by LLC attorneys Richard C. Keyt, JD, MS (accounting), and Richard Keyt, JD, LL.M. (federal tax law)
On January 1, 2014, the California Revised Uniform Limited Liability Company Act (the “New LLC Law”) became effective. The New LLC Law threw out and completely replaced California’s prior LLC law entitled the Beverly-Killea Limited Liability Company Act (“Former LLC Law”). This article explains the major changes the New LLC Law made to the Former LLC Law.
Major Changes Caused by the New LLC Law
“the name of a limited liability company shall not be a name that the Secretary of State determines is likely to mislead the public and shall be distinguishable in the records of the Secretary of State from all of the following:
(1) The name of any limited liability company or foreign limited liability company authorized to transact business in this state.
(2) Each name reserved under Section 17701.09.
The LLC name standard under the Old LLC Law was that the name of a new California LLC had to be “distinguishable on the record” from an existing California entity.
The California Secretary of State’s (“SOS”) one page form Articles of Organization (SOS Form LLC-1) has a box the organizer checks to indicate if the LLC will me member managed, managed by a single manager or managed by more than one manager. If none of these boxes is checked, then by default the LLC will be member managed. Member managed means all members have management power and can sign documents on behalf of the LLC regardless of how much or how little of the LLC a member owns.
California Revised Uniform Limited Liability Company Act Section 17703.01 states:
“Unless the articles of organization indicate the limited liability company is a manager-managed limited liability company, every member is an agent of the limited liability company for the purpose of its business or affairs, and the act of any member, including, but not limited to, the execution in the name of the limited liability company of any instrument, for the apparent purpose of carrying on in the usual way the business or affairs of the limited liability company of which that person is a member, binds the limited liability company in the particular matter, unless the member so acting has, in fact, no authority to act for the limited liability company in the particular matter and the person with whom the member is dealing has actual knowledge of the fact that the member has no such authority.”
Warning for LLCs Formed Before 2014 that Intend to be Manager Managed
If your California LLC was formed before 2014 and it is supposed to be manager managed then the LLC must file an amendment to its Articles of Organization that states that the LLC is managed by a sole manager or by more than one manager. You an amend the Articles of Organization and specify manager management by filing one of the following forms with the California Secretary of State:
“A limited liability company shall reimburse for any payment made and indemnify for any debt, obligation, or other liability incurred by a member of a member-managed limited liability company or the manager of a manager-managed limited liability company in the course of the member’s or manager’s activities on behalf of the limited liability company, if, in making the payment or incurring the debt, obligation, or other liability, the member or manager complied with the duties stated in Section 17704.09.
The Former LLC Law allowed LLCs to indemnify members and managers, but indemnification was not required.
If the LLC is member managed then all members must consent to any act that is outside the LLC’s ordinary course of the LLC’s activities. California RULLCA Section 17704.04(b)(4). If the LLC is manager managed, all members of a California LLC must approve a merger or conversion, the sale, lease, exchange of all, or substantially all, of the limited liability company’s property or any other act outside the ordinary course of the limited liability company’s activities. California RULLCA Section 17704.04(b)(5).
Warning: Whenever all of the members of your California LLC approve act that require the consent of all members it is critically important that the approval be documented in minutes or actions by consent signed by all of the members.
“The obligation of a member to make a contribution to a limited liability company may be compromised only by consent of all the members.”
The member’s obligation to make capital contributions is not discharged by death or disability. California RULLCA Section 17704.03(a), states:
“A person’s obligation to make a contribution to a limited liability company is not excused by the person’s death, disability, or other inability to perform personally.”
If a California LLC is member managed the members are subject to the fiduciary duties of loyalty and care and the obligation of good faith and fair dealing. The duty of loyalty to the LLC and its members means members must:
1. account for any property, profit, or benefit derived from the member’s use of a LLC property or the appropriation of an LLC opportunity,
2. not act on behalf of somebody who has an interest that is adverse the LLC, and
3. not compete with the LLC.
The duty of care means members must not engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. See California RULLCA Section 17704.09(b) & (c).
If the California LLC is manager managed then the members are not subject to the duties of loyalty or care. Instead, it is the managers of the LLC who are subject to the fiduciary duties of loyalty and care. Members and managers of a manager managed CA LLC are subject to the obligation of good faith and fair dealing. See California RULLCA Section 17704.09(f).