California LLC Operating Agreement (Guide + Free Template)

Atty. Danya Shakfeh
Published by Atty. Danya Shakfeh | Author
Last updated: February 13, 2024
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If you're planning to establish a California LLC, it's a good idea to draft an LLC operating agreement that'll spell out the rules and regulations of your business.

To help you get started, we solicited expert help from our in-house team of LLC attorneys with over fifteen years of experience in the field.

After reviewing different official operating agreement templates for four weeks, we've created a detailed guide that includes everything you should know about this legal document.

As another option, premium California LLC service companies can provide legal assistance, ensuring your operating agreement includes all necessary clauses.

Quick Summary

  • In California, an LLC operating agreement is mandatory and required to be filed with the state​​.
  • A California LLC operating agreement is a legally binding document that governs the ownership, management, and operational processes of an LLC, ensuring clarity and smooth operations​​.
  • Micro-enterprises employing about 7.2 million people, or 48.5% of the private workforce in California, underline the significance of LLC Operating Agreements in supporting the state's economic backbone.
  • A California case involving the involuntary dissolution of an LLC under the Beverly Killea Act, in my view, highlights the significant role of operating agreements in legal disputes​​.


California Operating Agreement Free Template

Disclaimer: This template is for informational purposes only; consult a legal professional before use, as we assume no responsibility for its applicability or accuracy.

Before downloading our template, we invite you to read our article on the key differences between member-managed and manager-managed LLCs.

What Is a California LLC Operating Agreement?

Reading a document for California LLC operating agreement

A California LLC operating agreement is a legally enforceable contract that describes the ownership structure, management structure, and operational processes of a limited liability company (LLC).

It outlines the rights, duties, and liabilities of the LLC's members (owners) and management and how the LLC operates internally.

This internal legal document covers specifics like policies, guidelines, and clauses about how the single-member LLC or multi-member LLC operates.

The operating agreement governs company operations and acts as a manual for handling conflicts, recruiting new members, and handling various scenarios that could arise while conducting business. It gives firms limited liability status while ensuring seamless operation and clarity.

"In California, creating an operating agreement involves the members' consensus to establish a limited liability company in accordance with the state's LLC laws."
- Jon Morgan, Co-Editor & Co-Founder of Venture Smarter

Writing Operating Agreement Do's and Don'ts

Do's:

  1. Ensure Compliance with California Law: Adhere to California-specific regulations, like mandatory clauses required by state law.
  2. Update Regularly: Keep the agreement current with business changes and legal updates. Regular reviews ensure the document remains relevant and compliant.
  3. Include a Non-Compete Clause: If appropriate, a non-compete clause can protect the LLC from members starting competing businesses.
  4. Include Confidentiality Agreements: Protect your business's sensitive information with clauses that bind members to confidentiality.
  5. Consider Future Growth: Make provisions for potential expansion, new investment opportunities, or changes in business scope.

Don'ts: 

  1. Don't Ignore State-Specific Requirements: Failing to include necessary clauses as per California law can lead to legal complications.
  2. Don't Be Vague about Financial Arrangements: Ambiguity in profit distribution or capital contributions can lead to disputes.
  3. Don't Neglect Dispute Resolution: Without a set process, disputes can escalate and harm the business.
  4. Don't Copy Generic Agreements: Using a one-size-fits-all template may miss crucial elements specific to your business and California law.

What Should Be Covered in My Operating Agreement?

Writing for California operating agreement

A California operating agreement should encompass details such as company and member specifics, management guidelines, and rules on ownership stakes, along with legal and financial responsibilities, to provide a clear structure for LLC governance.

You can also hire a lawyer to write the document and pay a filing fee or use a free operating agreement template offered by a professional LLC service.

Here are the components that should be covered in details:

1. LLC Name

The first step when writing a California LLC operating agreement is to include basic information about your company, such as:

  • The organization's official name
  • Any DBAs or trade names
  • The principal business address
  • California Registered agent name and contact details

In general, this section of your LLC operating agreement will contain any fundamental information mentioned in your articles of incorporation, which you submitted to the California SOS.

2. Ownership Details

Writing the business objective

Your LLC operating agreement should include fundamental details on each member and management, including their names, addresses, roles, and ownership interests.

The LLC operating agreement should detail each owner's contributions to the company and their respective values or percentages.

Members may offer money, equipment, assets, labor, talents, intellectual property, or other resources; all these should be recorded in the agreement.

This part of the agreement ensures clear guidelines for maintaining or altering the ownership structure over time, safeguarding members' interests and the company's stability.

3. Voting Rights and Decision-Making Powers

Because members typically vote on significant decisions at meetings, you should include voting rights and meeting provisions in the operating agreement.

The voting requirements should specify each member's voting share in detail. You must also state if a simple majority is required to end a vote.

4. Profit Distributions

The amount that each member receives depends on their position in the company and the tax payment option chosen for the LLC.

