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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.
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.
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
Do's:
Don'ts:
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:
The first step when writing a California LLC operating agreement is to include basic information about your company, such as:
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.
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.
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.
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].
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.
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.
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.
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.
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.
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:
Related Articles:
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:
About The Author
Education: Northwestern University Pritzker School of Law Lives in: IllinoisAs a corporate attorney, Danya supports entrepreneurs in having successful businesses by building strategic relationships, assisting in transactions, and protecting their companies.
After over a decade of experience, she has helped several organizations get their deals done so they can focus on their dreams.
As a firm, Motiva Law not only provides excellent legal services – it delivers a top-quality client experience by being communicative and providing an easy-to-understand strategy for their clients' business deals. In other words, they handle the legalese so the clients don't have to!
Accreditations: Being selected as a "Rising Star" by Super Lawyers from 2015-2024. This award goes to less than 2.5% of attorneys in Illinois.
