Rachelle Cohen
As of January 1, 2014, the Revised Uniform Limited Liability Act ("RULLCA")1 became the law in California. RULLCA fully replaced the prior act, the Beverly-Killea Limited Liability Company Act ("Bev-erly-Killea").2 Not surprisingly, the courts did not begin to interpret the substance of RULLCA in 2014. However, a couple of courts did consider whether RULLCA applied to the controversies at hand.3 Although these cases do not provide much insight into the rationale of the courts, they should be on your reading list if you have an LLC case in court. Other notable events in 2014, which all are discussed further below, are: a court opinion addressed limited liability company dissolution under Beverly-Killea;4 the Franchise Tax Board ("FTB") put out its position on taxation of out-of-state members of LLCs doing business in California,5 the California legislature closed a loophole for foreign LLCs, and a California court delivered an unexpected holding dealing with changes of ownership of LLCs in the context of the documentary transfer tax.6
In Legal Ruling 2014-01, the FTB stated that out-of-state members will be treated as "doing business" in California if they own an interest in a limited liability company that is organized, registered to do business, or does business in California and if the limited liability company is treated as a partnership for tax purposes. The FTB holds that if a limited liability company is treated as a partnership for tax purposes, then its members should be treated like general partners in a partnership. The FTB's position in Legal Ruling 2014-01 contradicts the decision in Appeals of Amman & Schmid Finanz AG, et. al.7 In that decision, the State Board of Equalization determined that an out-of-state limited partner was not "doing business" solely because it held an interest in a limited partnership doing business in California.
Further, the FTB's decision did not take into account any differences between member-managed and manager-managed LLCs. In manager-managed LLCs, the members typically have rights very similar to those of limited partners. In an unpublished order, Swart Enterprises, Inc. v. FTB,8 the judge rejected the FTB's reasoning in Legal Ruling 2014-1 and granted summary judgment to an out-of-state member of a manager-managed limited liability company. The FTB had claimed the member was "doing business" in California because of its limited liability company ownership.
