Operating LLCs

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

New Member of a California LLC Bound by Operating Agreement

Question:  The initial members of my California LLC signed an Operating Agreement.  One of the initial members assigned ten percent of the membership interests to John Doe.  The initial members agreed to admit John as a member.  John refuses to sign the Operating Agreement.  What can we do?

Answer:  The good news for the initial members who signed the Operating Agreement is that Section 17701.11(b) states “A person that becomes a member of a limited liability company is deemed to assent to the operating agreement.”  John Doe is legally bound by the obligations contained in the Operating Agreement despite the fact he never signed it.

Warning to Prospective Members of an Existing California Limited Liability Company:  If you are thinking of becoming a member of an existing California LLC that has an Operating Agreement, do not become a member until you review the LLC’s Operating Agreement and approve all of its provisions.

By | 2016-12-13T21:20:06+00:00 May 10th, 2015|Categories: CA LLC Statutes, FAQs, Operating Agreements, Operating LLCs|0 Comments

California LLC Allocation of Profits

Question:  My friend and I started a California LLC.  We never signed an Operating Agreement.  I assumed that we would share the profits equally, but my friend says that he gets 60% of the profits and I get 40%.  This dispute has ruined our business relationship.  What should I do?

Answer:  Your dispute is too common.  Unfortunately the toothpaste is out of the tube, and it may be too late to solve the huge problem created by the members failure to sign an Operating Agreement that states how profits and losses will be allocated among the members.  The California Revised Uniform Limited Liability Act does not specify how profits and losses will be allocated among members of a multi-member California LLC.

Members of a California limited liability company must agree in an oral agreement or in a written and signed Operating Agreement as to how profits and losses will be allocated among the members.  The problem with an oral agreement is that it is a recipe for disaster because when people disagree they have no way to prove what they previously agreed to.

One of the main reasons all of the members of a multi-member California LLC need to sign an Operating Agreement is so they have proof in the document as to how the profits and losses are allocated among the members.

By | 2015-05-09T10:34:06+00:00 May 9th, 2015|Categories: FAQs, Member Disputes, Operating Agreements, Operating LLCs|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

Disassociation of a Member of a California LLC

Question:  Can a member of a California LLC disassociate (withdraw or terminate membership) from the LLC at any time even if disassociation is prohibited by an Operating Agreement?

Answer: Yes.  A good Operating Agreement will contain provisions that prevent a member from dissociating or that allow a member to disassociate only on the occurrence of one or more conditions.  See California Corporations Code Sections 17706.01(b)(1) and 17706.02(b).  However, even if a member is prohibited from disassociating the member may quit (disassociate) at any time by notifying the other members of the disassociation.

If the disassociation is prohibited by the LLC’s Operating Agreement, the disassociating member may be liable to the LLC for damages.  California Corporations Code Sections 17706.01(c). The disassociating member will not be entitled to any money or property unless the Operating Agreement provides otherwise.  California Corporations Code Section 17704.04(b).

By | 2016-12-13T21:20:06+00:00 May 2nd, 2015|Categories: FAQs, Operating Agreements, Operating LLCs|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

Manager Managed CA LLC Change to Member Managed

Question:  I formed a manager managed California limited liability company.  Can the members of the LLC change the form of management from manager managed to member managed by amending the Operating Agreement to state that the LLC is manager managed?

Answer:  No.  To change from manager managed to member managed, a California LLC must amend its Articles of Organization to provide in item 5 that the LLC will be managed by all of it members.  Of course the members should also modify the LLC’s Operating Agreement to provide for manager management.

To amend the Articles of Organization file Form LLC-5 with the California Secretary of State.

By | 2015-04-30T00:26:21+00:00 March 9th, 2015|Categories: Articles of Organization, FAQs, How Do I, Operating LLCs|0 Comments

Missouri Court Holds Minority Member can Pierce LLC’s Veil

Recently, in Hibbs v. Berger, the Missouri Court of Appeals ruled that a 5% minority member can pierce the veil of the LLC.  This case shows how extensive the court’s power is in determining these types of cases.  All LLCs should be knowledgeable about veil piercing, and also what can be one to prevent it.

In Hibbs v. Berger, the plaintiff (Hibbs) was an ex-employee of Tavern Creek, an LLC.  The plaintiff had no voting or management rights in this LLC, which were split on a 50-50 basis between Tavern Creek and Wood Nuts, another LLC.  Tavern Creek and Wood Nuts appointed Taylor and Berger, respectively, as co-managers of Tavern Creek.  Though Hibbs had no voting rights or management rights, he did acquire 5% of economic interests when his employment agreement was revised (once Wood Nuts became 50% owner).

