CA LLC Laws, Is Your Corp. at Risk?

CA LLC Laws, Is Your Corp. at Risk?

For California limited liability organizations, it’s vital that you review your current operating agreements. New California legislation which governs limited liability companies becomes effective on effect Jan. 1, 2014. Notably, the law may have a negative impact on limited liability partners who own companies in California. Essentially, this law can effectively rewrite the terms of your current operating agreements. To avoid any negative repercussions in the future among partners, members of California limited liability companies should seek a professional review and where appropriate, amend the current operating agreements.

The new law, The California Revised Uniform Limited Liability Company Act will replace the existing one, which has been status quo since 1994. There is some confusion over the law’s impact on LLC formed before January 2014. The wording of the legislation, on the surface, seems as if those who formed an LLC prior to the legislation enactment date can continue to function under their current operating agreements. According to a report on Loeb & Loeb:

The transition provisions of the new law state that the 1994 law continues to govern all contracts, including operating agreements, entered into by an LLC, its members or managers, prior to January 1, 2014, as well as any vote or consent by members or managers prior to that date, making it seem as if the New Law will not affect existing operating agreements or actions taken in reliance on those agreements.

But if members of a California LLC, stop reading there and carry on as usual, they may miss further language that does affect a current LLC’s operating agreement as it pertains to future decisions. It states that any acts taken by an LLC members or managers on or after January 1, 2014, will be governed by the new law not than the current law. Consequentially, the 2014 law may not only enhance any pre-2014 operating agreements, but unfortunately in many cases may actually change current operating agreements in such a way that it affects members’ positioning and rights. This can have a drastic impact on your company. If a member decides to enforce the provisions in the 2014 law and those changes aren’t in line with your current operating agreement, your company may face legal disputes.

Below, are a few of the provisions of the 2014 law that may materially change your rights and duties if you are a member or manager of a Limited Liability Corp.

Default Rules, LLC Game Changers

The forming of an LLC provides a lot of room for flexible rules and the drafting operating arrangements. The current LLC law has only a limited number of mandatory provisions and instead defers to the default rules, if and only if the operating agreement does not override them. But the amended 2014 law provides expanded default rules. Because of the specific wording of the transition section proviso in the new law, members operating the old agreement are actually at risk the defaults will override current agreements and essentially change the nature of members’ roles and relationships.

Who is the Manager, Ultimately?

The new law expands the consent rights of members. Depending on the language in the operating agreement, this may add limitations—notably, ones that were not present prior to the new law—to the authority of a manager to take action. Since many operating agreements were drafted with the intent of giving the manager with greatest interest and absolute authority over decisions over the course of business, the 2014 law could effectively diminish that authority and give minority members the right to veto. So amendment to the agreement to reflect voting rights may save many disputes down the line.

There are also a number of dissociation events for member status that can drastically change a member’s relation to the LLC if the intentions are not expressly spelled out in the operating agreement. Under the new law, these include:

Dissociation Events in the LLC Law

1. In the case of a member managed LLC, a judicial order is signed that an individual member is no longer competent to perform his or her duties

2. In the case of an individual member’s passing

3. In the case in which a guardian has been appointed or conservatorship for an individual member has been established

4. In the case where a member is a trust and/or a revocable living trust, the trust’s entire interest in the LLC is distributed

5. In the case of a member managed LLC, if a member declares bankruptcy

Consult a Pro on LLC Laws…

There are so many more nuances and expanded defaults in the new 2014 LLC law that I haven’t listed here. Click the link or if you would like to read all of the changes to the Uniform Liability Company Act. All or any of the changes, both the ones mentioned and those excluded, can effectively change your entire operation. If you (like many LLC members) aren’t certain about the legal verbiage of the new 2014 LLC law, it’s best to consult with a professional accountant who is an expert in LLCs and tax laws. Contact Joel Lewinson today with any and all of your questions related to the new 2014 liability laws.

photo by:

kevin dooley