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

Operating Agreements: Both Beverly-Killea and RULLCA define an operating agreement to include both oral and written agreements. However RULLCA provides that LLCs are member-managed unless the articles of organization and a written operating agreement state that the LLC will be manager-managed. By contrast, Beverly-Killea only requires that the articles of organization state that the LLC is to be manager-managed. Therefore, unlike under Beverly-Killea, RULLCA requires that a written operating agreement be in place for an LLC to be manager-managed. Absent a written statement in the articles of organization and the operating agreement indicating that the LLC is manager-managed, RULLCA provides that that every member of the LLC is an agent of the LLC for the purpose of its business or affairs. As such, the act of any member for the apparent purpose of carrying out the usual business or affairs of the LLC binds the LLC unless (i) the member so acting in fact has no authority to act, and (ii) the person with whom the member is dealing has actual knowledge of this fact.

Under RULLCA, if a record filed with the Secretary of State conflicts with the operating agreement, the operating agreement controls as to members, managers, dissociated members, and transferees; the records of the Secretary of State prevail as to other persons to the extent they rely on such record. This is different than Beverly-Killea, which provides that in the event of a conflict between the articles of organization filed with the Secretary of State and the operating agreement, the articles of organization control.

In addition, RULLCA provides that a person who signs a record knowing the information is inaccurate, or a member or manager who had notice of the inaccuracy and could have cured it can be liable to third persons who rely on the incorrect information. Beverly-Killea limits such liability to managers who execute a certificate of amendment that contains a false statement.

Further, unlike Beverly-Killea, RULLCA provides that a member of an LLC will be deemed to assent to the terms of an operating agreement even if the member did not sign the operating agreement.

Management: Both Beverly-Killea and RULLCA state that the default rule is that an LLC is member-managed unless the articles of organization provide that the LLC will be manager-managed. However, under RULLCA this default rule applies unless the articles of organization and a written operating agreement state that the LLC is to be manager-managed. Therefore, although RULLCA defines operating agreement to include both an oral and written agreement, a manager-managed LLC must have a written operating agreement stating that the LLC is manager-managed.

Under Beverly-Killea and RULLCA, in a member-managed LLC, absent a contrary provision in the operating agreement, matters outside the ordinary course of activities of the LLC require the approval of all members. However, RULLCA provides that in a manager-managed LLC, as a default, managers have equal rights in the management and conduct of the LLC’s activities and that a majority of managers decide matters in the ordinary course of business, except that all members must approve: (1) the sale, lease, exchange or other disposal of all or substantially all of the LLC’s property, (2) the undertaking of any act outside the ordinary course of the LLC’s activities, (3) merger or conversion, and (4) any amendment to the operating agreement. This is a change from Beverly-Killea, which provides as a default that all decisions of the managers would be decided by majority vote.