California LLC Operating Agreement

Why should a California LLC have an operating agreement?

A California LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.

You aren’t required to create a operating agreement for your California LLC (see California Corporations Code § 17701.13 to learn more), but it’s typically in an LLC’s best interest to have a written operating agreement on hand. Here’s why.

1. Your operating agreement proves you own your LLC.

California doesn’t require LLCs to list members’ names when filing Articles of Organization. But your operating agreement will include all member names, which means you can use it as proof of ownership—something your bank will likely require when you open a business bank account.

2. An operating agreement can help reinforce your limited liability status.

To benefit from limited liability status, LLCs have to be able to prove that the business is legally separate from its owners. Doing so requires following certain formalities, like keeping business and personal spending separate and following the procedures set out in your operating agreement. If you ever need to fight a lawsuit, an operating agreement will be a key part of your arsenal.

3. An operating agreement can help prevent misunderstandings.

A solid operating agreement will help your members get—and stay—on the same page. Should any disputes arise (and, let’s face it, they probably will), you can refer to your operating agreement for guidance.

4. An operating agreement can override California’s default laws.

Whatever your operating agreement doesn’t cover will be governed by California’s default LLC statutes. Those statutes might not be a great fit for your business, so it’s important to have a customized LLC operating agreement that suits your LLC’s needs.

California Case Law

We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*

“Consider the case of BGJ Associates, LLC where a group of individuals intended to purchase a piece of real estate, however in their haste to move forward with the deal, they failed to actually adopt an operating agreement. When disputes emerged among the individuals, particularly involving the terms of a draft operating agreement that was never executed, the individuals commenced extensive and expensive litigation.

“When resolving the matter, the court put strong emphasis on the fact that the operating agreement was never signed, coupled with the unresolved residual disputes among the intended members of the LLC. The BGJ Associates LLC case is an excellent example of why it is important to plan ahead and discuss potential pain points, then distill that understanding into a written operating agreement. Had the individuals done so in that case, valuable resources could have been preserved for more fulfilling commercial purposes.”

What is included in a California operating agreement?

Creating an operating agreement for your California LLC is important for establishing a big-picture vision for company operations. According to California Corporations Code § 17701.10, your operating agreement can include the following information:

• Activities of your LLC
• Transfer of membership interest
• Voting rights and decision-making powers
• Initial contributions
• Profits, losses, and distributions
• Management
• Compensation
• Bookkeeping procedures
• Dissolution