CALIFORNIA — Proposed changes to California’s statute governing limited liability corporations, or LLCs, could be advantageous for new businesses — and it may nudge the state in a more business-friendly direction — but both new and existing companies will need to look at the terms closely in order to benefit, attorneys said.
Already a popular form of governance and business structure, the LLC statute will change in several significant ways starting in January 2014. Chief among the changes is the adoption of the Revised Uniform Limited Liability Company Act, which was signed by Gov. Jerry Brown in September and replaces the Beverly-Killea Limitied Company Act.
The new act is far more flexible in the way it permits business owners forming an LLC chiefly because it honors previously agreed upon contracts, both written and oral, much more so than under the previous Beverly-Killea Act, which essentially treated LLCs the same way it did corporations, according to Sam Dibble, chair of Farella Braun +Martell’s Business Transaction Group, which has offices in San Francisco and St. Helena.
“It leans more heavily on the ability of parties to enter into a contract on how (the LLC) is run,” Mr. Dibble said. “That’s the general trend. It takes out some of the more formulaic arrangements. The old California act didn’t defer so much to the members; it actually imposed a number of provisions much like the corporate approach.”
The revised act brings California in line with other states, notably Idaho, Iowa, Nebraska and Wyoming in adopting more favorable terms, even if they’re slight, for LLCs, according to State Bar of California’s Business Law Section.
While California still has several unique provisions governing LLCs that might be viewed as a touch cumbersome, the changes will be appealing for small and family businesses looking to afford themselves more protection and flexibility, said James Haskell, an attorney with Napa-based Gaw Van Male.
“The bottom line is if you liked LLCs before, you’ll like them more so now,” said Mr. Haskell, whose practice areas include business, estate and tax planning. The new changes, he added, “respect the written agreement, and that helps members decided what business to get into. It emphasizes the written contract.”
The LLC approach is common for a number of industries, but is particularly popular with smaller business such as independent wineries or vineyards, restaurant groups or rental properties, Mr. Haskell said.
Despite the anticipated flexibility afforded to businesses forming an LLC, there are potential pitfalls if plans aren’t explicit, particularly for already established LLCs, both Mr. Dibble and Mr. Haskell said.
There is no grace period for implementation, and it will apply equally to new and existing LLCs. That means existing businesses should, at a minimum, review their existing contracts and provisions, attorneys said.
Additionally, the new act changes provisions to how an LLC can conduct the process of a merger or acquisition, a potentially key aspect of the law for much of the region’s wineries and vineyards, which are increasingly acquisition targets.
Mr. Dibble said unless the owners control 90 percent or more of an LLC, M&A matters might get more complicated under the new act.
“There’s what is commonly referred to as the 50-90 rule,” he said. “If you’re doing an affiliated party merger, some special rules apply unless you own more than 90 percent. If you’re between 50 and 90 percent, where there’s a controlling group, (a merger or acquisition) requires a unanimous vote — and a unanimous vote is almost impossible.”
A provision in the new law makes it clear that LLCs cannot change the vote requirement, regardless of what might have been agreed upon, according to Mr. Dibble.
“It’s clear that LLCs are going to have to deal with the 50-90 rule and that can be challenging,” Mr. Dibble added.
Accordingly, already established LLCs should take the opportunity between now and January to make sure their agreements address the issue.
Another more favorable development of the new act is in how it can incorporate third-parties into an agreed-upon contract, Mr. Haskell said, particularly for matters related to mergers and acquisitions and disassociation.
“New LLCs also have the opportunity to have classification of members,” Mr. Haskell said. “Now you can be a member without an equity interest.”
Mr. Dibble echoed that notion. “You can now have the requirement from not just members to change terms, but a third-party like a bank. They can actually require that you point into your agreement that third-party consent is allowed. It didn’t permit that before. That’s the idea — to the extent that you’re moving to a more contractual mode, more freedom is better.”
While the new act is largely viewed as a favorable change, it doesn’t go into effect until 2014. The previous Beverley-Killea Act will remain in effect until then, and as such could become a source of confusion, particularly if operating agreements are changed without taking into account the forthcoming changes in January. But if measures are taken to prevent that, the new LLC could be more attractive, Mr. Haskell said.
“It’s going to be the entity of choice of the vast majority of new entities,” he said. “It’s not a complete paradigm shift, but it changes in good direction both in terms of universality and catering to business owners just a little more.”
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