California revised uniform limited liability company act

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California’s Revised LLC Act – Default Rules to Know
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A Summary of the California Revised
Uniform Limited Liability Company Act

  1. The Operating Agreement is supreme. Under the Revised Act if there is a conflict between the Articles of Organization and the Operating Agreement, the Operating Agreement will control. This reverses prior law, except to the extent that a third party has relied on the Articles.
  2. Contributions. The Revised Act allows for a member’s contribution into the LLC to be “any benefit” to the company, whereas prior law required a member’s contribution to satisfy a legal standard in terms of sufficiency.
  3. Manager-managed LLC requires express language. The Revised Act requires that a manager-managed LLC (1) specifically state that it is a manager-managed LLC and (2) that the Operating Agreement contain language such as “manager-managed,” “managed by managers” or that management powers are “vested in managers.” If this language is not in the Operating Agreement, the LLC will be a member-managed LLC.The Revised Act defines “Manager” as “a person that… is responsible, alone or in concert with others, for performing the management functions stated in Section 17704.07(c).” A Manager is not a “manager” if the LLC is a member-managed LLC. .
  4. Default Rules for Manager-Managed LLCs. The default rules for manager-managed LLCs are that (1) each manager has equal rights in management, (2) differences between members will be decided by a majority of the managers, and (3) any matter relating to the LLC’s activities will be decided by the managers, with certain exceptions. These exceptions are that unanimous consent of the members of the LLC is required for sale/lease of all or substantially all of the LLC’s assets, mergers and conversions, acts outside the ordinary scope of business and amendment of the Operating Agreement.
  5. Default Rules for Member-Managed LLCs. The default rules for a member-managed LLC are that (1) the members have the right to conduct the business of the LLC, (2) members have equal voting rights, and (3) matters in the ordinary scope of business are determined by a majority of the members, while matters outside the ordinary scope of business are determined by unanimous consent.
  6. Non-Economic Member. The Revised Act allows for a person to become a member of an LLC without having a transferable interest and without being required to make a contribution to the LLC.
  7. Third Party Approval for Amendments. The Revised Act allows for amendments of the Operating Agreement that require the approval of a third party and/or the satisfaction of a condition to be effective. If such a provision is contained in the Operating Agreement and not complied with, the Revised Act renders the amendment ineffective.
  8. Distributions. Distributions are improper if they render an LLC incapable of paying its debts and reduce the LLC’s assets below its liabilities. Members can be liable for accepting distributions which they knew were improper, but not if the member had no authority to consent to such a distribution.
  9. Transfer of Interest. A transfer of a membership interest occurs when there is pledge or grant of a security interest in the transferable interests. An LLC does not have to provide any rights to the transferee until the transferee is notified of the transfer. The transfer of any interest that violates any restrictions regarding transfers in the Operating Agreement will be ineffective if the transferee had notice of the restriction. Also, any member who transfers 100% of such member’s interest will be treated as a transferee under the Revised Act and can be dissociated by the other members.
  10. Dissociation of Members. A person transferring 100% of his/her interests in an LLC can be “dissociated” from the LLC (i.e. withdrawn as a member). Dissociation can also occur when certain events happen, such as expulsion of a member, death, and the appointment of a guardian/conservatorship. A dissociated person loses the right to participate in the company and immediately prior to the dissociation he/she will be treated as a “transferee.” As a transferee, his/her right to participate as a member terminates, he/she has no rights to vote, he/she will have limited access to company information and he/she will have no rights to sue for dissociation. No fiduciary obligations are owed to a dissociated member.
  11. Fiduciary Duties. The Revised Act expands upon a member’s fiduciary obligations, including the duty of care and duty of loyalty. For example, the duty of care cannot be unreasonably reduced in the Operating Agreement and the Operating Agreement can specify activities that do not violate the duty of loyalty.
  12. Indemnification and Damages. The Operating Agreement can eliminate or modify indemnification of members and managers. It may eliminate a member or manager’s liability to the LLC and other members for money damages, except where such damages are the result of a breach of loyalty, excessive distributions, intentional harm and/or criminal conduct by the member/manager or where such member/manager received financial benefits to which they are not entitled.In addition to these default rules, Members and Managers of LLCs should be aware that Operating Agreements are prohibited from modifying certain provisions of the Revised Act, including those concerning mergers and conversions. Members and Managers may wish to have counsel review their current Operating Agreements and determine if any amendments should be made due to the Revised Act.

“This information is for educational purposes only and not intended to constitute legal advice. Every project and property is unique. Please seek legal counsel for advice specific to your project.”