The New California LLC Act - Part I, Forming the LLC

As of January 1, 2014, the California Revised Uniform Limited Liability Company Act ("RULLCA"), California's new limited liability company act went into effect. The previous LLC act had been in place for almost 20 years, with relatively few changes. The RULLCA is a complete re-write of the law. It applies to all existing California LLCs as well as all LLCs from other states that are registered in California. If you have an LLC, you should know that you cannot opt out of the new law. It automatically applies to your LLC, without any requirement for you to sign or file anything.

Although much of the new LLC act is similar to the old LLC act, the RULLCA is much more thorough. It includes more default rules that will apply in the event your LLC operating agreement is silent on an issue. It also includes some substantive changes. This series of blogs will review some of those changes in an effort to inform existing LLC managers and members of the changes being imposed upon them and their entities.

Forming the LLC

Under both the old and the new law, an LLC is formed by filing Articles of Organization with the California Secretary of State. The required contents of the Articles of Organization remain the same under the old and new laws. Under the old law, an LLC must have an operating agreement to be fully formed. As a result, individuals that may have formed their own LLC, or used an on-line service to do so, often did not have the true protection of the LLC because they had not signed an operating agreement, and therefore the LLC was not correctly formed. Under RULLCA it will now be possible to form an LLC without an operating agreement. However, the operating agreement is the foundational contract that governs the relationship between the members and should not be overlooked as one of the most important parts of forming an LLC. This is even more important under the new law because of the number of default provisions that you may not like or even be aware of, but will apply to you if you don't have a thorough LLC operating agreement that contradicts those default provisions. For those members and managers of existing LLCs, this is a good time to revisit their operating agreements to see if some of the new detailed provisions of the RULLCA may override the terms previously agreed to by the members.

Under the old LLC law, if any provision of the Articles of Organization conflicted with the operating agreement, the Articles of Organization controlled. However, under RULLCA, the operating agreement provisions will prevail with respect to members, dissociated members, transferees, and managers. This is another reason to look very carefully at your operating agreement to see if you need to, or want to, make any changes. Even without the change in the LLC law, it is a good idea to take a look at your documents once a year to see if they still reflect the current agreement between you and your partners.

Stay tuned for additional blogs on the new LLC law, including information on naming your LLC under the new rules.

The information appearing in this article does not constitute legal advice or opinion and should not be construed as such. If you have specific questions regarding this article, please contact the author.

Categories: LLC's

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