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California Operating Agreement LLC

Does a California LLC Need an Operating Agreement?

An Operating Agreement refers to a legal document that specifies the ground rules for structuring and managing a limited liability company in California. These agreements define the decision-making procedure of the LLC, the responsibilities of the LLC members, and how the profits and liabilities will be shared. 

In California, there are some state-specific rules and regulations that must be followed when drafting an agreement. The operating agreement should speak to how the LLC will respond if someone files a lawsuit against the entity. 

An operating agreement is an important document that establishes ownership of the LLC and financial liability to third parties such as banks. Pursuant to the California Corporations Code §17050 every LLC in the state must file Articles of Incorporation with the state and provide a copy of a properly executed LLC Operating Agreement.

The operating procedures of an LLC will be outlined in the agreement along with the ownership structure. There can be one member LLC or an LLC that involves multiple members. Establishing and incorporating an LLC can seem overwhelming to the layperson. If you are not sure about how to begin your business journey, you should seek help from an experienced Los Angeles Business Lawyer.

California Operating Agreement LLC

Essentials of a California Operating Agreement LLC

To get off on the right foot and set yourself up for business success, you need to create an operating agreement for your California LLC at the onset of forming your corporate entity. 

Organization: When establishing an LLC, it is vital to define the membership and the division of ownership. In the multi-member LLC, there are multiple options for the ownership structure and division of profits. 

Management & Voting: Clearly detailing the management structure of the LLC is an important part of any operating agreement. The agreement must specify who will have authority for the day-to-day management and who has the authority for voting on business matters. It may be arranged that each member has one vote or that each member has a voting stake equal to his or her ownership stake. 

Capital Contributions: Capital contribution is the amount of money that has been contributed by every member to start a business. It provides a basis for ownership division and in the early stages, it can give a perception of how much additional funds, if any, a business will require.

Distributions: The California operating agreement LLC must state the division of profits and losses. One of the most common options is to segregate the profits equally between the members. However, depending on the membership and initial investments, a different approach may be preferable. Regardless, it needs to be clearly delineated in the operating agreement.

Modifications to Membership Structure: Suppose, a member leaves a company at some stage of the life of the LLC. The operating agreement needs to detail what happens when members leave the organization or new members join. Regardless of who joins and leaves the organization, all essential functions for operation and management must be filled.

Dissolution: Every operating agreement must make an allowance for the dissolution of the LLC. The process for resolving debts and dividing the remaining property must be specified in the California Operating Agreement. 

Signatures: As with any binding legal document, an operating agreement must be signed by all parties. You can discuss the necessity for witness signatures and notarization with your California business attorney.

Different Types of California Operating Agreement, LLC

Generally, there are 3 different types of operating agreements. 

  • Single member Agreement: This type of LLC is formed by a single member.
  • Multi-member Agreement (Member managed): LLCs that involve multiple members who collectively manage the responsibilities of the business. 
  • Multi-member Agreement (Manager-managed): LLCs that are formed by the collective support of more than one member. The responsibility of the business is managed by one or more managers chosen by the membership.

You can also create a customized agreement by discussing it with a legal expert.

Contact an experienced legal counsel at The Venture Lawyer

Drafting a California LLC Agreement is a complicated affair. Further, the real-world implications of the document can be huge. Therefore, consulting one of our experienced business law attorneys is a great way to make sure you get the operating agreement you and your entity need. Call our firm for a free consultation today.

Frequently Asked Questions on Operating Agreements