California recently enacted changes to its laws governing limited liability companies (LLCs) which should cause LLC owners to dust off their operating agreements and consult with their attorneys to ensure that new provisions do not inadvertently and unknowingly alter the members’ relationships and obligations.
The new law, which took effect January 1, 2014, applies to all California LLCs, including ones formed before that date, and governs every act taken by a California LLC or its members on or after that date. Like the old LLC law, the revised law provides LLCs with certain default rules to be applied in disputes when the entity’s operating agreement is silent on the subject. To the extent that parties relied on the default rules when drafting their operating agreements, this can lead to unwanted surprises down the road.
Some of the more important new default rules include:
- Designation of Manager-Managed LLCs. Under the old LLC law, establishing a manager-managed LLC could be accomplished simply by including a statement to that effect in the articles of organization; without such a statement, the LLC would be considered member-managed by default. Now, however, both the articles of organization and the written operating agreement must designate the LLC as manager-managed. Accordingly, manager-managed LLCs that currently do not have such language in their operating agreements should amend them or risk being deemed member-managed by default. The standard operating agreement prepared at the Cohen Law Firm (subject to modification for differing circumstances) contains the language necessary to establish a manager-managed LLC.
- Manager Powers and Member Consent. Under the new law’s default rules, an LLC manager must get the unanimous consent of the members before taking any actions outside of the ordinary course of business, including the sale, lease or exchange of all or substantially all of the assets of the company. This effectively means that in the absence of specific language to the contrary in the operating agreement, a single minority member could veto any such actions against the clear will of the majority of members. Operating agreements should be reviewed to ensure that the managers have the amount of control over business decisions that the members desire, that they will not be authorized to do things for which the members expect unanimous consent, and that they will not be hampered by having restricted authority that was never intended or desired.
- Mandatory Reimbursement and Indemnification. The new LLC law mandates that members or managers be reimbursed for expenses incurred on behalf of the LLC and be indemnified for liabilities incurred on behalf of the LLC, provided that neither the expenses nor the acts constitute violations of fiduciary duties.
- Fiduciary Duty Changes. Speaking of fiduciary duties, one of the more significant changes under California’s new LLC law involves clarifying the duties owed by members and managers. It specifically defines the “duty of loyalty” as being limited to 1) the duty to account, 2) the duty to refrain from self-dealing and 3) the duty to refrain from competing. However, the parties can modify and further define the duty of loyalty as well as the duty of care and the duty of good faith and fair dealing within certain limits.
All California LLCs are advised to have their operating agreements reviewed and modified where necessary to ensure that the new LLC law does not contradict the intentions of the members, which could lead to costly conflicts in the future.
The Cohen Law Firm in Westlake Village serves the unique needs of business owners. From formation to restructuring, and in an ever-changing legal, regulatory and economic landscape, businesses must constantly evolve to survive. To talk about your business’s goals and challenges or to make an appointment, please call the Cohen Law Firm today at (805) 267-7147 or send an e-mail to Randall Cohen at firstname.lastname@example.org.
This article has been prepared by Cohen Law Firm for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.