Are you a member of a California LLC? Are you aware there is a new law taking effect in January that will make dissolving the entity much easier than in the past? DeAnn Chase of Chase Law Group explains the new law and its effect on the dissolution process beginning in 2017. Below is her article from their newsletter I received last week.
January will ring in more than just resolutions for California's business owners. A new law is set to change the conditions under which a limited liability company may dissolve - and this could have a major positive impact on small businesses and entrepreneurs alike.
A California LLC is a business entity that provides personal liability protection, if maintained properly, without as much paperwork and annual maintenance as a corporation. We generally recommend LLC structures to our small business owner or entrepreneur clients because the structure is much more manageable over the lifetime of the business. Of course, every situation is different and there are times when the corporation is required by law or the client's long time goals for the business are better suited for a corporation.
Unless the members of the LLC have agreed otherwise in writing, the current law requires that majority of LLC members agree to a dissolution of the entity. The new law will be of particular significance to LLCs that are owned "50-50" as this ownership structure inherently leads to deadlocks between disagreeing partners. Under the current law, in the absence of a written operating agreement that provides an adequate mechanism for breaking a deadlock, the only way out of a deadlocked LLC partnership is litigation.
The current law creates issues in the event the owners of the LLC never put their agreement in writing and then subsequently come to a disagreement over the operations of the LLC. (In the absence of a written operating agreement, the LLC statutes govern the relationship between the LLC members.) In addition, many existing operating agreements provide for dissolution by a vote of the majority of the LLC members because that has been the law.
In essence the new law will:
- Permit an LLC to dissolve with 50% or more of the voting interests rather than a majority; and*
- Permit an LLC to cancel the articles of organization with 50% or more of the voting interests of the members or majority, rather than a majority of those voting interests (if there aren't any members or managers in the business, then an LLC may cancel the articles of organization with 50% or more of the persons signing the articles of organization).
The sponsors of the bill, The Conference of California Bar Associations, stated this of the new law, "AB 1722 would harmonize the LLC dissolution statute with the corporate voluntary dissolution statute to require only 50 [percent] of the voting power of the LLC's member to initiate voluntary dissolution under default circumstances. If the members wish to require a higher voting percentage to [a]ffect dissolution, they may still do so through the LLC's articles of organization or operating agreement.
The reality of small business creation is that many are formed without the advice of counsel due to the rise in online options. The entrepreneurial spirit that fuels small businesses generally leads to the haphazard formation of business entities that result in unnecessary angst and litigation because the expectations of the partners are not clearly spelled out in writing while the parties are still cordial.
Soon LLC members can contour their operation agreements in a manner that suits them best while eliminating the dread of a hostile dissolution. If you or someone you know is interested in reviewing their current LLC structure, or are looking to form an LLC in the New Year, please let us know. Mention this newsletter article, and the consultation is free!
If you'd like to contact DeAnne, you can reach her at 310-545-7700, www.chaselawmb.com, or deannc@chaselawmb.com.
Photo courtesy of canva.com/Unsplash