Soon after the new employment agreement in 2007, Tavern Creek experienced financial troubles.  Wood Nuts would assist Tavern Creek during these times by loaning Tavern Creek money.  Despite this, Tavern Creek was unable to recover, and defaulted on these loans.  Wood Nuts exercised its rights under the agreement of these loans, and  obtained all collateral as satisfaction in 2009.  During this time, Hibbs was working for Tavern Nuts.  He was not fully paid for his commission earned in 2007, and never paid for the commission in 2008.  In late August of 2008, Hibbs was terminated and then re-hired as an employee-at-will.  Hibbs then left Tavern Creek two months later.

In January 2010, Hibbs filed a claim against Berger and Taylor, in an attempt to pierce the corporate veil.  The defendants motioned for summary judgment, which was granted, but Hibbs appealed.  The Missouri Court of Appeals began by acknowledging that members of an LLC usually are not responsible for debts of the LLC.  Then, however, the court acknowledged a three-prong test that determines if the court will piece the business entity’s veil.  The parts of this test include:

“(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal

(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.”

After establishing the rule for veil piercing, the Missouri Court of Appeals specifically discussed if an LLC’s minority member can pierce the entity’s veil.  The court mentioned that this was a case of first impression, meaning that the Court of Appeals has not dealt with this type of case.  Because of this, the court looked to a case in which the District of Columbia Court of Appeals held that a minority shareholder is not prohibited from piercing the veil of the business entity.  The Missouri Court also stated that precluding a minority member from piercing the corporate veil would be unfair to those members.  For these reasons, the Missouri Court of Appeals held that the minority member of an LLC can pierce the entity’s veil, if the plaintiff meets the requirements set by the three-prong test.

Although it was eventually determined that this plaintiff did not meet the requirements to overcome summary judgment, the case provides an important lesson.  LLCs and other business entities should not assume that a member is unable to pierce their entity’s veil.  These managers must know the veil-piercing standard of their formation state, and take steps to ensure that a disgruntled member cannot hold the majority member(s) personally liable.

 

 

By | 2016-12-13T21:20:14+00:00 February 25th, 2015|Categories: Lawsuits, Members, Operating LLCs, Veil Piercing|0 Comments

How to Change the Agent for Service of Process of a California LLC

Question:  My California limited liability company intends to change its agent for service of process, aka its resident agent.  How does a California LLC change its agent for service of process with the California Secretary of State?

Answer:  A member or manager of the California LLC must file a revised Statement of Information (Form LLC-12) with the California Secretary of State.  The revised Statement of Information will list the name and address of the new agent for service of process.  The agent’s address cannot be a Post Office box.  FYI:  Some people call the agent for service of process the CA LLC’s resident agent.

By | 2015-02-25T20:00:47+00:00 November 21st, 2014|Categories: FAQs, Operating LLCs|0 Comments

Administrative Dissolution for Failing to File a Statement of Information

Administrative dissolution of an LLC occurs when an LLC fails to follow the state’s requirements, resulting in the state agency penalizing or dissolving the LLC.  In California, these requirements include payment of the annual tax and fee, in addition to filing the initial and biennial Statement of Information.  When an administrative dissolution occurs, the LLC must act in a timely manner to correct the deficiency.

There are many instances when an LLC is administratively dissolved, yet it continues to operate.  This often occurs when the LLC is not aware of the administrative dissolution.  An issue then arises as to who is liable for acts when an administratively dissolved LLC enters into a contract and subsequently is unable to pay or perform.  This issue was dealt with in Pannell v. Shannon, when a single-member Kentucky LLC was dissolved, but continued to enter into a lease agreement.  When the dissolved LLC defaulted on the lease, the other party sued not only the dissolved LLC, but also the single member.  The LLC responded by immediately taking steps for reinstatement, which was granted by the Kentucky Secretary of State.  Still, the issue remained whether or not the single member was personally liable.

The Supreme Court of Kentucky affirmed the lower courts’ decision in holding that the member was not personally liable for the administratively dissolved LLC’s lease.  By relying on the Kentucky LLC Act, the court determined that since the reinstatement related back to the date of the dissolution,  the LLC was essentially never dissolved in the first place.  The court emphasized the absurdity of limiting an unintentionally dissolved LLC to only winding-up activities.  This limit on activities, if taken literally, would prevent the LLC from filing the necessary paperwork to be reinstated.  Also, the court highlighted the purpose of the LLC Act: to limit personal liability.  A missed LLC fee or tax payment does not justify disregarding the most important principle behind why people form LLCs.

