Understanding the California Uniform Limited Liability Company Act

The California Uniform Limited Liability Company Act, officially cited as the California Revised Uniform Limited Liability Company Act, is the cornerstone of LLC operations within the state. This comprehensive title, enacted as part of the California Statutes, provides the legal framework governing the formation, operation, and management of limited liability companies in California. Understanding this act is crucial for anyone looking to establish or operate an LLC in California, ensuring compliance and leveraging the benefits this business structure offers.

This article delves into Article 1 of the Act, titled “General Provisions,” which lays the groundwork for the entire statute. We will break down each section within this article, providing clarity and context to the legal jargon, making it more accessible and understandable for business owners, legal professionals, and anyone interested in California LLC law.

Article 1. General Provisions: Laying the Foundation for California LLCs

Article 1 of the California Uniform Limited Liability Company Act encompasses sections 17701.01 through 17701.17. These sections define key terms, establish fundamental principles, and outline the scope of the Act. Let’s examine each section in detail:

Section 17701.01: Short Title – California Revised Uniform Limited Liability Company Act

This initial section is straightforward but important for legal citation and reference. It clearly states that the title can be officially referred to as the “California Revised Uniform Limited Liability Company Act“. This precise title is essential for legal documents, searches, and discussions related to California LLC law.

Section 17701.02: Definitions – Key Terms in California LLC Law

This section is foundational as it defines crucial terms used throughout the Act. Understanding these definitions is paramount to correctly interpreting and applying the law. Here’s a breakdown of some key definitions:

(a) “Acknowledged”: Specifies the requirements for formal acknowledgment of legal instruments, referencing California Civil Code for detailed procedures and allowing for a simplified declaration under penalty of perjury. This ensures the authenticity of legal documents related to the LLC.
(b) “Articles of organization”: Defines this as the document required to be filed with the Secretary of State to form an LLC. This document is the LLC’s birth certificate, and its contents are prescribed by Section 17702.01.
(c) “Contribution”: Clarifies what constitutes a contribution to an LLC, including benefits provided by a person to become a member, both during formation and afterward, and in their capacity as a member. Contributions can be in the form of cash, property, services, or promises to contribute.
(d) “Debtor in bankruptcy”: Defines this term in the context of both US federal bankruptcy law and comparable state or foreign laws, including assignments for the benefit of creditors and receiverships. This definition is crucial for understanding the implications of member bankruptcy on the LLC.
(e) “Designated office”: Refers to the office an LLC is required to maintain in California, which may or may not be its place of business. For foreign LLCs, it refers to their principal office. This is important for official communications and legal notices.
(f) “Distribution”: Defines a distribution as a transfer of money or property from an LLC to a person based on a transferable interest, excluding certain payments like reasonable compensation or payments in liquidation.
(g) “Domestic”: Specifies “domestic” in relation to an LLC as being organized under California law, distinguishing it from “foreign” entities.
(h) “Effective”: Defines “effective” in relation to records filed with the Secretary of State, referencing Section 17702.05(c) for details on when filings become legally binding.
(i) “Electronic transmission by/to the limited liability company”: Details the permissible methods of electronic communication for official notices and documents, including email, fax, and electronic message boards, ensuring proper delivery and record-keeping.
(j) “Foreign limited liability company”: Defines an LLC formed under the laws of a jurisdiction outside of California.
(k) “Limited liability company”: Defines a “domestic entity” formed under this title, or an entity that becomes subject to this title.
(l) “Majority of the managers” & (m) “Majority of the members”: Define these terms as more than 50%, unless the operating agreement specifies otherwise. These definitions are important for voting and decision-making within the LLC.
(n) “Manager”: Defines a manager in a manager-managed LLC as someone responsible for management functions as stated in Section 17704.07(c).
(o) “Manager-managed limited liability company” & (q) “Member-managed limited liability company”: Distinguishes between these two fundamental LLC management structures.
(p) “Member”: Defines a member as a person who has been admitted to an LLC as a member and has not dissociated.
(r) “Membership interest”: Encompasses a member’s rights in the LLC, including transferable interest, voting rights, management participation, and access to information.
(s) “Operating agreement”: Defines the core agreement among members governing the LLC’s operations. It can be written, oral, or implied and covers a wide range of matters described in Section 17701.10(a). It’s the internal rulebook of the LLC.
(t) “Organization”: Provides a broad definition of “organization” to include various business entities such as partnerships, corporations, and trusts.
(u) “Organizer”: Defines the person who forms an LLC by filing the articles of organization.
(v) “Person”: Offers a comprehensive definition of “person,” including individuals, partnerships, corporations, trusts, and other legal entities, highlighting the broad scope of who can be involved with an LLC.
(w) “Principal office”: Refers to the main office of the LLC, whether in California or elsewhere.
(x) “Record”: Defines “record” broadly to include both tangible and electronic forms of information storage.
(y) “State”: Defines “state” to include US states, territories, and possessions.
(z) “Transfer”: Provides a wide-ranging definition of “transfer” covering various methods of conveying property or interests.
(aa) “Transferable interest”: Defines the right to receive distributions from the LLC, regardless of continued membership.
(ab) “Transferee”: Defines a person who has received a transferable interest, whether or not they become a member.
(ac) “Vote”: Includes authorization by written consent or electronic transmission, broadening the methods of member approval.

