BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 323
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          Date of Hearing:  August 28, 2012

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                Bob Wieckowski, Chair
                    SB 323 (Vargas) - As Amended:  August 23, 2012

                    PROPOSED CONSENT (As Proposed to be Amended)

           SENATE VOTE  :  37-0
           
          SUBJECT  :  CALIFORNIA REVISED UNIFORM LIMITED LIABILITY COMPANY 
          ACT

           KEY ISSUE  :  SHOULD CALIFORNIA ENACT THE REVISED UNIFORM LIMITED 
          LIABILITY COMPANY ACT WHICH RECASTS AND REORGANIZES THE EXISTING 
          Beverly-Killea Limited Liability Company Act? 

           FISCAL EFFECT  :  According to Assembly Appropriations Committee, 
          the Secretary of State will incur one-time special fund costs of 
          around $90,000 to revise forms and materials on its website and 
          for staff training regarding the revised provisions governing 
          limited liability companies (Business Fees Fund).

                                      SYNOPSIS
          
          This bill, sponsored by the Partnerships and Limited Liability 
          Companies Committee of the Business Law Section of the State 
          Bar, enacts the California Revised Uniform Limited Liability 
          Company Act (CRULLCA) in place of the Beverly-Killea Limited 
          Liability Company Act.  A limited liability company (LLC) is a 
          hybrid between a corporation and a partnership.  An LLC 
          generally has the characteristics of a partnership for 
          operational and taxation purposes, but its members enjoy the 
          immunity provided by a corporation to its shareholders for 
          contract debts or tort liability.  This bill replaces the 
          Beverly-Killea with a modified version of the Revised Uniform 
          Limited Liability Company, which recasts provisions governing 
          the formation and operations of LLCs.  

          The most recent amendments to the bill deleted a provision from 
          the Unemployment Insurance Code, which provided that an 
          "employee" does not include any member of an LLC that is treated 
          as a partnership for federal income tax purposes.  CalTax and 
          others have raised concerns that the repeal of this provision 
          will create conformity issues between state and federal payroll 








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          tax requirements and will result in compliance difficulties for 
          LLCs.  As a result, the author proposes to remove the 
          provision's repeal from this bill.  There is no opposition to 
          the bill as proposed to be amended.

           SUMMARY  :  Enacts, as of January 1, 2014, the CRULLCA.  
          Specifically,  this bill  :

          1)Repeals, as of January 1, 2014, the Beverly-Killea Limited 
            Liability Company Act and enacts the CRULLCA which recasts 
            provisions governing the formation and operation of LLCs.  

          2)Distinguishes between a manager-managed limited liability 
            company and a member-managed limited liability company for 
            purposes of defining the scope of a member's agency and 
            limiting fiduciary duties of members who are not in control of 
            an LLC.

          3)Authorizes the Secretary of State to issue a certificate of 
            registration with respect to a foreign limited liability 
            company.  Provides for the filing of specified records and 
            provides that an individual who signs such a record affirms 
            under penalty of perjury that the information in the record is 
            accurate.

          4)Allows an LLC to be subject to the nonexclusive jurisdiction 
            of courts in another state and California or the exclusive 
            jurisdiction of California courts.  Allows a member to consent 
            to arbitration, as specified.

          5)Specifies when a member may be dissociated from an LLC and the 
            effects of dissociation on the member.

          6)Revises and recasts provisions relating to capital 
            contribution standards and liability of members, and regulates 
            the allocation of profits and losses, distributions of money 
            and property, withdrawal of membership, assignment of 
            interests, and dissolution of LLCs.  

          7)Provides that the CRULLCA applies to all foreign LLCs 
            registered with the Secretary of State whose registrations 
            have not been cancelled as of the January 1, 2014, to all 
            domestic LLCs existing on and after January 1, 2014, and to 
            all actions taken by the managers or members of such LLCs on 
            and after that date.








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          8)Provides that except as otherwise expressly provided, any vote 
            or consent by the mangers or members of an LLC prior to 
            January 1, 2014 in accordance with the prior law shall be 
            effective in accordance with the prior law and if any 
            certificate or document is required to be filed in any public 
            office of this state relating to such action, it may be filed 
            after the January 1, 2014 in accordance with the prior law.

          9)Provides that the CRULLCA does not cancel or otherwise affect 
            the status of, or create a new filing requirement with the 
            Secretary of State or any other agency, board, commission, or 
            department for, an LLC in existence on December 31, 2013, or a 
            foreign LLC registered to transact intrastate business in this 
            state prior to January 1, 2014.

          10)Provides that the CRULLCA may, at any time, be amended or 
            repealed.