Members can receive compensation for their work and dividends if the LLC is taxed like a corporation. In a disregarded entity scenario, dividends are based solely on ownership stakes.

Additionally, all LLCs in California must pay a yearly franchise tax of at least $800. According to the State of California Franchise Tax Board, businesses with revenue exceeding $250,000 are subject to a gross receipts tax ranging from $900 to $11,790 based on their revenue, affecting the overall financial distributions within the LLC [1].

5. Management

Talking to manager about the member informations

The LLC operating agreement should indicate whether the LLC is manager- or member-managed.

If the company is member-managed, the members will oversee all daily activities. If the firm is manager-managed, the members will choose a manager to run it (either from within their ranks or from a third party).

If it is manager-managed, the written LLC operating agreement should also specify the manager's duties, compensation, and length of service. It should also state how a manager can be removed or replaced.

6. Record-Keeping

It's essential to specify the types of records the company will maintain, such as financial statements, member meeting minutes, and tax filings.

This section should state that records will be kept at the principal place of business and be readily accessible to members. It must comply with California state laws regarding record retention and confidentiality.

Also, it outlines procedures for member access to records, possibly including advance notice requirements or limitations on access to sensitive information. This ensures transparency, legal compliance, and the protection of proprietary information.

7. Member Change Process

Your LLC requires a procedure for accepting new members and managing the departure of current members. A vote and a meeting are often necessary to admit new members.

You must also discuss what would happen if a member quit the company and sold their ownership stake. For example, you can state that exiting members must sell to current parties who meet certain requirements.

To ensure members maintain complete control over the company, most LLC operating agreements provide existing owners with the first option to buy existing owners' holdings.

8. Meeting Requirements

Meetings for members are not mandated by law, like shareholder and director meetings are in companies.

However, your LLC's operating agreement should specify regular meetings for voting on significant issues. The agreement should include a summary of the meetings' dates, locations, procedures, and goals.

9. Operational Rules and Regulations

Pointing at compensation terms for members

You should consider including a description of the LLC's business operations, management procedures for daily activities, compliance protocols with relevant laws, methods for amending the operating agreement, dispute resolution processes, and guidelines for the business's dissolution, each tailored to the LLC's specific needs and legal requirements.

Why Do You Need an LLC Operating Agreement in California?

You need an LLC's operating agreement because it's mandatory in California.

Given that micro-enterprises employ approximately 7.2 million people, accounting for 48.5% of the private workforce in California, as stated in the Office of Governor Small Business Sheet, an LLC Operating Agreement is essential [2].

It supports the backbone of the state's economy by providing a legal framework that enhances the operational stability and legal protections for these significant job creators.

Here's a detailed description of the benefits of having California LLC operating agreements:

  • Separate Your Personal And Professional Identities: For liability purposes, an operating agreement aids in separating the business from the owner. It safeguards the company's assets from members' personal responsibilities while also protecting members from business liabilities. In the absence of an operating agreement, the company and the owner are treated as one, and this forfeits the limited liability status because courts will not view your limited liability company as a separate legal entity from you.
  • Better LLC Management Terms: To focus on business development prospects as the company grows, you should engage an LLC manager to handle the day-to-day business operations. An operating agreement should specify the manager's responsibilities, including power, salary, and what happens if they quit or start their own business.
  • Avoid Default Rules Imposed By The State: Your California LLC is subject to the default state's standard regulations without an operating agreement. However, with an operating agreement, your LLC avoids these state rules as the internal document drafts customized rules for the company.
  • Clearer Succession Terms: What happens if you pass away or cannot manage the firm might be spelled out in an operating agreement. Without this precise clause, your family could struggle to run or close the limited liability company.
  • Legitimize Your Company: Your business gains professionalism and credibility thanks to an operating agreement. Before letting you create an LLC business bank account, financial institutions frequently need to see your operating agreement. Additionally, providing a thorough operating agreement will give you more credibility when you request loans or ask investors to support your company.
  • Better LLC Scalability: Your successful company may expand, and any business expansion needs money from crowdfunding, banks, or investors. Your operating agreement lays out the terms of scalability, stating the treatment of potential investors. The company will also be better positioned in the investment talks if these clauses are written into the customized LLC operating agreement.

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FAQs

What happens if an LLC in California doesn't have an Operating Agreement?

If an LLC in California doesn't have an Operating agreement, the LLC will be governed by default state laws, which may not be favorable or suitable for the specific business needs of the LLC.

Can an Operating Agreement be modified?

Yes, an operating agreement can be modified as needed. However, the process for making amendments should be outlined in the Agreement itself, and all members should agree to the changes.

References:

  • https://www.ftb.ca.gov/file/business/types/limited-liability-company/index.html
  • https://www.gov.ca.gov/wp-content/uploads/2020/09/Small-Business-Fact-Sheet-9.9.20.pdf

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