Understanding these definitions is essential for navigating the complexities of the California Uniform Limited Liability Company Act.

Section 17701.04: Nature of Limited Liability Company – Distinct Entity and Powers

This section establishes the fundamental nature of an LLC in California:

(a) Distinct Legal Entity: It clearly states that an LLC is a separate legal entity from its members. This is the cornerstone of limited liability protection, shielding members’ personal assets from business debts and liabilities.
(b) Lawful Purpose: An LLC can be formed for any lawful purpose, whether for profit or non-profit, except for specific restricted businesses like banking, insurance underwriting, and trust companies. However, it allows LLCs to render licensed services if authorized by specific California codes.
(c) Perpetual Duration: California LLCs have perpetual existence, meaning they continue to exist indefinitely unless dissolved according to the Act or the operating agreement.
(d) Health Care Service Plans: Provides a specific exception allowing LLCs to operate as licensed health care service plans under certain conditions, particularly as subsidiaries of existing health plans, while importantly maintaining full tort and contract liability.
(e) Professional Services: Explicitly prohibits LLCs from rendering professional services as defined under California law, reserving this for professional corporations or other specific entity types.

This section clearly defines the legal standing and operational scope of a California LLC.

Section 17701.05: Powers of Limited Liability Company – Broad Authority

This section grants California LLCs extensive powers, mirroring those of a natural person, to conduct business. These powers include, but are not limited to:

(a) Conducting Business Anywhere: Operate and qualify to do business in any US or foreign jurisdiction.
(b) Legal Actions: Sue and be sued in its own name in any legal proceeding.
(c) Company Seal: Adopt and alter a company seal, though it’s not mandatory for document validity.
(d) Contracts and Liabilities: Make contracts, incur debts, act as surety, and borrow money.
(e) Property Transactions: Sell, lease, mortgage, and dispose of assets.
(f) Property Acquisition: Purchase, lease, and deal with real and personal property.
(g) Member and Employee Assistance: Lend money to and assist members and employees.
(h) Issuing Obligations: Issue bonds and secure debts with company assets.
(i) Investments: Invest in stocks, bonds, and obligations of other entities or governments.
(j) Surplus Funds: Invest surplus funds and lend money for business purposes.
(k) Business Associations: Act as a promoter, partner, member, manager, or agent of any person.
(l) Indemnification: Indemnify or hold harmless any person.
(m) Insurance: Purchase and maintain insurance.
(n) Own Securities: Deal with its own bonds and securities.
(o) Employee Benefits: Establish and manage pension, profit-sharing, and other benefit plans.
(p) Donations: Make charitable donations for public welfare.
(q) General Business Acts: Perform any act that furthers the LLC’s business and affairs, consistent with law.
(r) Compensation: Pay compensation for past services.
(s) Life Insurance: Insure the lives of members, managers, and employees for business purposes, including buy-sell agreements.
(t) Other Lawful Acts: Carry out any other act consistent with law to achieve its organizational purposes.

This section provides California LLCs with broad operational flexibility and the legal capacity to engage in a wide array of business activities.

