Pub. 2 2014 Issue 3

Winter 2014 11 E ffective January 1, 2014, all California limited liability companies, including those already in existence, became subject to the newly enacted California Revised Uniform Limited Liability Company Act, popularly known as “RULLCA.” Much of the substance of RULLCA is similar to the current law in effect in California which governs limited liability companies, but there are a number of substantive changes. RULLCA furnishes more detail regarding the withdrawal of an LLC member from the LLC (including the death of the member) and the consequences of such withdrawal. It also modifies the default member voting rights. The newact adds detailed provisions concerningwhich sections of the law can be, andwhich cannot be, overridden by the operating agreement. One of the primary characteristics of a limited liability company, and one of its potential advantages over a corporation, is flexibility in the structure of the entity and the relative rights and responsibilities of the members and, if manager-managed, the manager and the members. While the structure of a corporation is for the most part dictated by the California Corporations Code (the“Code”), the rules for limited liability companies under the Code are in most instances subject to modification in the “operating agreement” of the company. While both the old California limited liability company act and RULLCA provide for certain issues which are not subject tomodification in the operating agreement, or are subject to modification only under certain circumstances, RULLCA has made changes which could well impact existing companies. One of the more significant aspects of RULLCA is the modification of rules concerning the fiduciary duties of members and managers. Although it preserves the standard in existing law governing the duty of care (essentially, a gross negligence standard), it adds detailed provisions regarding the duty of loyalty. The rules regarding the duty of loyalty relate to 1) the duties owed by members to the company and one another in the case of a mem- ber-managed LLC, and 2) the duties owed by the manager and the members to the company and the other members in the case of a manager-managed LLC. While the fiduciary duties of a manager to the company and to the members may be modified, they may only be modified in a written operating agreement with the informed consent of the members. Merely assenting to the operating agreement does not constitute informed consent. In a member-managed LLC, each member must account to the company and hold as trustee for the company any property, profit, or benefit derived in the conduct of the activities of the company, including the appropriation of a company opportunity. The member must also refrain from dealing with the company as or on behalf of a party having an interest adverse to the company, and refrain from competing with the company in its activities. In a manager-managed LLC, the obligation of good faith and fair dealing applies to both the manager and the members. However, only the manager must account to the company and hold as trustee for the company any property, profit, or benefit derived in the conduct of the activities of the company, including the appropriation of a company opportunity. And only the manager must refrain from dealing with the company as or on behalf of a party having an interest adverse to the company, and refrain from competing with the company in its activities. While the operating agreement may not eliminate the duty of loyalty, it may: 1. Identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable, and 2. Specify the number or percentage ofmembers thatmay authorize or ratify, after full disclosure to all members of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty. The operating agreement further may not unreasonably reduce the duty of care (as defined elsewhere in the Code) or eliminate the obligation of good faith and fair dealing (as defined elsewhere in the Code), although it may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable. RULLCA does, however, authorize the operating agreement to relieve members and managers from liability for money damages arising from breach of duty, subject to specific limitations. What does this mean to your California limited liability company? It is likely a good idea to have your operating agreement reviewed, particularly with regard to member voting rights, any rights regarding competition with the business of the LLC, the effect of the death of a member, and the indemnities provided to managers and members. It is possible that the provisions of RULLCA could, just by its enactment, alter the terms of your agreement. Nancy C. Ferruzzo, AV Preeminent®, with an M.B.A. in taxation and 30 years of tax experience, acts as a resource for all of the practice areas of the law firm of Ferruzzo & Ferruzzo, LLP. In her primary practice area of business transactions, her tax advice has saved clients millions of tax dollars with sophisticated acquisition and joint venture structures. Her expertise with limited liability companies and complex partnership tax issues has also enabled successful transitions of many businesses from one generation to the next with minimal tax consequences. California’s New Limited Liability Company Act By Nancy C. Feruzzo, Ferruzzo & Ferruzzo, LLP