           EXISTING LAW  :

          1)Authorizes, under, the Beverly-Killea Limited Liability 
            Company Act, the creation of, and governs the activities of, 
            (LLCs having one or more members.  (Corporations Code Section 
            17000 et seq.  Unless stated otherwise, all further statutory 
            references are to that code.)

          2)Requires an LLC to provide modifications to the operating 
            agreement, voting rights, meeting requirements, the election 
            or removal of managers, appointment of officers, and 
            indemnification in either the articles of incorporation or a 
            written operating agreement.  (Section 17005(b).)
           
           3)Provides that a manager's fiduciary duties may only be 
            modified in a written operating agreement with the informed 
            consent of the members.  (Section 17005(d).)

          4)Provides that all managers are agents of the LLC, and, unless 
            a manager has been designated, all members are agents of the 
            LLC, and managers and members acting on behalf of the LLC bind 
            the LLC, as specified.  (Section 17157.) 

          5)Provides that an LLC has enumerated powers, subject to any 
            limitations contained in the articles of organization.  
            (Section 17003.)








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          6)Provides penalties for the failure of a member to make 
            contributions to the LLC, and protects the rights of 
            third-party creditors of LLCs to seek equitable remedies and 
            maintains their rights under the Uniform Fraudulent Transfer 
            Act.  (Section 17201.)
             
           7)Provides that if the members of a foreign limited liability 
            company residing in California represent 25 percent or more of 
            the voting interests of members of an LLC, those members are 
            entitled to all information and inspection rights provided to 
            members of domestic LLCs.  (Section 17453.)

           COMMENTS  :  This bill, sponsored by the Partnerships and Limited 
          Liability Companies Committee of the Business Law Section of the 
          State Bar, repeals the Beverly-Killea Limited Liability Company 
          Act and, taking into account California's particular LLC 
          protections, replaces it with a modified version of the Revised 
          Uniform Limited Liability Company, which recasts provisions 
          governing the formation and operations of LLCs.

          An LLC is a hybrid between a corporation and a partnership.  An 
          LLC generally has the beneficial characteristics of a 
          partnership for operational and taxation purposes, but its 
          members enjoy the immunity provided by a corporation to its 
          shareholders for contract debts or tort liability.  The interest 
          of a member in an LLC is an economic interest, in the same 
          manner that a partnership interest or a corporate share is an 
          economic interest, that may be transferred under terms and 
          conditions provided by the LLC agreement, the partnership 
          agreement, or the corporate structure.

          California first recognized LLCs in 1994 with the enactment of 
          the Beverly-Killea Limited Liability Company Act, which provided 
          comprehensive provisions for the organization, management, and 
          dissolution of LLCs.  (SB 469 (Beverly), Chap. 1200, Stats. 
          1994.)  That same year, the National Conference of Commissioners 
          on Uniform State Laws approved the use of the Uniform Limited 
          Liability Company Act.  In 2006, after reviewing the development 
          of LLC laws across the states, the National Conference of 
          Commissioners on Uniform State Laws adopted the Revised Uniform 
          Limited Liability Company Act, which has since been enacted in 
          five states (Idaho, Iowa, Nebraska, Utah, and Wyoming) and the 
          District of Colombia.  This bill enacts a modified Revised 
          Uniform Limited Liability Company Act, taking in account 








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          particular provisions and protections already in California law.

           Author's Amendments  :  The most recent version of the bill 
          deleted a provision from the Unemployment Insurance Code, which 
          provided that an "employee" does not include any member of an 
          LLC that is treated as a partnership for federal income tax 
          purposes.  This provision had been added by SB 1244 (Walters), 
          Chap. 522, Stats. 2009, and sought to conform state and federal 
          payroll tax requirements with respect to LLCs.  According to 
          Cal-Tax, changing the definition of who is considered an 
          employee of an LLC in this context will mean that California 
          will no longer be in conformity with the federal check-the-box 
          entity classification rules for payroll tax purpose, "will wreak 
          havoc on LLCs and cause a whirlwind of compliance issues" for 
          LLCs as between the Employment Development Department and the 
          federal government.

          As a result, the author proposes to delete the repeal of that 
          Unemployment Insurance Code provision.  This is accomplished by 
          the following amendment:

               On page 163, delete lines 38-39.  Renumber remaining 
               sections of the bill.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support  

          Partnerships and Limited Liability Companies Committee of the 
          Business Law Section of the 
               State Bar (sponsor)
          Commission on Uniform State Laws

           Opposition (as proposed to be amended)

           None on file  


          Analysis Prepared by  :  Leora Gershenzon / JUD. / (916) 319-2334














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