New LLC Operating Agreement Rules Coming Soon To California

California's new LLC operating agreement rules
California’s new LLC Rules Go Into Effect on January 1, 2014

On January 1, 2014 California’s Revised Uniform Limited Liability Company Act goes into effect. An update of the 1994 LLC law, the new statute will impact Golden State Limited Liability Companies with either a vague or nonexistent operating agreement.

The primary difference between the old and new laws is the number of “default rules”. Default rules are a set of obligations and provisions that kick in if an issue of dispute is not addressed in an operating agreement or if the parties don’t have an operating agreement. The new LLC law has more default rules than the old statute.

Here’s what you need to know:

California LLC Law Rule Change #1: Managers and Members Have More Leeway To Take Action

Under the new rules, individuals in a member- or manager-run LLC cannot take any action “outside the ordinary course of business” without obtaining unanimous consent of all members. As such, if your business’s current operating agreement specifies instances when members and managers can act, vote or protest a decision, then the new law won’t have an effect on your operation.

On the other hand, if your business’s old operating agreement does delineate or disclaim additional voting rights, nor include language that specifies voting rights as “described in the LLC Law,” then the January 1, 2014 changes will have an effect on your company. Why? Because any member could, in theory, have a valid cause of action if he or she finds out a decision was made without his or her approval. So if you do want everyone with a stake in your LLC having equal voting rights, and your current operating agreement does not address the issue, run, do walk, to get your agreement updated to specify limitations on a manager’s or member’s authority.

California LLC Law Rule Change #2: Assignees are now Transferees

Under the old law, any non-member to whom a membership interest was transferred was called an “assignee;” now they’re called “transferees.” Under the old law, assignees didn’t enjoy member rights. Under the new law: “An amendment to the operating agreement made after a person becomes a transferee is effective with regard to any obligation or LLC or its members to the transferee.” In other words, managers and member can theoretically vote to lower transferees’ piece of the pie on the day the transferee takes possession of the membership interest, which could lead to some nasty battles. If you want to avoid the hassle, update your operating agreement to address this new default LLC rule in California.

Membership Interests: Membership interests are considered personal property and therefore can be freely transferred by the holder to either members or non-members. Typically holders of membership interests have no governing or voting rights, just an economic interest.

California LLC Law Rule Change #3: Change in Dissociation Guidelines

Dissociation of a member to transferee status is a new provision of the 2014 California LLC law. Since the previous law didn’t provide for dissociation, businesses will probably want to add language to their operating agreements addressing the issue. Beginning on January 1, 2014, events that can trigger a dissociation include:

  1. Death of a member;
  2. Assignment of a conservatorship or appointed a guardian;
  3. A court order saying a member is incapable of carrying out duties;
  4. Member becomes a bankruptcy debtor and the LLC is member managed.

So, if you don’t want members to lose rights in the event of any of the above, make sure you change your current operating agreement to reflect the changes.

Moreover, a contradiction exists in the new California LLC law. On one hand, it states that dissociated members don’t have the right to access any records except for accounting records from the LLCs dissolution. However, another part of the law grants “a holder of transferable interest” the right to access certain LLC records and information. Again, make ensure your operating agreement covers this scenario or the new default rules take effect.

California LLC Law Rule Change #4: Personal Representatives Have Fewer Rights

Under the 1994 LLC law, members’ personal representatives had the right to exercise full member rights. Under the new law, however, the representative of a deceased or legally incompetent member only has the rights of a transferee.

California LLC Law Rule Change #5: Indemnification Added

The old law did not require the indemnification of any individual doing work on behalf of the LLC, so pre-2014 operating agreements may not even mention it. The new rules state that the LLC must indemnify members and managers of managed LLCs respectively, so long as he or she has fulfilled his or her “statutory duties.”

If you need an attorney to review your LLC operating agreement, contact Kelly Warner Law.

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