The opinion reveals that despite a complicated scenario, an understanding of the basic reason behind a limited liability company is not to be ignored: An LLC is meant to protect owners and members from personal liability.  The opinion also shows that the normal requirements for a winding-up LLC do not apply for LLCs which are unintentionally dissolved.  By protecting managers and remembering the purpose of an LLC, this ruling should be regarded as a victory.

 

 

 

By | 2016-12-13T21:20:14+00:00 September 25th, 2014|Categories: Lawsuits, LLCs & Corporations, Miscellaneous, Operating LLCs|0 Comments

How to Register an LLC to Do Business in California

Question:  My limited liability company was not formed in California, but it has a an employee who lives in California.  I understand that if a foreign LLC has an employee or office in California the foreign limited liability company must register to do business in California.  How do I register a foreign LLC to do business in California.

Answer:  An LLC formed outside California that does business in California must register to do business in California by filing an Application to Register (Form LLC-5).

When is an LLC Formed Outside CA Doing Business in California?

To learn more about when a foreign LLC must register to do business in California read my articles called “Warning for Non-California LLCs that Have Members, Managers or Agents in California” and “California’s LLC Law Lists Events that Do Not Cause a Foreign LLC to Do Business in CA.”

By | 2015-04-12T08:54:36+00:00 September 21st, 2014|Categories: FAQs, How Do I, Operating LLCs|0 Comments

Records a California LLC Must Maintain in Its Office

Question:  What records does California LLC law require a California LLC to maintain in its office?

Answer:  California LLCs must continuously maintain certain records in its office in California that the LLC must designate and maintain pursuant to California Corporations Code Section 17701.13(a).  All California LLCs must comply with California Corporations Code Section Section 17701.13(a), which states:

Each limited liability company shall maintain in writing or in any other form capable of being converted into clearly legible tangible form at the office referred to in subdivision (a) all of the following:

(1) A current list of the full name and last known business or residence address of each member and of each holder of a transferable interest in the limited liability company set forth in alphabetical order, together with the contribution and the share in profits and losses of each member and holder of a transferable interest.

(2) If the limited liability company is a manager-managed limited liability company, a current list of the full name and business or residence address of each manager.

(3) A copy of the articles of organization and all amendments thereto, together with any powers of attorney pursuant to which the articles of organization or any amendments thereto were executed.

(4) Copies of the limited liability company’s federal, state, and local income tax or information returns and reports, if any, for the six most recent fiscal years.

(5) A copy of the limited liability company’s operating agreement, if in writing, and any amendments thereto, together with any powers of attorney pursuant to which any written operating agreement or any amendments thereto were executed.

(6) Copies of the financial statement of the limited liability company, if any, for the six most recent fiscal years.

(7) The books and records of the limited liability company as they relate to the internal affairs of the limited liability company for at least the current and past four fiscal years.

A  California LLC that fails to maintain all of the required records at its designated California office has one strike against it if a court is ever asked to pierce the company veil and hold the the owners/members liable for the debts of the LLC.

By | 2014-08-12T20:37:15+00:00 August 11th, 2014|Categories: CA LLC Statutes, FAQs, Operating LLCs|0 Comments

When LLC Member May Be Held Personally Liable For Signing Loan Agreement

Take care when you sign a contract on behalf of your LLC that you do not sign in a way that makes you liable as a party to the contract.  California LLC law contains the general rule that a California LLC that signs a contract is liable for the obligations created under the contract, not its members.  There is a big exception to the general rule.  If you will be signing contracts for a California LLC ignorance of how to sign the contract could cost you big bucks.

The Maryland case of Ubom v. Suntrust Bank, involved a a lawyer who obtained a line of credit for his LLC.  The member of the LLC signed a loan agreement that included language about a personal guaranty.  The member put his personal information such as his social security number and personal address in the guaranty section of the contract, but he did not put anything in the space that asked for the “Legal Name of the Guarantor.”

The loan agreement had a signature line for the “applicant” and a second signature line for the “guarantor.”  Mr. Ubom signed one each lien and wrote “Managing Attorney” after his signature.  The LLC defaulted on the loan and the lender sued the LLC and Mr. Ubom.

The lender claimed that Mr. Ubom was personally liable as a guarantor because language in the loan agreement stated that he guaranteed the loan.  The loan agreement said:

To induce Bank to open the Account and extend credit to the applicant, or to renew or extend such other credit, each of the individuals signing this Application as a “Guarantor” (whether one or more, the “Guarantor”) hereby jointly and severally guarantee payment to Bank of all obligations and liabilities of the applicant of any nature whatsoever and whether currently existing or hereafter arising, including without limitation, all obligations and liabilities under this Application and/or the Account, and reasonable fees and expenses of Bank’s attorney(s) incurred in the collection of such obligations (collectively the “Obligations”).

