A New Year’s Resolution for Your LLC?

January 10, 2014

Making a list of New Year’s resolutions for your limited liability company (LLC) might seem odd but there is one that no LLC should ignore in 2014:  Taking a look at your operating agreement.

 Limited liability companies have become a very popular choice for small business.  Highly flexible and adaptable, LLCs allow for a structure that can provide liability protection as well as benefits for succession and tax planning.  On January 1, 2014, the Beverly-Killea Limited Liability Company Act was repealed and replaced by the California Revised Uniform Limited Liability Act (or “RULLCA”).  RULLCA is intended to apply to all LLCs after January 1, 2014.  Unfortunately, the new act has quite a few inconsistencies and ambiguities.  It is unclear whether the new law is supposed to apply to existing operating agreements, amendments to existing agreements, or just new operating agreements.  A “technical corrections” bill is pending, but a prudent LLC should consider the new act applicable until otherwise indicated.

  RULLCA has not received a great deal of attention because the basic structure of the LLC has not changed and many revisions appear to be superficial.  As with so many things in law, small changes can have significant unintended consequences.

 The new act greatly expands the meanings of “operating agreement”.  The operating agreement is the document that defines the rights and obligations of the LLC’s owners.  When most people think of a binding agreement, they think of a formal written document signed by all parties.  Under RULLCA, an operating agreement could be expanded to include emails and other informal communications, including oral communications.  That could come as quite a surprise to many owners, particularly since most of us don’t consider our emails to be a binding agreement.  If you don’t already have a written operating agreement, you should strongly consider adopting one.

 Another change is the approval required for some “major transactions.”  Under the old law, the default for many decisions was the consent of the majority of the ownership interest.  Many current operating agreements assume that the statutory default is majority consent and do not specifically address the consent required for the sale of all of the assets or a change to the operating agreement itself.  However, under the new act, these decisions as well as others now require unanimous consent of ALL of the members unless otherwise specifically stated in the operating agreement.

 There are also significant changes regarding the ability of management to limit fiduciary duties and limit or eliminate indemnification and liability for damages in certain circumstances.  RULLCA also contains detailed provisions specifying which provisions can and CANNOT be changed by the operating agreement.  There are also other changes under RULLCA that may impact your LLC.

 2014 can be an exciting time for the prosperity and expansion of your LLC.  To ensure that there are no unintended consequences regarding management and operations, you should discuss with your legal adviser whether your operating agreement conforms to the new act.

 This Article originally appeared in the January 2014 Edition of the Santa Paula Chamber News.