Section 17701.06: Law Governing Internal Affairs – California Law Applies

This section establishes that California law governs the internal affairs of a California LLC, including:

(a) Internal Affairs: Management structure, member relations, and operational procedures.
(b) Liability: Liability of members and managers for LLC debts and obligations.
(c) Authority: Authority of members and agents to act on behalf of the LLC.

This ensures clarity and predictability regarding the legal framework governing California LLCs, regardless of where their members or operations are located.

Section 17701.07: Principles of Construction – Freedom of Contract and Equity

This section outlines guiding principles for interpreting the Act:

(a) Freedom of Contract: Emphasizes the policy of maximum effect to freedom of contract and the enforceability of operating agreements. This highlights the importance of a well-drafted operating agreement in defining member relationships and LLC operations.
(b) Supplementation by Law and Equity: Principles of law and equity supplement the Act, unless specifically displaced by its provisions. This ensures that established legal and equitable principles can fill gaps in the statutory text.
(c) No Strict Construction: Rules of strict construction against statutes in derogation of common law do not apply. This promotes a more flexible and practical interpretation of the Act.
(d) Singular and Plural, Gender Neutrality: Rules of construction regarding singular/plural and gender apply throughout the Act unless context dictates otherwise.

These principles guide courts and parties in interpreting and applying the California Uniform Limited Liability Company Act.

Section 17701.08: Limited Liability Company Name – Requirements and Restrictions

This section sets forth requirements and restrictions for LLC names in California:

(a) Required Words/Abbreviations: The name must include “limited liability company,” “L.L.C.,” or “LLC.” Permitted abbreviations for “Limited” and “Company” are also specified.
(b) Distinguishable Name: The name cannot be misleading to the public and must be distinguishable from existing names registered with the Secretary of State, including other LLCs, foreign LLCs, and reserved names.
(c) Enjoinment: Use of a name violating this section can be legally stopped (enjoined), even if the articles have been filed.
(d) Foreign LLCs: This section applies to foreign LLCs transacting business in California.
(e) Prohibited Words: The name cannot include words suggesting banking, trust, incorporation, or insurance businesses, ensuring it doesn’t mislead the public about the nature of the business.

These regulations ensure clarity and prevent public confusion regarding LLC names and the types of businesses they conduct.

Section 17701.09: Reservation of Name – Exclusive Use for 60 Days

This section allows for reserving an LLC name in California:

(a) Reservation Process: Upon paying a fee, a person can apply to reserve a name for up to 60 days. The Secretary of State issues a certificate of reservation if the name is available. Consecutive reservations for the same or similar names by the same person are prohibited.
(b) Transfer of Reservation: The name reservation can be transferred to another person by filing a notice with the Secretary of State.

This provides a mechanism for securing a desired LLC name while preparing for formation.

Section 17701.10: Operating Agreement – Scope, Limitations, and Flexibility

This is a critical section detailing the scope and limitations of the operating agreement, the foundational contract among LLC members:

