October 31, 2016

karenBy Karen Gjerdrum Fothergill

Since their adoption in California in the 1990’s, limited liability companies have afforded individuals the limited liability protections of corporations without their stringent operational rules. Now, effective January 1, 2017, California Assembly Bill 1722 will amend California’s Revised Uniform Limited Liability Company Act to give even greater flexibility to members of California limited liability companies.

Under current law, if the members (owners) of a limited liability company want to dissolve and wind up its activities, they must have, among other things, approval by a majority of the members. A “majority” in this context means at least 51%. This means that for a small, two-person company that is owned 50/50, both members have to agree to dissolve the company. And if they can’t agree, the member who wants out of the company has to go to court and seek judicial dissolution, which can be a lengthy and expensive process.

Under the amended law, members only need a vote of 50% or more to dissolve the company. This means that one of the members of a 50/50-owned company can initiate the dissolution process on his or her own, without fighting to convince the other member. This amendment will potentially result in a huge savings of time and money for a member trying to make his or her exit from the company.

However, in some small companies, an easy out for the members does not make good business sense. Not to worry — the amended law allows members to agree in the articles of organization or the operating agreement to require a higher percentage of voting approval to initiate dissolution. So members can, by choice, revert to the “majority” rule for decisions on dissolution.

You can read the bill and the amended law in its entirety here.

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