United States: Implications Of The New California LLC Act

Last Updated: June 13 2014
Article by Brandon E. Barker and Elizabeth A. Willes

On January 1, 2014, a new law governing limited liability companies ("LLCs") went into effect in California. The California Revised Uniform Limited Liability Company Act ("RULLCA")1 superseded in its entirety the prior limited liability company act in California, the Beverly-Killea Limited Liability Company Act (the "Prior Act"), and enacted numerous substantive changes to the Prior Act's governance of LLCs. Although the Prior Act continues to govern agreements, including operating agreements, entered into by LLCs and their members and managers prior to January 1, 2014 (together with votes or consents by members or managers prior to such date), RULLCA provides that any acts taken by an LLC or its members or managers on or after January 1, 2014 will be governed by RULLCA rather than the Prior Act. Although not explicit in RULLCA, the new law implies that the votes or consents by members or managers after January 1, 2014 are governed by RULLCA, not the Prior Act. Consequently, RULLCA does impact pre-2014 operating agreements and may significantly modify the rights and obligations of members and managers on and after January 1, 2014.

Of particular concern in RULLCA are certain rules which apply by default to LLCs absent express provisions in the LLC operating agreement. For example, one such default rule requires unanimous member approval for amendments to operating agreements; the Prior Act's default rule required only the majority of the interests of the LLC. Given this default rule, operating agreements should be clear on the voting threshold for amendments to the operating agreement or an LLC risks having members with small interests retaining veto power over the will of the majority.

Many, but not all, of RULLCA's default rules may be overridden by the operating agreement, if the operating agreement is drafted correctly.

Some of the key substantive revisions to California LLC law imposed by RULLCA and the practical implications of those revisions are summarized below.

LLC Management and Authority of Managers

Under RULLCA, an LLC will be member-managed by default. To create a manager-managed LLC, both the articles of organization and the operating agreement must explicitly state such structure.2 Since the Prior Act permitted the establishment of a manager-managed LLC by a statement to that effect solely in the articles of organization, managers should review these organizational documents to confirm that the designation is clear in both documents.

The Prior Act included only a few default rules concerning when a manager of a manager-managed LLC would need to obtain the consent of members prior to taking action; however, RULLCA expands the consent rights of members in such situations. Specifically, RULLCA includes a requirement that the consent of all members in a manager-managed LLC is required to (i) sell, lease, exchange, or otherwise dispose of all, or substantially all, of the LLC's property, with or without the goodwill, outside of the ordinary course of the LLC's activities; (ii) approve a merger or conversion; (iii) undertake any activity outside of the ordinary course of the LLC's activities; or (iv) amend the operating agreement. The foregoing requirements may be overridden in a written operating agreement.

If an operating agreement created under the Prior Act provides that approval by members (whether all of the members or a majority of the members) is required only for those actions specifically set forth in the operating agreement, the manager would likely retain the same powers despite RULLCA's default rules. Nonetheless, managers of a California LLC, particularly an LLC with multiple members, should review and amend operating agreements as needed to enumerate those actions which require the consent of all or a majority of the members and those that do not, especially those actions which would otherwise be subject to RULLCA's default rules. Further, consideration should be given as to whether the operating agreement sufficiently defines the matters that are within the "ordinary course of the LLC's activities," a nebulous term that could serve as a potential source of conflict between managers and members. In short, the delegation of powers to a manager (and the limitations to such powers) should be specified in the operating agreement.

Fiduciary Duties

Unlike the Prior Act, RULLCA is specific about the fiduciary duties owed by members (in a member-managed LLC) and managers (in a manager-managed LLC) and the limitations on modifications to such duties, which include the duty of loyalty, the duty of care, and the duty of good faith and fair dealing.3 Specifically, (i) the duty of loyalty cannot be eliminated, but an operating agreement may identify activities that do not violate the duty of loyalty, provided the activities are not manifestly unreasonable; (ii) the duty of care cannot be eliminated or unreasonably reduced; and (iii) the duty of good faith and fair dealing may be modified as long as the new standards are not manifestly unreasonable.

RULLCA provides that the fiduciary duties of a manager may be modified only by a written operating agreement with full disclosure and the "informed consent" of the members.4 RULLCA clarifies that informed consent of a member differs from a member who is deemed to consent to the operating agreement when such party becomes a member of an LLC. Thus, an LLC that elects to modify the default fiduciary duties imposed by RULLCA should determine the appropriate actions necessary to be able to demonstrate that informed consent of the members was obtained. Additionally, if modification of the fiduciary duties is intended, the modifications should be targeted and the operating agreement should specifically authorize certain actions that might otherwise be viewed as conflicting with the duty of loyalty (e.g., engaging in a competing business venture) or the duty of care (e.g., permitting the delegation of certain manager duties to officers or agents).


The Prior Act provided that an operating agreement may provide for the indemnification of any person acting on behalf of the LLC. Conversely, RULLCA's default rule is that the LLC must indemnify members of member-managed LLCs and managers of manager-managed LLCs, provided that members and managers, as the case may be, comply with their statutory duties.5 As a result, if a pre-2014 operating agreement does not sufficiently address the indemnification of members and managers, RULLCA could alter the expectations of members and managers within the operating agreement.

