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How Changes To The California Revised Uniform Limited Liability Company Act (RULLCA) Can Affect Your LLC

In early 2014, California's Revised Uniform Limited Liability Company Act (RULLCA) went into effect. This replaced the Beverly-Killea Limited Liability Company Act - referred to in this article as the LLC Act - which had governed the default rules of operating agreements in California LLCs since 1994.

This article addresses some of the most common questions that have arisen in the wake of California's decision to enact RULLCA.


California's RULLCA is a modified version of the Revised Uniform Limited Liability Company Act that was created by the National Conference of Commissioners on Uniform State Laws (NCCUSL). California's RULLCA modifies the NCCUSL's version by removing certain provisions, adding others (mostly those based on the prior LLC Act) and modifying some of the language throughout. The PLLC Committee of the business law section of the State Bar of California believes that the NCCUSL's version favored LLC management, but California's version of RULLCA does a better job balancing the interests of LLC members and LLC managers.

Does RULLCA Affect Existing LLCs?

Yes. Existing LLCs, in addition to LLCs formed after RULLCA's date of enactment, are subject to the provisions of RULLCA.

When Do The Provisions Of RULLCA Apply?

RULLCA provides default rules for topics on which an LLC's operating agreement is silent. That is, if an operating agreement does not address a particular topic, it is assumed that the default provision in RULLCA regarding that topic will apply.

This is especially important for existing businesses to understand. Most LLCs created before the promulgation of RULLCA were drafted based on the provisions of the prior LLC Act. Due to RULLCA being much more thorough in the scope of topics that it addresses, existing operating agreements can become subject to default provisions that LLC members and the LLC's attorneys never intended.

Consider this example:

An LLC's existing operating agreement does not contain provisions related to indemnification because the previous LLC Act did not require such provisions. The old LLC Act stated that an operating agreement may contain language regarding indemnification, but because it did not require such language, the LLC's counsel decided not to include any in the operating agreement.

RULLCA, however, requires that LLCs indemnify members (when an LLC is member-managed) and managers (when an LLC is manager-managed). Due to the operating agreement not mentioning indemnification, if a member incurs liability, the LLC will be required to indemnify the member based on the language of RULLCA. RULLCA does allow for indemnification to be eliminated, but only if such removal of indemnity obligations is explicitly spelled out in the operating agreement. As such, the existing operating agreement needs to be modified or the new default provision will go into effect.

What Are The Main Differences Between RULLCA And The Old LLC Act?

By superseding the previous LLC Act, RULLCA has not only modified many of the existing default rules, but also added rules that were not included in the prior LLC Act. Some of the main differences include:

  • Indemnification requirement: As previously mentioned, the previous LLC Act did not require indemnification of members or managers, although it left open the possibility that an operating agreement could address this topic. RULLCA's default rule now requires indemnification of these individuals and will remain in place unless the operating agreement specifically overrides this provision.
  • Fiduciary duties: RULLCA contains much more specific language regarding fiduciary duties than the prior LLC Act. It also explicitly states that certain duties cannot be eliminated or unreasonably modified, including the duty of care, duty of loyalty and duty of good faith.
  • Member dissociation: The concept of dissociation was not part of the previous LLC Act. RULLCA explicitly addresses this issue; it has rules relating to when a member is dissociated (by choice, expelled by unanimous consent, etc.) and how that member's rights and responsibilities are altered after dissociation (the member can no longer participate in LLC management, his or her fiduciary duties end, etc.).
  • Automatic dissociation: Under RULLCA, specific events can trigger automatic dissociation of a member. They include the death of a member, a guardian or conservator being appointed for a member, a judicial order stating that a member is not capable of performing his or her duties and similar situations. This automatic dissociation is now in effect for all LLCs unless the operating agreement specifically forbids it.
  • Unanimous member consent: The previous LLC Act granted great latitude to managers of manager-managed LLCs when it came to making major decisions. The default provisions of RULLCA limit a manager's power by requiring unanimous member consent to sell or otherwise dispose of an LLC's property (beyond the ordinary course of the LLC's activities), to approve a conversion or merger, to amend the operating agreement and to allow the LLC engage in any new act that is not part of its ordinary course of activities.
  • Operating agreement vs. articles of organization: Under the old LLC Act, any conflict between the operating agreement and the articles of organization was resolved in favor of the articles of organization. RULLCA reverses this rule, so conflicting language in the articles of organization is now overridden by the language in the operating agreement.

Due to these changes, it is vital that all LLCs have an attorney assess their operating agreements to ensure that all possible effects brought about by RULLCA are adequately addressed. Failure to do so can, at minimum, alter the rules governing the LLC's operation, and, at worst, needlessly expose the company to serious liability.

Are More Changes To LLC Law In California Expected Soon?

Several revisions to RULLCA have been formally and informally proposed. The PLLC Committee of the business law section of the State Bar of California has proposed substantial revisions to both RULLCA and the California Revised Uniform Limited Partnership Act (RULPA), which is similar to RULLCA, but deals with partnerships instead of LLCs. These revisions are designed to resolve ambiguous and inconsistent language that the PLLC Committee has noticed since the enactment of RULLCA. State lawmakers have also introduced legislation that would modify the provisions of RULLCA related to indemnification, unanimous consent and many similar issues.

With the enactment of RULLCA and potential shifts in the law that could yet occur, it is important to review your LLC's operating agreement and other vital documents at regular intervals. Yearly, and possibly even twice yearly, reviews are a prudent course of action that all LLCs should consider.

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