"CRULLCA" NOW EFFECTIVE FOR LIMITED LIABILITY COMPANIES

With each new year comes a flood of new laws taking effect in California. This year's flood brings with it an overhaul of the Corporations Code statutes governing the organization and operation of limited liability companies ("LLCs") in California. The California Revised Uniform Limited Liability Company Act ("CRULLCA") repeals and replaces California's 1994 enactment of the Beverly-Killea Limited Liability Company Act, and its provisions now govern all LLCs operating in the State without any "opt in" or "opt out" procedures for existing LLCs.

In the nearly 20 years since the enactment of the Beverly-Killea LLC Act, LLCs have become popular vehicles for businesses and investments across the United States and each state has passed its own LLC statutes—many of these later statutes based upon the Uniform Limited Liability Company Act (the "1996 Uniform Act") adopted by the National Conference of Commissioners on Uniform State Laws (the "Uniform Laws Commission"). In order to facilitate the multi-state operation of LLCs and increase uniformity of regulation, the Uniform Laws Commission superseded the 1996 Uniform Act with a Revised Uniform Limited Liability Company Act ("RULLCA"). In adopting CRULLCA, the California legislature approved RULLCA's comprehensive update of LLC regulation, but retaining certain aspects of the Beverly-Killea LLC Act addressing California public policy concerns.

CRULLCA is codified as new Title 2.6 of the Corporations Code at sections 17701.01 to 17713.13, and formally took effect for all existing and future LLCs on January 1, 2014. Much of CRULLCA is similar to current law. As under current law, an LLC is formed by filing articles of organization with the Secretary of State and the relative rights and obligations of the LLC's members are set forth in an operating agreement or, to the extent not set forth in an operating agreement, by the default rules set forth in CRULLCA.

In brief, CRULLCA does the following:

• adds detailed rules regarding the agency and fiduciary duties of members and managers under both member-managed LLCs and manager-managed LLCs, including that members in member-managed LLCs and managers in manager-managed LLCs will be subject to the duty of loyalty and the duty of care which prohibit, among other things, such persons from in any way competing with the LLC and/or appropriating LLC opportunities—current LLCs should review their operating agreements regarding these duties and consider whether amendments are appropriate;
• confirms that a member has the right to withdraw or dissociate from an LLC at any time, however the member may be liable for damages on a wrongful dissociation. This area of law was not well developed in the Beverly-Killea LLC Act and current operating agreements may need to be amended accordingly;
• establishes a more robust set of default rules that apply to LLCs unless modified by an operating agreement. To ensure that such default rules do not unknowingly come into play, current LLCs are encouraged to have operating agreements addressing all significant governance matters; and
• preserves a number of provisions unique to California LLC law, including the prohibition of professional services LLCs, the right of minority members to seek judicial dissolution, dissenter's rights in connection with certain LLC transactions, and monetary penalties for the failure of the LLC to maintain at its office statutorily required information, documents and tax returns.

With this enactment, California joins Florida, Idaho, Iowa, Nebraska, New Jersey, Utah, Wyoming and the District of Columbia as adopters of RULLCA. As more states adopt RULLCA, the benefits of uniformity (including reduced compliance costs, streamlined administration and consistent governance across jurisdictions) will become more apparent. California LLCs should evaluate their operating agreements with corporate counsel to ensure appropriate conformance with the new statute's more comprehensive approach to LLCs and their operations.