Changes to Member Managed LLC's
Effective January 1, 2014, the legislature changed the rules for forming California limited liability companies
California Revised Uniform Limited Liability Company Act ("RULLCA") became effective January 1, 2014RULLCA makes several significant changes to the former Beverly-Killea Limited Liability Act.
RULLCA replaces the former Beverly-Killea Limited Liability ActThe California Revised Uniform Limited Liability Company Act (RULLCA) took effect in 2014, resulting in several significant changes to the former Beverly-Killea Limited Liability Company Act (Beverly-Killea). The RULLCA replaces and clarifies Beverly-Killea.
The following list summarizes several noteworthy changes made by the RULLCA.
Manager Managed LLCs. Under the RULLCA, LLCs are member managed by default. In order to create a manager managed LLC, both the articles of organization and the operating agreement must expressly elect to be manager managed by stating that the entity is "manager managed," "managed by managers," "vested in managers," or similar.
Unanimous Consent Required. Unless modified by the operating agreement, the unanimous consent of all members is required to:
o sell, lease, exchange, or otherwise dispose of all or substantially all of a limited liability company's property outside the ordinary course of the LLC's activities;
o approve of a merger or conversion;
o undertake any other act outside the ordinary course of business; or
o amend the operating agreement.
Note: this is only a default rule and may be modified by a written operating agreement. If your operating agreement is silent on this issue, the new default rules will apply and you may need to amend the operating agreement to avoid voting conflicts between members and managers.
Indemnification. The RULLCA requires an LLC to indemnify its managers (if the LLC is manager managed) or members (if the LLC is member managed) for debts, obligations, or other liabilities incurred by the manager or member on behalf of the LLC. Indemnification is not required if the manager or member breached a fiduciary duty while incurring the debt, obligation or other liability. Under the old rules, LLCs were permitted but not required to provide such indemnification.
Reimbursement. The RULLCA requires an LLC to reimburse its managers (if the LLC is manager managed) or members (if the LLC is member managed) for expenses incurred by the manager or member while acting on behalf of the LLC. Reimbursement is not required if the manager or member breached a fiduciary duty while incurring the expense. Under the old rules, LLCs were permitted, but not required to reimburse.
Fiduciary Duties. Beverly-Killea provided that a manager owes the same fiduciary duties to the LLC and its members as a partner owes to a partnership and its partners. Under RULLCA, the fiduciary duties owed by a managing member include the duty of loyalty, the duty of care and the duty of good faith and fair dealing. Note: the operating agreement may modify these duties but cannot eliminate them.
Dissociation of Members: Under RULLCA, certain events trigger the automatic dissociation of a member, including death; appointment of a guardian or conservator; a judicial order; in the case of a trust, the distribution of the trust's interest in the LLC; and a member's bankruptcy.
New Members: a new member is subject to the terms of the operating agreement, even if the new member does not sign it or otherwise consent to it. Note: this is a default rule that may be modified in the operating agreement