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New California Limited Liability Company (LLC) Regulations coming January 1, 2014: the Basics – What You Should Know (Part 2 of 2)

In January, 2014, California’s current limited liability company act, the Beverly-Killea Limited Liability Company Act (“Beverly-Killea”), will be replaced by the California Revised Uniform Limited Liability Company Act (“RULLCA”). RULLCA is based on the Revised Uniform Limited Liability Company Act, which was drafted and approved by the National Conference of Commissioners on Uniform State Laws in 2006.

This article is intended to highlight some of the more notable differences between Beverly-Killea and RULLCA. This article has two parts. This is Part 2 of 2. For Part 1, click here – https://www.northerncaliforniabankruptcyattorneysblog.com/2013/07/new-california-limited-liability-company-llc-regulations-coming-january-1-2014-the-basics-what-you.html

Fiduciary Duties: Beverly-Killea does not specify the fiduciary duties owed by members or managers of an LLC, instead stating that the fiduciary duties of an LLC manager are the same as those of a general partner in a partnership (“[t]he fiduciary duties a manager owes to the limited liability company and to its members are those of a partner to a partnership and to the partners or the partnership”). RULLCA changes this by setting forth detailed provisions concerning fiduciary duties.

In addition, Beverly Killea provides that fiduciary duties may be modified but does not specify in extent or manner in which they can be modified (“[t]he fiduciary duties of a manager to the limited liability company and to the members of the limited liability company may only be modified in a written operating agreement with the informed consent of the members.”). By contrast, RULLCA provides that an operating agreement may not “unreasonably” reduce the duty of care and may not “eliminate” the duty of loyalty, but may with respect to the duty of loyalty “[i]dentify the specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable” and “[s]pecify the number or percentage of members that may authorize or ratify, after full disclosure to all members of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.”

Voting: Like Beverly-Killea, RULLCA provides that absent a contrary provision in the operating agreement, voting by members is based on each member’s interest in the current profits of the LLC. Also like Beverly-Killea, RULLCA provides as the “default position” that changes to the articles of organization or the operating agreement require the consent of all members but that a vote of the majority of members is sufficient for all other matters for which a vote is required.

Contributions: RULLCA defines contribution as “any benefit” provided by a person to the LLC, which seemingly creates a potential valuation problem. By contrast, Beverly-Killea defines contribution as “money, property, or services rendered, or a promissory note or other binding obligation to contribute money or property, or to render services as permitted in this title.”

Tax Allocations: Unlike Beverly-Killea, RULLCA is silent on the allocation of profits and losses among LLC members for tax purposes. Thus, under RULLCA a company’s operating agreement should specify the method by which profits and losses are to be allocated.

Indemnification: Unlike Beverly-Killea, which states that an operating agreement may provide for indemnification of any person, RULLCA provides as a default rule that an LLC shall reimburse for any payment made and indemnify for any debt, obligation or other liability incurred by a member-manager or a manager.