The court said that based on the language quoted above Ubom agreed to guaranty the debt.  The court said it did not matter that Ubom did not put his name in the on the “Legal Name of the Guarantor” line.

Before you sign a contract on behalf of your LLC you must carefully read the contract and make sure it does not contain any language that would obligate you as the signer.  If you are not sure that signing a contract for your LLC will not cause you to incur liability ask your attorney to review the contract.

By | 2016-12-13T21:20:14+00:00 July 29th, 2014|Categories: Asset Protection, Lawsuits, Operating LLCs, Why People Need an LLC|0 Comments

Are Foreign LLCs that Don’t Register to Do Business in CA Subject to CA’s LLC Law?

Question:  My LLC was formed in a state outside California.  The foreign LLC has an employee who lives in California, but it is not registered with the California Secretary of State to do business in California.  Is the foreign LLC subject to California’s Revised Uniform Limited Liability Company Act (the “New LL Act”) effective January 1, 2014?

Answer:  Probably, but not because of any provision in the New LLC Law.  California RULLCA Section 17713.04(a) provides the California’s Revised Uniform Limited Liability Company Act applies to all CA LLCs that exist after December 31, 2013, and all foreign LLCs that were registered with the California Secretary of State: (i) before January 1, 2014, and (ii) after December 31, 2013.

It’s odd that Section 17713.04(a) does not state that the New LLC Law applies to foreign LLCs that do business in California and that did not register to do business with the California Secretary of State.

The New LLC Law does expressly state that the law of the state in which an LLC is formed governs:

  • The foreign LLC’s organization, internal affairs and members’ and managers’ authority.
  • Members’ liability as a member of the foreign LLC for the LLC’s liabilities, obligations and debts.

Managers’ liability as a manager of the foreign LLC for the LLC’s liabilities, obligations and debts.

 

By | 2015-04-12T08:55:19+00:00 July 21st, 2014|Categories: FAQs, Operating LLCs|0 Comments

How Does a California LLC Change Its Address with the California Secretary of State?

Question:  My California limited liability company moved so it is now located at an address that is different from the address stated in the Articles of Organization filed with the California Secretary of State.  Does my California LLC have to notify the California Secretary of State of the address change?

Answer:  Yes.  A member or manager of the California LLC should notify the California Secretary of State of the address change by filing a revised Statement of Information (Form LLC-12) with the California Secretary of State.

By | 2015-02-25T20:01:32+00:00 June 21st, 2014|Categories: FAQs, Operating LLCs|0 Comments

What Happens If the Sole Member of a CA LLC Dies?

Question:  I am the sole member of my California limited liability company.  I am not married and have two children.  What happens to my California LLC if I were to die?

Answer:  California RULLCA Section 17704.01 provides:

A limited liability company is dissolved, and its activities shall be wound up, upon . . . The passage of 90 consecutive days during which the limited liability company has no members, except on the death of a natural person who is the sole member of a limited liability company, the status of the member, including a membership interest, may pass to the heirs, successors, and assigns of the member by will or applicable law.

Based on this statute the good news is that the single member CA LLC does not automatically dissolve if the membership interest of the deceased sole member is inherited by the heirs of the deceased by a Will or the law of intestate succession.  If the deceased member has a valid Will then the membership interest will pass to the heir(s) named in the Will.  If there is no Will then the membership interest will go to the heirs according to the law of intestate succession of the state in which the deceased member resided at the time of death.

Warning:  The membership interest of a deceased member who was a California resident may have to go through an expensive and lengthy California probate.  To learn about the costs of a California probate and how to save your family thousands of dollars by avoiding a California probate read “Trusts Should Own Valuable LLCs to Avoid Probate.”

By | 2016-12-13T21:20:15+00:00 June 2nd, 2014|Categories: FAQs, Operating LLCs|0 Comments

Manifestly Unreasonable Standard under California’s RULLCA

California’s Revised Uniform Limited Liability Company Act (RULCCA) sets out duties owed by managers or members of the LLC.  While managers of manager-managed LLCs and members of member-managed LLCs  both owe a duty of loyalty and care, all members and managers have a contractual obligation of good faith and fair dealing.  However, unless terms are manifestly unreasonable, the LLC’s operating agreement affords the LLC an opportunity to edit these duties and responsibilities.  This includes a modification of the duty of loyalty, duty of care, in addition to good faith and fair dealing.  This begs the question: what is the manifestly unreasonable standard?

