What LLCs Need to Know About the Revised Uniform Limited Liability Company Act

Any manager or owner of a California LLC established after January 1, 2014 needs to be familiar with how the Revised Uniform Limited Liability Company Act (RULLCA) impacts their business.

Unanimous Approval Required When Issue Not Addressed

The RULLCA places certain restrictions on voting approval of certain issues that are not addressed specifically by the operating agreement. For instance, unanimous voting approval is required in order to:

● Merge the LLC with another entity or to convert the LLC to another type of entity.
● Dispose of LLC property, such as selling, leasing or exchanging the property.
● Amend the operating agreement.
● Do anything on behalf of the LLC that is outside of the ordinary course of business.

Because unanimous voting approval is required to do any of the above if it is not specifically provided for in the operating agreement, one member or manager of the LLC could stall out a decision to act on one of these matters by withholding their approval. Addressing these issues explicitly in a written operating agreement can circumvent a lot of potential headaches.

What The RULLCA Means for Agreements

Under the RULLCA, any agreement between the members of the LLC concerning the governance of the LLC is considered binding, which can create a lot of problems within the company if an agreement was made orally or was implied. Under the RULLCA, it is important to memorialize, in writing, any operating agreement concerning:

● Management’s rights and duties.
● The activities and conduct of the LLC.
● Relations between and among members of the LLC.
● How amendments to the operating agreement are to be made.

When matters concerning LLC governance are made in writing, there is less risk that members of the LLC will dispute the agreement, because the terms and conditions of the operating agreement have been documented.

Also, for LLCs that choose to be manager-managed, the RULLCA requires that this should be made explicit in both the operating agreement for the LLC, as well as in the the articles of organization.

Fiduciary Responsibilities under the RULLCA

Members or managers of an LLC owe fiduciary duties to one another and the LLC under the RULLCA; however, these fiduciary duties can be modified if they are modified in a written operating agreement, but they may not be eliminated altogether or modified in such a way that they are rendered manifestly unreasonable. Under Section 17704.09 of the California Corporations Code, those fiduciary duties include:

● The duty of care.
● The duty of loyalty.
● The duty of good faith and fair dealing.

When modifications to the fiduciary duties are made in the written operating agreement, they could be potentially drafted in a way that could open up individual members or managers of the LLC to liability for the LLC’s actions. This is because under the RULLCA, members or managers can lose their indemnification protections if the fiduciary duties of the members or managers are modified. LLC members and managers should make sure that they fully understand any modifications that have been made to the fiduciary duties in the written operating agreement before consenting to them.

Contact our office to speak with a senior Los Angeles business attorney for more information on what RULLCA means for your business entity today.

Whether pertaining to your personal or professional life, chances are you have entered into, or sought to enter into a partnership at some point.  For some, it provides a sense of security; for others, a dinner drink led to a friendly discussion about an idea you had and WHAM, you’re going to move on that idea together – as partners, or; for those timid-hearted types, perhaps you gravitated toward a partnership because you simply wanted half the responsibility, half the risk, and half the potential blame.

Whatever your cause, and whatever your (personal) purpose, you could stand to save yourself a lot of time, frustration and money by knowing up front what sort of partnership you’re actually getting into.

Whereas some people use ‘partnership’ more as a term of art (i.e., corporation owners may call themselves ‘partners’, but that does not necessarily make it so), there are, in fact, a variety of legally recognized partnerships.  They are: (1) General Partnerships; (2) Limited Partnerships; (3) Limited Liability Partnerships; (4) Limited Liability Companies and; (5) Joint Ventures. And of these different types of partnerships – some governed by corporate law and still others governed more by contract law – the one that is of particular interest in this article is that of the “General Partnership”.

Attorneys are often surprised to find the staggering number of parties involved in general partnerships who believe they are being afforded certain corporate law advantages.  Let’s take a moment to touch upon a bit of the confusion.

A General Partnership is like a sole proprietorship except that there are two (2) or more persons conducting business under one name.  Unlike Limited Liability Companies, for example, no articles need to be filed with the Secretary of State, nor does the partnership even need to enter into a written partnership agreement (although it has been considered a terrible idea not to). A significant difference between formally established partnerships (i.e., LLC’s, LLP’s, etc.) and that of a general partnership is that each partner in a general partnership is jointly and severally liable for the actions and debts of the partnership.  Since any partner may bind the partnership, the other partners may be held liable for actions, contracts and/or debts in which they didn’t even know existed.  Take that one step further — partners can even be held personally liable for the acts of agents or employees that had apparent authority to bind the partnership.

So, for those of you not wishing to formally establish a partnership at the state level, and, whether you are willing to entertain and execute a partnership agreement or not, you may wish to have a better understanding of the risky business you could be entering into, or, may already be involved in, as a partner in a general partnership.

If an individual is looking to business-incorporation/”>form a new business, they may want to consider forming a Limited Liability Company. This type of business structure is similar to a corporation but is less formal, more flexible and offers several benefits, including personal liability protection, for its owners.

What is an LLC?

A “Limited Liability Company” (LLC) is a hybrid between a partnership and a corporation. It has the operating flexibility and “pass through” tax treatment of a partnership with the limited liability for its “members” accorded to corporate shareholders. “While an LLC is a business entity, it is best to think of it as an unincorporated association,” said Anthony Spotora, an extremely experienced business attorney. “Although sometimes incorrectly referred to as Limited Liability Corporations, they are in fact not corporations.” See California Corporations Code, Title 2.6.

Further Benefits

LLCs are highly attractive to some because of the flexibility in tax choices. LLC business ventures qualify for a single layer of taxation, which prevents ownership from being double-taxed under the corporate tax structure.

“However, LLCs may also elect to be taxed under a corporate tax structure if they wish,” Spotora advised. “In fact, the full list of taxation choices for LLCs are as a sole proprietor, a partnership and either an S- or C- Corporation.”

LLCs also often require much less administrative paperwork and record-keeping than do corporations. The laws also allow LLCs to customize the rules for how the LLC is best operated.

Drawbacks

Some people feel that LLCs do have disadvantages, however.

In California and a handful of other states, LLCs must pay a franchise or capital values tax on the business.

LLC’s in California must pay an annual tax to the state’s Franchise Tax Board. The fee is $800 per year, though if the LLC’s net annual income exceeds $250,000, then there will be an additional fee that must be paid, too.

Also, some people believe LLCs have a more difficult time raising financial capital because investors may be more comfortable investing funds into corporate firms.

If a person is considering forming a Limited Liability Company or other business entity, it is important for them to speak with a knowledgeable attorney. Anthony Spotora is a Los Angeles business attorney who specializes in incorporation and can guide you on the best strategy for your business.

You can visit our blog to learn more about corporate formation and other topics in business law, including the impact of RULLCA, California’s 2014 revision of the laws governing LLCs.