December 2022 Update
In Blizzard Energy, Inc. v Schaefers (2021) 71 CA5th 832, a husband and wife were the sole members of an LLC, each owning 50 percent. A creditor obtained a judgment against the husband for fraud that occurred 15 years after the husband and wife had separated. No judgment was obtained against the wife or the LLC. The judgment creditor sought to reverse veil pierce the LLC to reach its assets to satisfy the judgment. The court held that although the LLC might be the alter ego of the judgment debtor, the wife of the judgment debtor might be an innocent third party, and if so, that could preclude reverse veil piercing. See §1.15.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act (HR 5376) (Pub L 117–169, 136 Stat 1818), which implemented a number of changes to the Internal Revenue Code as well as incentives for wind, solar, energy storage, electric vehicle charging, and other clean energy-related businesses. Among other things, effective January 1, 2023, the Act adds a 1-percent nondeductible excise tax on stock repurchases by public companies (see IRC §4501) and a corporate alternative minimum tax of 15 percent on corporations with book income of over $1 billion for the preceding 3 taxable years (see IRC §§55(b), 59(k)). In addition, the Act adds an additional payroll tax credit for certain research and development expenses of businesses with gross receipts of less than $5 million per year. See IRC §41(h). See §3.14.
Assembly Bill 150 (Stats 2021, ch 82) (July 16, 2021) added Rev & T C §17052.10, later amended and corrected by SB 113 (Stats 2022, ch 3) (Feb. 9, 2022), which created a California tax election for pass-through entities (PTEs), including S corporations and entities taxed as partnerships (including LLCs), effective for the tax years beginning January 1, 2021, and before January 1, 2026. Rev & T C §17052.10(a). Under AB 150, a PTE may annually elect to pay an entity level state tax at a rate of 9.3 percent on its income. The PTE owners (including shareholders, partners, and members) receive a credit for their share of the entity level tax, reducing their California personal income tax. In addition, the California taxes paid by the PTEs on behalf of their owners reduce the owners’ federal tax burden, effectively creating a SALT cap workaround. The California Franchise Tax Board (FTB) continues to update guidance of the PTE elective tax on their website at https://www.ftb.ca.gov/file/business/credits/pass-through-entity-elective-tax/index.html. See §3.57A.
The California Secretary of State has published an extensive guide to using its new online Bizfile service (called bizfile Online, see https://bizfileonline.sos.ca.gov/), which can be used not only for filing LLC documents but also other business entity documents, UCC statements, and judgment liens. Among other things, the guide explains how to navigate the Bizfile website and how to search for, file, and retrieve business entity documents. For practitioners not accustomed to the Bizfile service, the guide can be most helpful. The guide can be found at https://bpd.cdn.sos.ca.gov/ucc/ucc-online-help.pdf. See §7.1.
Previously, an LLC could apply to the Secretary of State for authorization to use a name that is not distinguishable in the records of the Secretary of State by obtaining written consent from the current user, registrant, or owner of the name. Effective January 1, 2021, the ability to use a name not distinguishable in the records of the Secretary of State by obtaining such consent was repealed. SB 552 (Stats 2020, ch 361). The use by an LLC of a name in violation of statutory rules may be enjoined notwithstanding the filing of its articles by the Secretary of State. Corp C §17701.08(c). See §7.4.
The Secretary of State’s office offers “frequent payor [sic]” accounts to allow practitioners and others with a recurring need to use the Bizfile portal to make payments when required by the portal. See §7.7.
As a result of AB 3075 (Stats 2020, ch 357), effective as of January 1, 2022, every Statement of Information must contain a Yes or No answer to the following question:
Does any Manager or Member have an outstanding final judgment issued by the Division of Labor Standards Enforcement or a court of law, for which no appeal therefrom is pending, for the violation of any wage order or provision of the Labor Code?
Because Statements of Information filed prior to the year 2022 would not have contained the required question and would not have provided the required answer, the Secretary of State will reject a No Change Statement of Information until there is on file at least one Statement of Information that contains the required question and answer. See §§7.35, 13.3.
Effective January 1, 2022, due to the implementation of AB 3075 (Stats 2020, ch 357), which added the labor judgment language to Form LLC-12, all LLCs are required to file a complete Statement of Information to answer the labor judgment question. Once a complete statement is filed after January 1, 2022, Form LLC-12NC (the “no change” form) can be submitted for filing. See §§7.35, 13.3.
The Corporate Transparency Act (CTA) (Pub L 116–283, 134 Stat 4604) became law as of January 1, 2021. It will become effective when implementing regulations are finalized by the Secretary of the Treasury. 31 USC §5336(b)(5). The first set of proposed regulations was issued on December 8, 2021, and will be codified in 31 CFR Pt 1010. See 86 Fed Reg 69920 (Dec. 8, 2021). As of August 2022, the first set of regulations is not yet final and two more sets are reportedly in the works. See §7A.1.
If a member sues for dissolution of an LLC, the other members may purchase the suing member’s interest to avoid the dissolution and liquidation. The buyout price will be payable in cash at the “fair market value” of the moving member’s membership interest. Corp C §17707.03. The ability of the moving member to avoid the repurchase right by dismissing the proceeding may be limited if a buyout motion is approved. See Guttman v Guttman (2021) 72 CA5th 396. See §§12.9, 13.40A, 16.19, 16.21.
As of January 1, 2022, California adopted a new “crowdfunding exemption” (Corp C §25102(r)). This exemption allows issuers to raise up to $300,000 relying on the federal “intrastate offering” exemption (see §§12.29–12.32). Although Corp C §25102(r) relies on the intrastate exemption at the federal level, it also references the federal “Regulation Crowdfunding” for several of its 14 requirements for compliance (see §12.34A). The use of crowdfunding rules to raise capital involves the issuance of equity securities to a large number of small passive investors. LLCs are usually the entity of choice when flexibility is needed in defining the rights and obligations of a relatively limited number of investors. As a result, an LLC is unlikely to be the entity of choice for a crowdfunded offering. See §12.74.
In Sirott v Superior Court (2022) 78 CA5th 371, the court held that the trial court’s discretion under Corp C §17709.02(a)(1) to permit an LLC member to maintain a derivative suit without meeting statutory requirements applies only to the contemporaneous ownership requirement, not to the continuous ownership requirement. Thus, the continuous ownership requirement cannot be excused because the California Supreme Court has interpreted similar language in Corp C §800 to impose a mandatory requirement of continuous ownership for a shareholder’s derivative action on behalf of a corporation, and in general, LLC derivative actions are subject to the same principles as corporate derivative actions. See §§13.39, 16.38.
In Cheng v Coastal L.B. Assocs., LLC (2021) 69 CA5th 1121, the court declined to follow the case law interpreting the Corp C §2000 definition of “fair value” and held that “fair market value” requires that a valuation be discounted if it is a minority interest, as it was in this case. See §§16.20, 16.20B.
In Friend of Camden, Inc. v Brandt (2022) 81 CA5th 1054, the court held that an LLC was dissolved when holders of 50 percent of its membership interests voted to dissolve it under Corp C §17707.01, and that action rendered moot the judicial dissolution action and effectively circumvented the buyout procedure in Corp C §17707.03(c). The vote to dissolve under Corp C §17707.01 did not constitute a dismissal of the judicial dissolution action; thus, Corp C §17707.03(c)(6) did not apply. See §16.21.