(a) Governance by Operating Agreement: The operating agreement governs:
- Relations among members and between members and the LLC.
- Rights and duties of managers.
- LLC activities and conduct.
- Amendment procedures for the operating agreement.
(b) Act Governs if Operating Agreement Silent: To the extent the operating agreement doesn’t address a matter in (a), the Act governs.
(c) Mandatory Limitations: Specifies matters that cannot be varied by the operating agreement, including:
- LLC’s capacity to sue and be sued.
- Applicable law (California law).
- Court’s power under Section 17702.04.
- Eliminating fiduciary duties (duty of loyalty, duty of care, and contractual obligation of good faith and fair dealing), subject to exceptions in (d) to (g).
- Varying requirements for registered office, agent for service of process, and foreign LLC registration.
- Varying court’s power to dissolve LLCs or provisions for avoiding dissolution.
- Varying requirements of Articles 2 and 7 (formation and dissolution).
- Unreasonably restricting member’s right to maintain legal actions.
- Restricting rights of members with personal liability in mergers or conversions to approve such transactions.
- Restricting rights of non-members or non-managers, except as provided in Section 17701.12(b).
- Varying provisions of Articles 10, 11, 12, or 13 (mergers, conversions, foreign LLCs, and miscellaneous provisions).
- Eliminating the duty of loyalty entirely, but allowing for specifying permissible activities or ratification of breaches under certain conditions.
- Unreasonably reducing the duty of care.
(d) Permitted Variations: Allows for variations of the Act’s provisions by the operating agreement, except for matters listed in (c) and (e) to (g). However, certain sections and subsections can only be varied by a written operating agreement. Specifically lists provisions that cannot be varied, including:
- Definitions in Section 17701.02 (except as specifically provided in those definitions).
- Member’s rights under Section 17704.10 (information access).
- Provisions of this section and Section 17701.12 (operating agreement and records).
- Subdivisions (s) and (t) of Section 17704.07 (member’s rights to reimbursement and indemnification in member-managed LLCs).
(e) Modification of Fiduciary Duties: Fiduciary duties of managers in manager-managed LLCs and members in member-managed LLCs can only be modified in a written operating agreement with informed consent of the members. Simply assenting to the operating agreement doesn’t constitute informed consent.
(f) Member Responsibility Delegation: In member-managed LLCs, if the operating agreement relieves a member of a responsibility and assigns it to others, it can also eliminate or limit the fiduciary duty related to that responsibility for the relieved member.
(g) Indemnification and Liability Limitation: The operating agreement can alter or eliminate indemnification for members and managers and limit liability for money damages, except for:
- Breach of the duty of loyalty.
- Financial benefit improperly received.
- Liability for excess distributions.
- Intentional harm to the LLC or a member.
- Intentional violation of criminal law.

This section meticulously balances the flexibility of operating agreements with mandatory legal requirements and fiduciary duties, ensuring a robust and legally sound framework for LLC governance.

Section 17701.11: Operating Agreement – Binding Effect and Assent

This section addresses the legal effect of the operating agreement:

(a) Binding and Enforceable: The LLC is bound by and can enforce the operating agreement against its members.
(b) Assent Upon Membership: Becoming a member of an LLC is deemed assent to the operating agreement.
(c) Formation Agreement: Prospective initial members can agree that their agreement will become the operating agreement upon LLC formation. A sole initial member can also assent to terms that become the operating agreement upon formation.

This section reinforces the operating agreement as a legally binding contract among members and the LLC.

Section 17701.12: Operating Agreement – Amendment and Effect on Third Parties

This section deals with amendment of the operating agreement and its effect on non-members:

(a) Amendment Conditions: The operating agreement can require approval from non-parties or satisfaction of conditions for amendments to be effective.
(b) Effect on Transferees and Dissociated Members: Obligations to transferees and dissociated members are governed by the operating agreement. Amendments made after someone becomes a transferee or dissociated member are effective regarding debts and liabilities to them, subject to charging orders.
(c) Ineffective Provisions in Filed Records: Provisions in records filed with the Secretary of State that would be ineffective in an operating agreement under Section 17701.10 are also ineffective in the filed record.
(d) Conflict Between Filed Record and Operating Agreement: In case of conflict:
- The operating agreement prevails as to members, dissociated members, transferees, and managers.
- The filed record prevails as to other persons who reasonably rely on it.

This section clarifies the interplay between the operating agreement, publicly filed documents, and the rights of different parties involved with the LLC.

Section 17701.13: Designated Office and Agent for Service of Process – Mandatory Requirements

This section mandates that LLCs maintain a registered office and agent for service of process in California:

(a) Domestic LLC Requirements: California LLCs must continuously maintain:
- An office in California (not necessarily a place of business).
- An agent for service of process in California.
(b) Foreign LLCs: Foreign LLCs registered in California must also maintain an agent for service of process in the state.
(c) Agent Qualifications: The agent can be a California resident individual or a corporation that has complied with Section 1505 of the Corporations Code. If a corporation is designated, its address is not included in filings.
(d) Records to be Maintained at Designated Office: LLCs must keep the following records at their designated office:
- Current list of members and transferees with contact information, contributions, and profit/loss shares.
- List of managers (if manager-managed).
- Articles of organization and amendments, with powers of attorney.
- Past six years of federal, state, and local tax returns.
- Written operating agreement and amendments, with powers of attorney.
- Past six years of financial statements.
- Books and records relating to internal affairs for the current and past four fiscal years.
(e) Access for Assessors: LLCs must make business records relevant to property assessment available to assessors at their principal California office, designated office, or a mutually agreed location.

