All new companies should utilize written agreements outlining key matters such as personal liability, distribution of profits and managerial responsibilities, and how breach of contract will be handled in the event of a future dispute or lawsuit. However, these documents have different names and functions depending on the legal structure of the underlying business.
For example, only limited liability companies (LLCs) utilize operating agreements. Partnerships use partnership agreements, while S-Corporations and C-Corporations use articles of incorporation. While all of these documents share some basic similarities, operating agreements are designed for a different purpose than partnership agreements or articles of corporation. A well-crafted operating agreement should supply detailed provisions for matters like voting rights and management plans.
Because the operating agreement builds the foundation upon which virtually every aspect of the LLC will rest, it is absolutely critical for entrepreneurs and LLC managers and members to utilize clear and detailed documents which simultaneously comply with state and federal laws while protecting the financial interests of the business. The limited liability company lawyers of Bellatrix PC have extensive experience drafting tailored operating agreements on behalf of LLCs in a wide variety of industries. To arrange for a confidential legal consultation, call the law offices of Bellatrix PC today at (800) 449-8992.
RULLCA Update: New Laws for California Limited Liability Companies
All LLCs operating in California are required to establish formal operating agreements. This requirement is provided by Cal. Corp. Code § 17050(a), which states, “In order to form a limited liability company, one or more persons shall execute and file articles of organization with, and on a form prescribed by, the Secretary of State and, either before or after the filing of articles of organization, the members shall have entered into an operating agreement.” However, there have been some important legal updates to the process in recent years.
On January 1, 2014, California’s former Beverly-Killea LLC Act was replaced by the California Revised Uniform Limited Liability Company Act, more commonly known as RULLCA. RULLCA makes significant changes to the previous rules governing operating agreements in California, with which new and existing LLC managers and members must familiarize themselves. Note that existing LLCs may need to amend or modify operating agreements which were created prior to January 1, 2014 in order to be compliant with the new laws.
Some of the changes resulting from RULLCA are described below:
- Default Member Management – RULLCA makes all LLCs member-managed by default. If you wish to avoid automatically defaulting to management by members, then both your operating agreement and your articles of organization must include a clause explicitly restricting management by managers. This clause must be carefully worded in order for the LLC to avoid defaulting to a member management system. If your LLC is currently manager-managed, but your operating agreement and articles of organization do not include these clauses, prompt review by an experienced business lawyer is absolutely crucial.
- Modification of Fiduciary Duties – Under Beverly-Killea, LLC managers had the same fiduciary duties to their members as partners did to their partnerships. Under RULLCA, a manager’s fiduciary duties are further clarified, being categorized into three groups: good faith and fair dealing, the duty of care, and the duty of loyalty. In turn, the duty of loyalty is subdivided into three additional duties: the duty to avoid competition, the duty to avoid self-dealing, and the duty to account.
- Unanimous Member Consent – Under RULLCA, LLC managers are not permitted to take any actions which fall “outside the ordinary course of business” unless there is unanimous consent from all members of the LLC. These actions might include selling assets, proceeding with mergers and acquisitions or entity conversions, or making material changes to the operating agreement itself.
The above examples are by no means exhaustive or representative of all changes enacted by RULLCA. Regardless of whether you plan to start an LLC, or are already a member or manager of an existing entity, RULLCA compliance is always a must. Our business law attorneys will assess your current documentation for vulnerable points with our comprehensive business risk review, so that you can feel confident and secure.
What Should Be Included in an LLC Operating Agreement?
While all operating agreements inevitably share some core features, it’s important to emphasize that template-based, boilerplate operating agreements should be avoided at all costs. Prefabricated operating agreements will never provide the same degree of forethought as custom-made agreements, and usually cause more harm than they prevent – particularly in light of the recent changes under RULLCA. Bellatrix PC will listen to your goals, questions, plans, and concerns, and will help you prepare a unique agreement that aligns with your company’s practical needs.
With that in mind, any operating agreement should make sure to address the following points:
- Voting rights among LLC members.
- A management plan clearly establishing whether the LLC will be member-managed or manager-managed.
- Capital contributions from individual members.
- Procedures to be followed should a new member be admitted to the LLC, or in the event that a member decides to step down.
- How the company’s profits and losses will be distributed.
- What will happen to the LLC if a manager passes away or becomes severely disabled.
- How dissolution and going out of business will be handled.
If you’re thinking about starting an LLC in California, or if it’s time for a review of your LLC’s existing agreement, articles of organization, or other documents or policies, Bellatrix PC is here to help. To set up a private consultation, call our business attorneys today at (800) 449-8992.