# California LLC Law

California's Revised Uniform Limited Liability Company Act (RULLCA), Cal. Corp. Code sections 17701.01-17713.13, governs Palace Fund's formation and internal governance as a California LLC.

## Manager-Managed Structure

Palace Fund is manager-managed, not member-managed. This distinction matters because:

- **Members** (the Korean investors) have no authority to bind the LLC. They vote only on matters the operating agreement grants them, such as removing the manager or dissolving the fund.
- **The Manager** (Palace Fund's GP entity or managing member) has exclusive authority over day-to-day operations, investment decisions, and fund administration.
- Third parties can rely on the manager's apparent authority. The operating agreement cannot secretly limit the manager's power to bind the LLC against a good-faith counterparty.

The operating agreement must explicitly state the LLC is manager-managed. If silent, California defaults to member-managed, which would give every investor authority to act for the fund.

## Fiduciary Duties

Under RULLCA, the manager owes two fiduciary duties to the LLC and its members:

**Duty of Loyalty** (section 17704.09(b)):
- Account for any property, profit, or benefit derived from LLC business or use of LLC property
- Refrain from dealing with the LLC as an adverse party
- Refrain from competing with the LLC in its stated business
- The operating agreement can narrow these duties but cannot eliminate them entirely. It can identify specific categories of activities that do not violate the duty of loyalty.

**Duty of Care** (section 17704.09(c)):
- Act with the care that a person in a like position would reasonably exercise under similar circumstances
- Standard is gross negligence, not ordinary negligence
- The operating agreement can further reduce this standard but not below bad faith, willful misconduct, or knowing violation of law.

**Implied Contractual Covenant**:
- Good faith and fair dealing always applies and cannot be eliminated by the operating agreement.

### Practical Implications for Palace Fund

The operating agreement should:
- Permit the manager to manage other funds and personal investments (carve-out from the competition restriction)
- Allow co-investment opportunities without triggering self-dealing concerns
- Define what constitutes a conflict of interest requiring disclosure versus member approval
- Include an exculpation clause reducing liability to the maximum extent permitted (bad faith / willful misconduct floor)

## Operating Agreement

The operating agreement is the primary governing document. California law defers to the operating agreement on most matters. Key provisions to include:

| Topic | What to Specify |
|---|---|
| Capital contributions | Amount, timing, default remedies |
| Allocations and distributions | Carried interest waterfall, preferred return |
| Management authority | Sole discretion of manager for investment decisions |
| Transfer restrictions | Lock-up period, ROFR, manager consent required |
| Admission of new members | Manager discretion, minimum investment |
| Withdrawal/redemption | Typically prohibited in closed-end fund |
| Dissolution | Term of fund, extension provisions |
| Indemnification | Indemnify manager except for bad faith/willful misconduct |
| Amendment | Manager can amend for tax/legal changes; material changes require member consent |

## Formation and Maintenance

**Filing requirements:**
- Articles of Organization filed with the California Secretary of State (Form LLC-1)
- $70 filing fee
- Statement of Information (Form LLC-12) due within 90 days of formation, then every two years
- $20 filing fee for Statement of Information

**Annual tax:**
- $800 minimum annual franchise tax payable to the Franchise Tax Board
- Due by the 15th day of the 4th month after formation, then annually
- Additional LLC fee if total income exceeds $250,000 (graduated from $900 to $11,790)
- First-year exemption for the $800 minimum tax for LLCs formed on or after January 1, 2021 has expired

**Registered agent:**
- Must maintain a registered agent in California for service of process

## Foreign Qualification

If Palace Fund operates or holds assets in other states, it must register as a foreign LLC in those states. Each state charges its own filing fee and may impose its own annual tax.

## Action Items

1. Confirm Articles of Organization designate manager-managed structure
2. Draft operating agreement with fiduciary duty modifications permitted under RULLCA
3. Include specific carve-outs for manager's outside activities and co-investments
4. Set up calendar for biennial Statement of Information and annual franchise tax
5. Evaluate whether fund activities in other states trigger foreign qualification requirements
6. Maintain written records of all member votes and manager decisions as required by section 17704.10