Last year, Senate Bill 323 was signed into California law by Governor Jerry Brown. This bill has been designated as the California Revised Uniform Limited Liability Company Act (RULLCA). On January 1, 2014, the RULLCA is set to replace the Beverly-Killea Limited Liability Company Act, which has governed California limited liability law since 1994. There are many key changes in the RULLCA that California business lawyers are left to figure out how they will affect California business owners who want to organize their businesses as limited liability companies.
One major problem of the RULLCA is that it applies retroactively to existing LLCs. There is no ability for existing California LLCs to “opt out” of the RULLCA; it will apply and potentially “rewrite” substantive provisions of existing California LLC operating agreements. This creates a danger because it appears the RULLCA is establishing an ex post facto law – a law that changes the legal consequences of an action after the action has already taken place – which is illegal according to the United States Constitution.
This Constitutional Clause preventing the creation of ex post facto laws presents the argument that the owners of a limited liability company could not have anticipated these new changes in the law, and had they known that a new set of laws would be passed that would govern the way their business was treated, they may not have chosen to organize themselves in a particular manner
Some of the more substantive changes under the RULLCA include:
- Members of an LLC will now be deemed to assent to the terms of an operating agreement even if a member did not physically sign it;
- New rules of “disassociation” whereby a member may be expelled from the LLC for certain specified reasons upon the unanimous consent of the others members; and
- Any member or manager who was not allowed to vote on whether or not to make a distribution, namely distributions which cause the LLC to be unable to pay its debts as they become due, will now be absolved from personal liability for such improper distribution.
Another major concern among California business owners is the uncertainty regarding the law of LLC operating agreements. A common question among LLC owners is that once the RULLCA becomes law on January 1, 2014, and an LLC was organized under the Beverly-Killea Limited Liability Act prior to that date, which set of laws govern any amendments that are made to the operating agreement? Is it possible that the original portions of the LLC operating agreement will be governed by the Beverly-Killea Act while the amendments are governed by RULLCA? If this is the case, a business owner might opt to not make an amendment to his or her operating agreement that could be beneficial to the company out of fear of the new laws.
At Pascuzzi, Moore & Stoker we are committed to staying on top of any new developments regarding the new RULLCA. If you have an existing LLC and operating agreement, we would be pleased to review it with you to determine what changes, if any, are appropriate to ensure that your company will be compliant with the new RULLCA.