These requirements ensure that LLCs have a physical presence and a designated contact in California for official and legal purposes, as well as maintaining essential records for transparency and compliance.

Section 17701.14: Change of Designated Office or Agent – Filing Statement of Information

This section outlines the procedure for changing the registered office or agent:

(a) Filing Statement of Information: LLCs can change their designated office, principal office, agent for service of process, agent’s address, mailing address, or (for foreign LLCs) principal California office by filing a statement of information with the Secretary of State as per Section 17702.09.
(b) Effectiveness of Statement: The statement of information is effective upon filing by the Secretary of State.

This provides a straightforward process for updating key contact information for the LLC.

Section 17701.15: Resignation of Agent for Service of Process – Procedure

This section details how an agent for service of process can resign:

(a) Resignation Statement: The agent must file a signed and acknowledged statement of resignation with the Secretary of State, including required information like LLC name, file number, agent’s name, and a statement of resignation.
(b) Notice to LLC: The Secretary of State will notify the LLC’s principal office of the resignation.
(c) Cessation of Authority: The agent’s authority ceases upon filing of the resignation.
(d) Disclaimer of Appointment: An agent can disclaim improper appointment by filing a specific form.
(e) Agent Death, Resignation, or Inability to Serve: If the agent dies, resigns, moves out of state, or becomes unable to serve, the LLC must promptly file an updated statement of information to appoint a new agent.
(f) Disposal of Resignation Filings: The Secretary of State can dispose of resignation filings after a new agent is appointed.

This section provides a clear process for agent resignation and the LLC’s responsibility to appoint a successor.

Section 17701.16: Service of Process – Methods and Procedures

This section outlines how legal process can be served on LLCs:

(a) Additional to Code of Civil Procedure: Service methods in this section are in addition to those in the California Code of Civil Procedure.
(b) Personal Service on Agent: Personal service on the designated agent (or corporate agent’s representative) is valid. Changes to agent information are not effective until a statement is filed. For foreign LLCs with the Secretary of State as agent (under Section 17708.07(d)), process must be delivered by hand to the Secretary of State with copies and fees.
(c) Substituted Service on Secretary of State: If the agent has resigned and not been replaced, or cannot be found with reasonable diligence, the court can order service on the Secretary of State. This requires an affidavit demonstrating diligent but unsuccessful attempts at personal service. Service is complete 10 days after delivery to the Secretary of State.
(d) Notice by Secretary of State: Upon receiving process, the Secretary of State must notify the LLC at its principal office by registered mail.
(e) Record Keeping by Secretary of State: The Secretary of State keeps a record of all process served and issues a certificate as prima facie evidence of service.

This section ensures there are reliable methods for legally serving process on California LLCs, even if the designated agent is unavailable.

Section 17701.17: Consent to Jurisdiction and Arbitration – Member Agreements

This section allows members to consent to specific jurisdictions for legal proceedings and arbitration:

(a) Consent to Jurisdiction: Members can agree in writing to non-exclusive jurisdiction of specified courts (including California) or exclusive jurisdiction of California courts.
(b) Consent to Arbitration: Members can agree to non-exclusive arbitration in specified states (including California) or exclusive arbitration in California.
(c) Consent to Service of Process: Members can consent to specific methods of service of process in the operating agreement or other written agreement.

This section provides flexibility for members to agree on dispute resolution mechanisms and locations within their operating agreements.

Conclusion: The Foundational Article of California LLC Law

Article 1 of the California Uniform Limited Liability Company Act provides the essential definitions, principles, and foundational rules that govern LLCs in California. From defining key terms like “operating agreement” and “member” to establishing the powers of an LLC and the importance of the operating agreement, this article sets the stage for the more detailed provisions that follow. Understanding these general provisions is critical for anyone seeking to navigate the legal landscape of California LLCs and ensure their business operates in compliance with state law. This detailed analysis provides a solid starting point for further exploration of the Act and its implications for your business.