Legislation on Track to Repeal and Replace California LLC Act*

By: Will Marshall

On February 14, 2011, California’s SB 323 was introduced in an effort to update California’s Beverly-Killea Limited Liability Company Act. In its latest form, on January 1, 2014, the current Act would be repealed and replaced by a new “California Revised Uniform Limited Liability Company Act.” The new Act would introduce a variety of changes such as allowing implied and oral operating agreements, the ability for an organizer to create a type of shelf LLC, and the creation of potential personal liability for filing inaccurate information with the secretary of state. Initially, the bill would have applied to new LLCs on January 1, 2014, and retroactively to all California LLC’s on January 1, 2016. This raised constitutional issues of impairment of contracts especially given that the current Act failed to include a provision allowing modification of the act as is customary. Apparently in an effort to address concerns, legislators recently amended the bill to provide a more complex implementation structure. As amended, the bill would make the new act apply to all LLCs existing on or after January 1, 2014, and to all “acts or transactions by [an LLC] occurring, or contracts entered into, on or after January 1, 2014.” All such acts, as well as “any vote or consent by the managers or members” occurring before January 1, 2014, would be governed by the Beverly-Killea Act notwithstanding that the bill would repeal the Act on that date. See proposed Corporations Code Sections 17713.04(a) and (b). The initial bill raised alarming issues concerning retroactive application of a new act to existing LLCs, which would be expected to result in costly reviews and redrafting of the operating agreements or worse, unforeseen outcomes. The recent amendment compounds the problem by adding an even less workable implementation scheme. For example, it is unclear how exactly how, in a given situation one would apply the new act to the LLC itself and the old Act to the “acts or transactions” of the LLC or to a “vote or consent” of its managers and members. Nor is it clear how amendments to an operating agreement post January 1, 2014, for an LLC existing prior to that date would be interpreted. Despite these and other issues, the current bill passed the Assembly on August 20, 2012, by a 77 to 0 vote and has been ordered to the Senate.

*Originally published in the September 2012 issue of the San Diego County Bar Association’s Bar Report