After years of dreaming of creating your own company, you have finally come to the point when you will be able to reach that goal. After having weighed your options and researched all the possibilities, you have decided to form a limited liability company (LLC). Choosing this business structure may be the best decision for small startups in California. It offers a simple way to build a business while protecting one’s personal assets in case of legal issues. But before you file that registration with the Secretary of State, you need to understand the California LLC Act to avoid having problems in the future.
The California LLC Act
On January 1, 2014, California replaced its LLC statute with the California Revised Uniform Limited Liability Act (RULLCA). It aims to update the default rules found on the previous law. However, the RULLCA does not only affect new LLCs but the existing ones too. Every LLC in California should review their operating agreements and Articles of Organization to ensure that all documents comply with the law.
Some Changes That You Should Know
The RULLCA has changed some aspects, so you should understand how different the new provisions are from the previous law.
LLCs require voting of members when making huge decisions related to the business. The previous law has touched this aspect. According to it, default rules will apply if the company’s written operating agreement or Articles of Organization does not address the voting rights of every owner. So, some changes that a company needs to have the vote of the majority of the members.
The new law, however, updated the default rules. So, instead of a majority of votes, LLCs now require a unanimous agreement of all members to take any of the following actions:
- Exchange, lease, disposition, or sale of all properties out of the ordinary course of the company’s activities
- Approval of merger or conversion
- Getting involved in other acts outside the LLC’s ordinary course of activities
You might think it can be inconvenient for you and other members. However, keep in mind that the RULLCA allows LLCs to create an operating agreement that changes the default rules. Thus, you can avoid having misunderstandings between members by providing a detailed agreement on the voting standard that will apply to your LLC.
Under the previous law, operating agreements between all LLC members can either be written or oral. Meanwhile, the new law accepts any form of agreement between all members. So, it does not matter if it is oral, recorded, implied, or a combination of the earlier types.
Implied agreements may seem vague for most people, and it may be open to more questions. Thus, it is better to have written documents of all agreements between various parties, especially if they have something to do with the company’s operations.
To ensure that all members understand the relevance of the operating agreement, the RULLCA states that all individuals who agree to become a member of the LLC lets them approve the operating agreement of the company.
The state used to consider LLCs member-managed by default. The only way to have a different management structure then was to include it on the Articles of Organization. The difference of that rule and the one written on the RULLCA is that LLCs now have to mention the management structure on both the operating agreement and the Articles of Organization. Otherwise, your LLC will be member-managed by default.
Previously, LLCs may provide for the indemnification of any person who acts on behalf of the company. However, the LLC should state it on its Articles of Organization or a written operating agreement. However, that is no longer the case. The RULLCA requires LLCs to provide indemnification to certain people.
Now, LLCs should reimburse and indemnify a manager or a member, in case it is a member-managed LLC, for debts, obligations, or liabilities they have gotten on behalf of the company. However, one should ensure that these individuals complied with their fiduciary duties. You can choose to have a different indemnification process only if you put it on your LLC’s written operating agreement.
The RULLCA also covers the fiduciary duties to the company. The person in control of the business, whether it is a manager or member, has a duty of loyalty and care to non-controlling members. However, they are not the only ones with duty. All members of the LLC have a duty of good faith and fair dealing.
If you want to modify these fiduciary duties, you can do so using a written operating agreement. Each duty should be subject to some defined limitations. Make sure all parties who wish to modify the said duties include a clear definition. To avoid problems, your LLC should also include in the agreement special authorization to conduct some activities that others may see as a breach of fiduciary duty.
Additionally, the informed consent of the LLC members is necessary for the approval of any variation of fiduciary duties. All members should be fully aware of the provisions on fiduciary duties before they become parties to the agreement.
Despite giving LLCs an opportunity to modify the default rules, the RULLCA does not allow the elimination of the duties.
As stated earlier, the new California LLC Act affects not only newly-formed companies but also those that have been around even before the effective date. So whether you already have an LLC or are still planning on forming one, you should review all provisions stated on the RULLCA. If there are default rules that you think are not applicable to your business, modify them accordingly.
Do your research and understand all the features of RULLCA before forming your LLC. If you need help in getting through the process, you can hire an experienced company like DoMyLLC to assist you while you are trying to reach your dream.
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