The National Conference of Commissioners on Uniform State Laws (NCCUSL) wrote RULLCA, on which California based their RULLCA.  Thus, the NCCUSL’s description and commentary on the manifestly unreasonable standard should be understood by those looking to interpret an LLC’s operating agreement.  This is especially true, given the little to no case law (in the entire nation) dealing with the manifestly unreasonable standard.  According to NCCUSL, the manifestly unreasonable standard is fundamental to RULLCA because it protects an operating agreement.  For example, if the concept of manifestly unreasonable were loosely applied, then the court would be able to alter the members’ agreement, something which RULLCA looks to prohibit.  Furthermore, unlike in the commercial context, here manifestly unreasonable is to be applied to the individual business organization in its’ own context.  Finally, it is important to note that when the manifestly unreasonable standard is used, the court’s determination is based off the date the term was adopted in the LLC’s operating agreement.

According to the NCCUSL, the party claiming that a term is manifestly unreasonable has the burden of proof.  Furthermore, the court can only rule the term is manifestly unreasonable under certain circumstances.  First, the court must first understand the purposes and activities of the LLC.  Then, the court must apply their understanding to the term in question.  The court can only find the term to be manifestly unreasonable if “it is readily apparent that (a) the objective term is unreasonable or (b) the term is an unreasonable means to achieve the provision’s objective.”

The court will obtain their understanding of the purpose/activities of the LLC by weighing factors like the sophistication of the parties, both parties’ interpretation of the manifestly unreasonable standard in addition to the overall bargain.  If the LLC’s operating agreement results in unjust operations, regarding unfair dealing or “a situation outside of the reasonable expectations of the parties in in regard to fiduciary duties,” the court will likely revert the operating agreement to the default fiduciary duties provided in California’s RULLCA.

 

 

 

By | 2015-04-12T08:56:03+00:00 March 25th, 2014|Categories: Operating LLCs|0 Comments

California LLC’s Fictitious Business Name

Question:  How does my California LLC get a dba also known as a fictitious name?

Answer:  If your California LLC wants to protect a fictitious business name it must prepare and file the appropriate form with the county in which  the LLC’s principal place of business is located.  To get the form go to the website of the appropriate county.

By | 2015-02-19T21:01:59+00:00 March 19th, 2014|Categories: FAQs, Operating LLCs|0 Comments

Lack of Business Records Leads Massachusetts to Pierce LLC’s Veil

In Kosanovich v. 80 Worcester Street Associates, LLC, the Massachusetts Appellate Division ruled that a single-member LLC’s veil should be pierced because of poor record keeping.  This case is particularly interesting because it seems inconsistent with previous rules and cases.

Here, the plaintiff bought a condominium from the single-member LLC.  In the agreement between the parties, the LLC was to repair any defects of the condominium within one year of the purchase date.  The LLC then failed to repair some of the defects, and the plaintiff sued for breach of contract and breach of an implied warranty.  The judge not only sided with the plaintiff, but also pierced the veil, holding the member of the LLC personally liable.  On appeal, the court started with the veil-piercing rule which states that the veil should only be pierced to defeat fraud or injustice.  Then, the court listed 12 factors that determine if piercing the LLC’s veil was justified.  These factors include:

  • (1) common ownership,
  • (2) pervasive control,
  • (3) confused intermingling of business assets,
  • (4) thin capitalization,
  • (5) nonobservance of corporate formalities,
  • (6) absence of corporate or LLC records,
  • (7) no payment of dividends or distributions,
  • (8) insolvency at the time of the litigated transaction,
  • (9) siphoning away of corporation’s funds by dominant shareholder or member,
  • (10) nonfunctioning of managers, or officers and directors,
  • (11) use of the corporation or LLC for transactions of the dominant shareholders or members, and
  • (12) use of the corporation or LLC in promoting fraud.

The court noted that when analyzing these factors, the veil-piercing was justified.  In particular, the court looked to the pervasive control and poor record keeping to support the trial court’s decision.  The court suggested that the poor record keeping applied to the other factors, since the LLC member could not provide documents convincing the court otherwise.

This decision seems odd because this case was not regarding fraud or injustice (the reason the court stated that veil-piercing should exist).  Also, the burden of proof in this case seemed to have shifted to the LLC member by suggesting that it was this duty to keep good records to show that the 12 factors weighed in his favor.  Still, one of the ways to prevent a veil piercing is to formally treat the LLC as a business.  This means keeping good books and records, and following the formalities of ordinary businesses.

By | 2016-12-13T21:20:16+00:00 February 25th, 2014|Categories: Operating LLCs|0 Comments