On January 1, 2014, the current LLC law in California (known as “the Beverly-Killea Limited Liability Company Act”) will be repealed and superseded by a new LLC law (known as the “Revised Uniform Limited Liability Company Act,” or “RULLCA”). Although the new RULLCA law does not require existing LLCs to file any new documents with the Secretary of State or to revise their operating agreements, it imposes many changes on LLC members and managers. Many LLCs will therefore want to file new documents and/or revise their existing operating agreements prior to January 1, 2014.
California’s new RULLCA began as Senate Bill 323 and was signed into law by Governor Jerry Brown on September 21, 2012. The new law takes effect on January 1, 2014 and will apply to all limited liability companies — both California and foreign — that are registered with the California Secretary of State’s office on that date for (1) all acts or transactions by the LLC (or its members or managers) occurring on or after January 1, 2014; and/or (2) all contracts entered into by the LLC (or its members or managers) on or after January 1, 2014.
The purpose of the new law was to clarify issues and questions that existed under the old law. Another goal of the new law was to give maximum effect to “freedom of contract” and the enforceability of operating agreements. A final goal was to better coordinate California’s LLC law with that of other states. California now joins Idaho, Utah, Wyoming, Nebraska, Iowa, Florida, New Jersey, and Washington, DC as jurisdictions that have adopted the RULLCA. In addition, the legislature in South Carolina recently introduced a bill to adopt the RULLCA.
Changes Brought by the New Law — New “Default Rules”
California’s existing LLC law generally provides LLC owners (known as “members”) a great deal of flexibility in drafting their operating agreement. The existing law only has a limited number of mandatory provisions and, instead, provides “default rules” which apply only if the operating agreement does not override them. Accordingly, one of the main goals in drafting an operating agreement is to make certain to override any default rules that the LLC members do not want to apply to their business.
Obviously, if the default rules change, an existing operating agreement may no longer contain all of the proper language necessary to override the default rule. In such a case, the LLC and its members would be subject to the new default rule even if it is contrary to their wishes. So it is critical that all LLCs operating in California understand the new default rules contained in the RULLCA to ensure that their operating agreements adequately address those.
In general, the new RULLCA greatly expands the number of default rules. Therefore, existing operating agreements have, in all likelihood, not addressed all these new rules properly. This puts existing LLCs at risk of having new default rules applied to them that fundamentally change the nature and/or intent of their business relationship. Some examples of how the new RULLCA changes default rules include the following: