California LLC Operating Agreement
In California, an operating agreement is required to form an LLC, every California LLC must have one. An LLC operating agreement establishes the rules and structure for the LLC and can help address any issues that arise during business operations.
While there are free templates available online, we recommend getting an LLC operating agreement from a trusted source like Northwest Registered Agent, Incfile, or ZenBusiness. They can provide you with a free template.
Visit any of these LLC services for a free LLC operating agreement template
Making a clear and thorough operating agreement today will help your company succeed down the road. Read on to learn what is covered in this document and how to construct one.
What is an LLC Operating Agreement?
An operating agreement is essential if you’re forming a California (LLC). This legal document offers information about the ownership and routine operations of your company as well as instructions for situations like the dissolution of the LLC.
An operating agreement is an internal document of the LLC. It is not legally required in California for LLC owners to file an operating agreement with the Secretary of State along with the Articles of Organization (the documentation required to formally incorporate an LLC).
An operational agreement is, however, officially recognized by California law, which defines it as “the written agreement which shall be entered into among all of the members as to the conduct of the business and affairs of a limited liability company.”
The state also advises that all LLC members sign into a written (rather than verbal) operating agreement. If you cover all the pertinent concerns, you may rest comfortably knowing that the state will respect your operating agreement.
An LLC Operating Agreement is required in California
|In the corporate sector, having an LLC operating agreement is the best practice. Before starting operations, it is advised by the U.S. Small Business Administration (SBA) that every LLC owner have these essential papers.
This legal documentation outlines who owns the company and how it will be operated. This documentation is essential, whether you’ve formed an LLC with pals or are a one-member LLC doing business alone.
Why You Should Have a California LLC Operating Agreement
Protect yourself from liability: An operating agreement aids in separating the members (owners) of an LLC from the corporate body. The operating agreement separates the members’ personal liabilities from the LLC’s obligation in the event that the company encounters legal issues, such as a lawsuit. In the event that the company entity is sued, your personal assets as a member, such as money and property, are safeguarded.
Put verbal agreements in writing: If you’re forming an LLC with partners, you’ve probably already spoken about the specifics of the company, like how much money each partner will put into it. It can be tempting to rely on verbal agreements since you trust your partners, but doing so is a bad idea. It is a fact that disagreements happen in business. In case of disagreements, having information like how much each partner owns in writing will be helpful.
Protection from the state: Without an operating agreement, your LLC will be subject to the “default rules” of California. This protects your agreement against interference from the state. An operating agreement safeguards you by preventing the state from literally interfering with your business.
Consider the division of earnings as an illustration. State law may require that profits be distributed equally among LLC owners when the LLC is dissolved. An operational agreement allows you to determine how profits are allocated in relation to the ownership share each owner has in the company.
Make the most of the flexibility an LLC provides: The most adaptable legal business entity you can create is probably an LLC. Less strict regulations apply to management, reporting, and taxes than, say, to a corporation. The operating agreement, which allows you to specify anything from members’ voting rights to what happens if a member wishes to quit the LLC and what processes are necessary to dissolve the LLC, is the key to this flexibility.
Legitimize your company: An operational agreement gives your company legitimacy by demonstrating to outsiders that it is being run ethically. Before they open a company bank account for you, for instance, the majority of banks will demand to see an operating agreement.
A serious angel investor will also request to see an operating agreement before investing in your company if you are looking for capital from private sources.
What should my California LLC Operating Agreement contain?
There won’t be any duplicate operating agreements. An operating agreement must address the particular needs that each firm will have given its uniqueness. However, any operating agreement in California must unquestionably have a few key elements. How to write a California operating agreement and what should be included in it is described in this section.
Source: From the ZenBusiness website, an LLC operating agreement should include:
- LLC Name
- Management Structure
- Duties of Members and Managers
- Voting Rights and Responsibilities
- Holding Meetings
- Buyout and Buy-Sell Rules
- Succession Planning
- Modifications to the Operating Agreement
- Single-Member LLC Statue
- Severability Provision
1. LLC Name
Indicate the company name exactly as it is written in the California Articles of Organization. This document is used to formally create your LLC and is filed with the Secretary of State in California. It is how the name appears in the official state registry and how the state would formally acknowledge it.
Use the full business name, including the words “Limited Liability Company” or an authorized abbreviation (“LLC,” “L.L.C.,” “L.C.,” or “LC”), and avoid using an acronym or nickname.
Give a breakdown of the percentage of each owner’s ownership in addition to the full names of the members (owners). There are various methods for calculating purported “degrees of ownership.”
Many companies decide to connect ownership with capital investments made by each member. For instance, if you invest $1,000 in the business and your partner contributes $500, you would be entitled to two-thirds ownership as opposed to your partner’s one-third.
If your LLC has just one member, you will own the entire company.
3. Management and Organizational Structure
An LLC may be managed by its members or by its managers. Which management structure you intend to use must be stated in your California Articles of Organization. In a member-managed LLC, the owners—known as members—are in charge of managing day-to-day business operations. In an LLC that is managed by a manager, the owners delegate management of day-to-day activities to the manager.
The management structure and the methods for altering it should be outlined in your operating agreement.
4. Manager and Member Responsibilities
As part of their participation in the LLC, members, and management have a variety of responsibilities to undertake. Your operating agreement should specify the exact responsibilities and rights of management, including what they may and cannot do on the company’s behalf.
Even members who are not active in day-to-day operations must still perform obligations like attending scheduled member meetings and participating in votes as needed.
5. Voting Rights and Responsibilities
The ability to vote on significant business decisions, such as a prospective buyout or the addition of a new member, is often granted to LLC members. It should be stated in the operating agreement who has the right to vote on certain matters.
It is possible to distribute voting rights among members unevenly. The voting power may reflect this and give the two-thirds owner two votes and the one-third owner only one, for instance if one member owns two-thirds of the business and the other one-third.
6. Distribution and Allocations
The division of gains and losses among members is referred to as distributions. Profits may be allocated equally or in accordance with ownership stakes. It’s entirely up to you; however, as profit distribution may sometimes be a source of disagreement among partners, you must make sure it is specified in the operating agreement.
Include details about how and when profits will be transferred, such as to members’ bank accounts at the conclusion of the fiscal year. You might also wish to be aware that each member is liable for paying any necessary taxes on any earnings.
7. Holding Meetings
Like corporations, LLCs are not compelled by law to hold periodic shareholder meetings or similar events. Despite this, it makes sense to schedule monthly meetings for members and management to discuss company developments and future changes.
Include this commitment right away in the operating agreement. You won’t have to worry later about persuading resistant participants. Additionally, members who refuse to fulfill this commitment may be subject to a vote to remove them from the LLC.
8. Rules for Buyouts and Buy-Sells
As your company grows, you can welcome new members or lose long-time members who want to take advantage of other opportunities. Describe the requirements for adding a new member, such as the amount of capital investment required and who will vote to approve them.
Include specifics about what must be done when a member resigns, including what happens to their ownership stake. For instance, the operating agreement can state that the surviving members must be given the first opportunity to purchase the retiring member’s stock in the company.
9. Succession Planning
The term “succession planning” describes what happens if an LLC member passes away or retires. What happens to their ownership stake in the company should be specified in the operating agreement.
Can they give it to their own relatives or friends? Does a current member need to receive their share?
Members may alter their own estate planning records (such as a will) to comply with the operating agreement’s requirements once these recommendations have been made clear to them.
A California LLC can exist indefinitely, but circumstances may arise where members no longer wish to continue or the business has a specific purpose that requires dissolution.
It is important to plan for this possibility and have a clear plan in place to make the process less complicated and costly. This plan should include determining who has the authority to initiate dissolution, who must vote to approve it, the required majority vote to move forward, reasons for dissolution, and how remaining assets will be divided after paying off debts and obligations. I
t is also crucial to wind up the business affairs and pay all outstanding debts and obligations to avoid the personal responsibility of the members to the LLC’s creditors.
Steps for dissolving an LLC include,
- Paying all tax liabilities and filing tax returns
- Filing a Certificate of Dissolution with the Secretary of State
- Notifying creditors
- Closing business bank accounts and credit cards
- Canceling licenses and permits
Incorporating clauses into the Operating Agreement can help prepare for the possibility of dissolution.
11. Modifications to the Operating Agreement
Operating contracts are designed to be flexible. For instance, if a new member joins, the operating agreement must be updated to reflect their name as well as any capital contributions, responsibilities, and voting rights.
Include instructions on how to change the operating agreement, and who needs to approve this by voting or signing it. This will serve as your manual for any subsequent updates.
12. Single-Member LLC Statute
It could seem as though many of the aforementioned ideas don’t apply to you if your LLC only has one member. For instance, since you—the LLC’s single owner—will make all decisions, voting could seem unnecessary.
From a legal perspective, the operating agreement still has to specify this! Include a sentence in your operating agreement that states unequivocally that you are the LLC’s single owner, possessing 100% ownership rights, and that you have the power to act on behalf of the LLC without conducting votes or having meetings.
You risk trouble with third parties, such as lenders who provided you with a business loan, if you conduct certain acts without having this stated in an operating agreement.
13. Severability Provision
You may have seen similar legal language like this in other contracts. In essence, it says that if one provision of the operating agreement is declared unconstitutional, the remaining provisions remain legitimate. This makes sure that your operating agreement won’t be completely useless due to a single minor error.
California Operating Agreement FAQs
In California, is an LLC Operating Agreement required?
An operating agreement in California is strongly advised even though it is not legally necessary. Your operating agreement is an internal document, which means you’ll keep it on file with your own business documents.
This important legal instrument makes membership (ownership) and regular activities clear. In the event of liability difficulties, such as lawsuits, protecting members’ (owners’) personal assets by separating them from the corporate entity is important.
Where can I get an LLC California operating agreement?
Most LLC services provide a prepared template for you to draft your operating agreement. However, because every firm is unique, you should speak with a business lawyer to make sure your operating agreement covers all necessary details.
Is an Operating Agreement needed for a single-member California LLC?
Yes. The answers to membership and operational-related questions, which are frequent sources of disagreements between partners, are clarified by an operating agreement. As a single-member LLC, the operating agreement also limits your personal liability, defending you financially and personally in the event that the company encounters legal issues.
Am I allowed to draft my own LLC operating agreement in California?
Technically, this is allowed. With the use of ready-made templates, which offer the pertinent key points and employ necessary legal wording, you may build your own operating agreement for your California LLC. However, you should always have a local attorney evaluate the final document to make sure you haven’t overlooked anything that is particular to your state or business model.
Legally speaking, you are not required to hire a lawyer to draft your operating agreement. However, you should always have your operating agreement reviewed by a business lawyer who is knowledgeable about the legislation in your state. They can draw attention to particular problems unique to your company that isn’t covered by pre-existing templates.
They can also assist you with clauses that provide indemnification for members who might be named in disputes, arbitrations, or investigations as a result of their employment with the company.
Small Business Administration (Operating Agreements)
California LLC Codes
IRS: Paying Yourself
California Secretary of State: Starting a Business Entity Guide
IRS: Limited Liability Company (LLC)
Brian Wilson is the content manager and founder of LLC Radar.
Brian grew up in North Texas, just outside of Dallas, and has a bachelor’s degree in business journalism from Southern Methodist University. Since graduating from SMU, Brian has gained over 10 years of experience in business writing for several online publications.
Brian resides in Plano, Texas and he can be reached by email: firstname.lastname@example.org
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