.

The LLC name standard under the Old LLC Law was that the name of a new California LLC had to be “distinguishable on the record” from an existing California entity.

California Revised Uniform Limited Liability Company Act Section 17702.01(b)(5) provides, “The articles of organization shall state . . . If the limited liability company is to be manager-managed, the articles of organization shall contain a statement to that effect.”  The significance of this statute is that all California LLCs (including CA LLCs formed before 2014) are member managed unless the Articles of Organization filed with the California Secretary of State states that the LLC is manager managed.

The California Secretary of State’s (“SOS”) one page form Articles of Organization (SOS Form LLC-1) has a box the organizer checks to indicate if the LLC will me member managed, managed by a single manager or managed by more than one manager.  If none of these boxes is checked, then by default the LLC will be member managed.  Member managed means all members have management power and can sign documents on behalf of the LLC regardless of how much or how little of the LLC a member owns.

California Revised Uniform Limited Liability Company Act Section 17703.01 states:

“Unless the articles of organization indicate the limited liability company is a manager-managed limited liability company, every member is an agent of the limited liability company for the purpose of its business or affairs, and the act of any member, including, but not limited to, the execution in the name of the limited liability company of any instrument, for the apparent purpose of carrying on in the usual way the business or affairs of the limited liability company of which that person is a member, binds the limited liability company in the particular matter, unless the member so acting has, in fact, no authority to act for the limited liability company in the particular matter and the person with whom the member is dealing has actual knowledge of the fact that the member has no such authority.”

Warning for LLCs Formed Before 2014 that Intend to be Manager Managed

If your California LLC was formed before 2014 and it is supposed to be manager managed then the LLC must file an amendment to its Articles of Organization that states that the LLC is managed by a sole manager or by more than one manager.  You an amend the Articles of Organization and specify manager management by filing one of the following forms with the California Secretary of State:

Under the New LLC Law the LLC’s Operating Agreement controls if it contains any provision that is inconsistent with a provision in the Articles of Organization.  This is the exact opposite of the Former LLC Law.

The general rule under the New LLC Law is that the LLC must indemnify members of a member managed LLC and managers of a manager managed LLC for any debt, obligation, or other liability incurred by the member or manager acting on behalf of the LLC.  California Revised Uniform Limited Liability Company Act Section 17704.08(a) states,

“A limited liability company shall 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 the duties stated in Section 17704.09.

The Former LLC Law allowed LLCs to indemnify members and managers, but indemnification was not required.

If the members of a California LLC adopted an Operating Agreement (oral or written) and the LLC acquires a new member, the new member is automatically legally bound to the terms and conditions of the Operating Agreement even if the new member does not sign the written Operating Agreement or agree to the oral Operating Agreement.  California RULLCA Section 17701.11(b).  Yikes!  How’d you like to be automatically obligated to an oral Operating Agreement?

Unlike the Former LLC Law, the New LLC Law requires that all members of a California LLC consent before the LLC can take certain action. The requirement that all members approve action is different for member managed LLCs vs. manager managed LLCs.

If the LLC is member managed then all members must consent to any act that is outside the LLC’s ordinary course of the LLC’s activities.  California RULLCA Section 17704.04(b)(4). If the LLC is manager managed, all members of a California LLC must approve a merger or conversion, the sale, lease, exchange of all, or substantially all, of the limited liability company’s property or any other act outside the ordinary course of the limited liability company’s activities.   California RULLCA Section 17704.04(b)(5).

Warning:  Whenever all of the members of your California LLC approve act that require the consent of all members it is critically important that the approval be documented in minutes or actions by consent signed by all of the members.

A member of a California LLC is not obligated to contribute money or property to the LLC unless the member agrees to do so.  See California RULLCA Section 17701-2(c).  However, once a member becomes obligated to make a capital contribution the obligation can be forgiven only if all of the members consent.   California RULLCA Section 17704.03(b), states:

“The obligation of a member to make a contribution to a limited liability company may be compromised only by consent of all the members.”

The member’s obligation to make capital contributions is not discharged by death or disability.  California RULLCA Section 17704.03(a), states:

“A person’s obligation to make a contribution to a limited liability company is not excused by the person’s death, disability, or other inability to perform personally.”

The Former LLC Law only provided that the fiduciary duties of managers of a California LLC were the same as the fiduciary duties owed by a partner of a partnership to the partnership and its partners.  The New LLC Law clarifies the fiduciary duties of members and managers of all California LLCs, but the duties depend on whether the LLC is member managed or manager managed.

If a California LLC is member managed the members are subject to the fiduciary duties of loyalty and care and the obligation of good faith and fair dealing.  The duty of loyalty to the LLC and its members means members must:

1. account for any property, profit, or benefit derived from the member’s use of a LLC property or the appropriation of an LLC opportunity,

2. not act on behalf of somebody who has an interest that is adverse the LLC, and

3. not compete with the LLC.

The duty of care means members must not engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.  See California RULLCA Section 17704.09(b) & (c).

If the California LLC is manager managed then the members are not subject to the duties of loyalty or care.  Instead, it is the managers of the LLC who are subject to the fiduciary duties of loyalty and care.  Members and managers of a manager managed CA LLC are subject to the obligation of good faith and fair dealing.  See California RULLCA Section 17704.09(f).

The New LLC Law created a new California LLC statute that provides ways a member can be “dissociated,” which means terminated as a member of the LLC.  The general rule is that a member of a CA LLC can terminate membership in the LLC at any time, even if termination is a default under the Operating Agreement.