A California LLC Operating Agreement, to put it plainly, is your own uniquely designed plan or blueprint for your LLC, offering a well-defined pathway for its operation. See it as your bespoke guidebook, delineating the guidelines for operating your business, embracing facets such as the distribution of ownership, the procedures for making decisions, and blueprinting for future leadership changes.
In this agreement, required under California law, you'll outline critical aspects such as member roles, decision-making processes, and ways to resolve disputes - providing a roadmap to avoid misunderstandings down the line.
Yes, it's legally required in California under § 17701.02. Single-member LLCs need an operating agreement to preserve their corporate veil and to prove ownership. And multi-member LLCs need one to help provide operating guidance, determine voting rights and contributions.
Read on to learn more about California operating agreements, including:
Here are some key components that are typically included in a California LLC operating agreement:
This guide breaks down standard sections and provides sample language for each to help you navigate.
Your LLC will have a name by the time you register your LLC formation documents with the state, and you'll also need to convey the purpose of your LLC. A general statement is enough here; it allows space for future business expansion without the need to re-register.
OPERATING AGREEMENT of [COMPANY NAME]
This operating agreement is adopted as of [Date] (the “Effective Date”), by [Member’s Name] , an individual and the sole member (the “Member”) of [Company Name] (the “Company”).
The Member hereby adopts this agreement as the operating agreement of the Company, which agreement sets forth the entire understanding of the Member regarding its subject matter and supersedes all prior understandings and agreements regarding its subject matter.
The purpose of the Company is [ Company Purpose] , and the conduct of other activities as may be necessary or appropriate to promote the stated purposes, and to engage in any other lawful business or activity for which a limited liability company may be organized under the Act.
This section determines who will manage your LLC—members or a designated manager. It also outlines each member's rights and responsibilities, including capital contributions, voting rights, and management structure. This section remains crucial even if you're an LLC's sole member to establish your single-member LLC.
The business and affairs of the Company will be managed by the Member. The vote, action, decision, or consent of the Member will constitute a valid decision of the Member and the Company. The Member may appoint one or more officers (including the Member, if the Member is an individual) who will have such powers and authority to act on behalf of the Company granted to them by the Member.
The business and affairs of the Company will be managed by the manager of the Company and any successor thereto appointed by the Member, which manager may also be referred to as the Company’s president (the “Manager”). The initial Manager will be [Manager Name] , who will serve until the Manager’s death, removal by the Member (for any reason or no reason), or resignation. The Manager will have the right and authority to manage the affairs of the Company and make decisions and take action with respect thereto without further approval or consent of any kind by the Member. Except as otherwise required by this agreement and in lieu of any limitations set forth in [State Name] ’s laws for limited liability companies (the “Act”), the Manager will be solely responsible for and is hereby authorized to manage and operate the business of the Company. Except to the extent that the authority of the Manager is expressly limited by the Member, the vote, action, decision, or consent of the Manager will constitute a valid decision of the Manager and the Company.
A Registered Agent is the person or entity will receive and handle important paperwork on your LLC's behalf. Though this detail may come up in some operating agreements, it's not mandatory as it is already listed on your state formation documents.
The Company’s registered agent in State is: Registered Agent Name , Address . The members may designate other registered agents or offices at any time in this state or, if necessary, in other states.
This is essentially the lifespan of your LLC, as defined in your formation documents. Often, business owners set up their LLCs to operate indefinitely. However, you can specify a definite period or closure date if you wish.
The duration of the Company will be perpetual.
Capital contributions are the initial investments made to jump-start your LLC. These could be made directly by the owner in a single-member LLC, giving you the flexibility to decide what goes into the business.
Keeping accurate records of these contributions is essential. It provides a clear financial picture of your LLC and supplies vital tax-related data.
The Member’s capital contribution(s) to the capital of the Company for the Member’s membership interest in the Company will be reflected on the books and records of the Company.
The members have made or shall make the contributions of cash, property or services to the LLC as set forth on Exhibit A attached
Indemnification is a provision in your LLC's Operating Agreement aiming to protect the company's members from certain legal costs that could arise from their duties for the company. In essence, if a member is facing legal action relating to their obligations for the LLC, the LLC will cover any legal cost or damages.
Your agreement should define when and under what conditions the LLC will provide such protection. Usually, indemnification doesn't cover deliberate misconduct or gross negligence.
The Member, the Manager, the officers, and the organizer of the Company and their respective affiliates, stockholders, members, managers, directors, officers, partners, employees, agents, trustees, and representatives (individually, an “Indemnitee”) will be indemnified by the Company against any and all losses, claims, damages, liabilities, expenses (including legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings, civil, criminal, administrative, or investigative, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise by reason of the Indemnitee’s status as any of the foregoing, which relates to or arises out of the Company or its assets, business, or affairs, if in each of the foregoing cases (A) the Indemnitee acted in good faith and in a manner the Indemnitee believed to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful, and (B) the Indemnitee’s conduct did not constitute gross negligence or willful or wanton misconduct. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, will not, of itself, create a presumption that the Indemnitee acted in a manner contrary to that specified in clause (A) or (B) above. Any indemnification under this section 5 will be made only out of the assets of the Company, and the Member will not have any personal liability on account thereof.