RULLCA's default rule may be overridden in a written operating agreement, except with respect to (i) breaches of the duty of loyalty, (ii) receipt by such party of a financial benefit to which such party was not entitled, (iii) liability for excess distributions, (iv) intentional inflictions of harm on a person or the LLC, and (v) intentional violations of criminal law.6


Under RULLCA, certain events now automatically result in a member's disassociation: (i) the death of a member who is an individual; (ii) in a member-managed LLC, the appointment of a guardian or conservator for an individual who is a member; (iii) in a member-managed LLC, a judicial order that a member who is an individual is incapable of performing the member's duties; and (iv) in a member-managed LLC, the member becomes a debtor in bankruptcy.7

Upon disassociation, the member's status is converted to that of a transferee who retains economic rights, but loses all rights to participate in the management of the LLC or retain information concerning the LLC other than a right to an accounting from the date of disassociation. Further, a disassociated member who is also serving as a manager is automatically removed as manager.8 Lastly, unlike the Prior Act, RULLCA is silent about whether a member who disassociates is entitled to payment for the member's interest in the LLC. Thus, unless the operating agreement addresses this situation, a disassociating member may have an argument for entitlement to payment for his or her interest in the LLC. The foregoing default rules should be addressed and modified in operating agreements (or amendments to same) as desired by the members.

Foreign LLCs

Although RULLCA provides that the statute applies to both domestic and foreign LLCs as of January 1, 2014,9 it also provides that the law of the state in which an LLC is formed governs, among other matters, the "internal affairs" of the LLC and the "management authority" of the members and managers of the LLC.10 One reading to synchronize those potentially contradictory provisions is to interpret California law as applying to all aspects of an LLC not otherwise specifically carved out in Section 17708.01(a) of the Code.11 Even if that reading proves accurate, it is still unclear which aspects of the LLC would be governed by California law. For example, which components of an LLC's operation constitute "internal affairs"? As currently constituted, RULLCA is opaque concerning its application to foreign LLCs. This ambiguity is troubling in many ways. Where parties prefer the use of Delaware law to govern their LLCs, manager authority and limitations on fiduciary duties, among other matters, could be impacted by the confusion of which state law is applicable.

The language in RULLCA has some similarities to Section 2115 of the Code, which deals with foreign corporations, but Section 2115 is clearer about which state law is applicable and requires a certain number of contacts to permit California law to extend to foreign corporations. Interpretation of the internal affairs doctrine, another choice of law rule applicable to corporations, may also lend some guidance. Ultimately, further clarity will be needed to determine if a set of provisions similar to Section 2115 and/or the internal affairs doctrine applies to RULLCA. To address this issue, one approach may be to include in the operating agreement of a foreign LLC a list of all of the matters deemed to be the "internal affairs" of the LLC; however, one concern with that approach is that if a particular matter is not listed, it could be interpreted as falling outside the scope of "internal affairs." Another approach may be to state that the operating agreement governs the internal affairs of the LLC and the authority of its members and managers, as the case may be, and to provide that all of the matters set forth in the operating agreement are to be considered the "internal affairs" of the LLC. With either approach, the operating agreement should provide that the members waive the application of any other jurisdiction other than the foreign jurisdiction of the LLC to the fullest extent permitted by law.


RULLCA requires reimbursement of members and managers for expenses incurred on behalf of the LLC unless such expenses violate any fiduciary duties.12 The Prior Act merely permitted such reimbursement. This default rule should be overridden as required under the operating agreement if LLCs would prefer that such reimbursement not be mandatory or prefer that reimbursement otherwise be subject to certain conditions.


RULLCA makes substantive changes to the law governing LLCs in California. If the operating agreement of an LLC does not sufficiently address the modifications and more expansive default rules codified by RULLCA, the rights and obligations of members and managers could be altered by RULLCA in a manner that conflicts with or overrides the intentions of the operating agreement.

In light of these changes, operating agreements of California LLCs in effect prior to January 1, 2014 should be reviewed, and perhaps amended, to address the impact RULLCA may create on existing contractual arrangements. Additionally, existing California LLCs may weigh the possibility of converting the entity to another domicile, such as Delaware; however, as discussed above, changing the domicile of a California LLC to another state will not completely take the LLC beyond the reach of RULLCA.

Further, prior to creating a new LLC, an examination of RULLCA should be undertaken to determine the best approach to address RULLCA's default rules in the operating agreement, or, alternatively, to determine if organization of the LLC in another state is a more prudent approach.


1 Codified at Section 17701.01 et. seq. of the California Corporations Code (the "Code").

2 See Section 17704.07 of the Code.

3 See Section 17704.09 of the Code.

4 See Section 17701.10(e) of the Code.

5 See Section 17704.08 of the Code.

6 See Section 17701.10(g) of the Code.

7 See Section 17706.02 of the Code.

8 See Section 17706.03 of the Code.

9 See Section 17713.04 of the Code.

10 See Section 17708.01 of the Code.

11 Section 17708.01(a) of the Code reads as follows: "The law of the state or other jurisdiction under which a foreign limited liability company is formed governs all of the following: (1) The organization of the limited liability company, its internal affairs, and the authority of its members and managers. (2) The liability of a member as member and a manager as manager for the debts, obligations, or other liabilities of the limited liability company."

12 See Section 17704.08 of the Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Brandon E. Barker
Similar Articles
Relevancy Powered by MondaqAI
McLane Middleton, Professional Association
Archer & Greiner P.C.
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
McLane Middleton, Professional Association
Archer & Greiner P.C.
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions