BILL ANALYSIS Ó SB 323 Page 1 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 SB 323 Page 2 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. SB 323 Page 3 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.) SB 323 Page 4 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 SB 323 Page 5 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 SB 323 Page 6