When it comes to taxes, your California LLC can choose from three main tax designations: a sole proprietorship, partnership, or corporation. Factors like your member count and your election status with the IRS can affect your LLC's tax standing.
A handy tip is to include a clause regarding tax status in your operating agreement. Why? This clause can outline your chosen tax status and describe how to change it, dealing with tax returns, and any allocations (if applicable). This provides a path to handle any tax-related matters and secure your LLC's financial operations, covering areas like profits, losses, distributions, and taxes.
The Company will be disregarded for federal and state income tax purposes. The admission of one or more additional members, however, will cause the Company to be recognized for tax purposes, and to be taxed, as a partnership.
The Member acknowledges that the Company has elected to be taxed as a corporation for federal tax purposes pursuant to the regulations currently in effect under Section 7701 of the Code, and to be taxed as an electing small business corporation under the provisions of Subchapter S of the Code. Notwithstanding such tax treatment, the Member acknowledges and agrees that the Company will be a limited liability company, for state law purposes, under the provisions of the Act, the Articles of Organization, and this operating agreement.
The Member acknowledges that the Company has filed or will timely file a Form 2553 (Election by a Small Business Corporation) with the Internal Revenue Service and that the election made pursuant to the filing is or will be in force and effect covering all periods since the date of this operating agreement. Except as otherwise provided in this operating agreement, during the term of this operating agreement and the continuation of the Company’s “S” corporation election under Section 1362 of the Internal Revenue Code, no Member shall take any action which would cause the revocation or termination of the Company’s “S” election (under Section 1362(a) of the Internal Revenue Code) and any attempt to take such an action will be null and void and without effect. Without limiting the foregoing, and notwithstanding any provision hereof to the contrary, any transfer or attempt to transfer any membership interest to any of the following will be null, void, and without effect:
(a) a person whose ownership thereof would cause the Company to have a number of Members and assignees of membership interests (shareholders of an “S” corporation) greater than the number permitted by Section 1361(b)(1)(A) of the Internal Revenue Code;
(b) an individual who is not a United States citizen or resident;
(c) a trust (or the trustee thereof) which fails to satisfy the requirements of Section 1361(c)(2)(A) or 1361(d) of the Internal Revenue Code;
(d) a corporation; and
(e)any other entity whose ownership would cause the termination or revocation of the Company’s tax status as an “S” corporation.
Your operating agreement helps outline how profits and losses will be distributed. If you’re a one-person show (single-member LLC), this process is fairly straightforward. But for multi-member LLCs, it's critical to provide a detailed procedure on when and how earnings will be distributed.
As the sole member of the LLC, the Member is entitled to all profits of the LLC and is responsible for all its losses. Profits and losses shall be determined annually and will be allocated to the Member's capital account. Distributions of cash or other assets will be made at such times and in such amounts as deemed appropriate by the Member.
The road of entrepreneurship often comes with a need for change. If any terms of your LLC need to be modified, you'll follow the amendment procedures laid out in your LLC operating agreement. For single-member LLCs, this is typically a breeze. Multi-member LLCs should consider the voting percentages and requirements for changing the operating agreement.
This agreement and the articles of organization of the Company may not be altered, modified, or changed, and no provision of this agreement may be waived, except by an amendment or waiver, as applicable, approved by the Member.
Normally, LLCs don’t need to stick to corporate formalities (those formalities are more a corporation’s thing). However, disregarding such formalities could pose a risk to your corporate veil. Therefore, including a waiver of all formalities in your agreement could be beneficial.
The failure of the Company or the Member to observe any formalities or requirements relating to the exercise of its powers or management of its business or affairs under this operating agreement or the laws in the state in which the Company is which govern limited liability companies will not be grounds for imposing personal liability on the Member for liabilities of the Company.
This essential clause presents a strategy for the proper winding down of your LLC, and who holds the reigns in your unexpected absence. Think of it as an 'exit strategy' for your LLC.
Upon the occurrence of any event which terminates the continued membership of the Member in the Company, the Company will not be dissolved, and the business of the Company will continue. The Member hereby specifically consents to such continuation of the business of the Company upon any such event. The Member’s legal representative, assignee, or successor will automatically become an assignee of the Member’s interest and will automatically become a substitute Member in place of the withdrawn Member.
Last but not least, this is the day when your operating agreement formally begins life. Think of it as your agreement’s ‘birthday’.
No need! Unlike your Articles of Organization, your operating agreement doesn't need to be filed. It’s an internal document. Just sign it, keep a copy for your records, and have it handy when needed.
Growth can come in various forms, including expanding your LLC team. If you need to add another member later, you'll rework the paperwork according to the terms agreed with the new member. You'll likely need a new agreement since multi-member LLC agreements tend to diverge significantly from single-member LLC agreements.
Et voilà, we’ve navigated through the key components of an LLC operating agreement for California. Remember, tailored legal advice from a professional is unbeatable, but having knowledge under your belt certainly empowers you on your entrepreneurial journey!
