A California LLC Operating Agreement is a legal document that stipulates how an LLC company is to be run and protects LLC owners’ assets like real estate, vehicles, etc.
It outlines the applicable policies or regulatory procedures, ownership distribution, capital contributions, management structure, and other operational details worth documenting. The document is alternatively known as a membership agreement.
The creation of a California LLC operating agreement is subjected to the following laws:
- California Revised Uniform Limited Liability Company Act – Corp Code Title 2.6
- Operating Agreement Laws – Corp Code 17701.10
- State Definition – Corp Code § 17701.02(s)
The document is legally binding to the LLC members and must therefore be signed by all the owners to be valid. The use of a California LLC operating agreement attracts several charges:
- A California state fee: $70
- A Statement of information fee: $20 (every two years)
- Annual franchise tax: $800 (every year)
Types of the Agreement
Four types of LLC operating agreements exist in the state of California. The types differ based on the LLC ownership and management criteria. These types are:
California Single Member LLC Operating Agreement
An operating agreement meant for an LLC entity owned by one individual.
Download: Microsoft Word (.docx)
Multi Member LLC Operating Agreement
A contract used in LLC entities with more than one owner/member.
Download: Microsoft Word (.docx)
Member Managed LLC
An operating agreement used in an LLC where the entity is managed by the member(s) of the company, and the members have the authority to enter into agreements on behalf of the LLC.
Download: Microsoft Word (.docx)
Manager Managed LLC
A manager-managed LLC is an LLC that is managed by an appointed manager who is allowed to bind the entity to contracts. Other members are automatically exempted from managing and conducting the day-to-day operations of the company.
Download: Microsoft Word (.docx)
Reasons to Have the Agreement
LLC entities are required by law to have an operating agreement in place in California. Therefore, a California LLC operating agreement is a compliant document. However, it does have other significances as illustrated below:
Sets the rules
Having an operating agreement allows LLC owners to come up with rules specific to their entity. The LLC members can define their decision-making protocols, financial and management policies without external influence. This way, disputes are prevented, and even if they happen, the agreement can be consulted for solutions.
Proves the ownership
A California LLC operating agreement indicates all the company owners, unlike the California Articles of Organization or manager-managed LLC statement of information. This agrees on an essential document in proving the ownership of an LLC in California. Parties such as banks, creditors, investors, title companies, courts, accountants, lawyers, and tax professionals will often require proof of LLC ownership.
Overrides default rules
Any LLC in California is automatically subjected to default LLC state laws without an operating agreement as expanded by The California Revised Uniform Limited Liability Company Act. These default laws are developed for all LLCs in general and might fail to capture issues or interests specific to a given company.
An operating agreement is an opportunity for LLC members to address these regulations according to the company’s vision and mission.
Protects liability status
An operating agreement further solidifies the limited liability aspect of an LLC in California. An LLC and its members are separate entities, which means that owners cannot assume legal and financial liabilities such as debts and litigation imposed on the LLC.
If the members’ personal life is mixed with the LLC business affairs, the limited liability privilege is compromised, and this can lead to loss of personal assets through legal and financial claims against the LLC.
By outlining LLC members’ roles, responsibilities, and expectations in writing, avoidable disputes can be prevented or mitigated through an operating agreement. A California LLC operating agreement can be referenced as the “constitution” of the LLC.
Potential investors, partners, and creditors can use an operating agreement to evaluate an LLC. Therefore, a well-run LLC improves the chances of collaboration or assistance.
Essential Information to be Included
Ensuring that an operating agreement adequately represents the members’ intent and contains all the required provisions is crucial.
Essential information to be presented in the operating agreement is the LLC name, name of a California registered agent, the purpose of the LLC, the LLC effective date, and the duration of the LLC. Other fundamental details included in a California LLC operating agreement are as given below.
Ownership of the LLC
The operating agreement states how much ownership percentage/interest/units each LLC member owns. Ownership will often be dependent on financial, time and effort contributions. As a result, ownership percentage will often influence a member’s profit share and voting power.
Starting up an LLC requires capital input/contribution. Capital contribution is the process of raising start-up funding which will involve making a deposit into the LLC’s bank account or issuing a check to the LLC. Checks are preferred as they are better for record-keeping.
The agreement is expected to show how much each member contributed. In a single-member LLC, the sole owner will often have to provide the initial capital solely, but in a multi-member LLC, the total capital needed is raised by members in portions. The portions can be equal or not. The initial contribution significantly influences ownership percentage.
Distribution of profits
Profits in an LLC have to be distributed to the owner(s). The California LLC operating agreement should direct members on how and when profits will be shared. For example, in a single-member LLC, the sole owner will likely take all the profits. Still, in a multi-member California LLC, profits have to be distributed proportionately with the ownership percentage. The same principle should apply to any losses incurred.
LLC entities have to file taxes in California. Therefore, the LLC operating agreement should state how the entity will be taxed.
In California, default state laws stipulate that an LLC is member-managed in accordance with the RULLCA regulations. Therefore, the operating agreement should specify the management structure adopted for the LLC and allow the members to appoint a manager to oversee the entity’s daily operations.
Voting rights will generally determine how decisions are made in a company. Different LLC members can have different voting rights within a California LLC. Ordinarily, voting power will be proportional to the members’ ownership percentage. However, a California LLC operating agreement allows for flexibility in awarding voting rights.
By the rule of a majority vote, members can appoint a manager or member to make most decisions in the LLC instead of voting on every other issue. However, issues such as transfer of ownership and dissolution of the LLC remain at the verdict of the LLC members. Issues that require a unanimous vote, such as amendment of the operating agreement, should be defined.
Changes and transfers
It is common for additions or withdrawal of members to occur in an LLC business. Protocols for assimilating new members into the company and removing existing members must be declared in the operating agreement. The document helps prepare for unprecedented events such as death, retirement, bankruptcy, incarceration, etc.
Without a clear stipulation of how ownership can be transferred in a California LLC, members can transfer their interest at their convenience and without approval from existing LLC members.
It is good to prepare for a situation where the company has to be dissolved, assets have to be distributed, debts repaid, and the LLC deregistered. The operating agreement should clarify the procedure to be followed in such a case. Ordinarily, a unanimous vote is required to dissolve an LLC entity; however, the members can specify their preferred procedure.
A California LLC operating agreement has to be signed to be legally enforceable. In a single-member LLC, the sole owner is expected to provide their signature on the document. In a multi-member LLC, all members should sign for the document to be valid.
California LLC Operating Agreement Template
The use of templates is common when creating an operating agreement due to its technical nature and the time it requires to prepare an up-to-the-mark operating agreement from scratch.
For this reason, we have provided our readers with free and downloadable California LLC operating agreement templates that are simple to customize to fit different LLC scenarios and arrangements. In addition, the templates are varied to meet the requirements of different types of LLCs.
How to Form the Agreement?
Regardless of whether it is a single-member or multiple-member LLC being started, its operating agreement must be compliant with the due process applicable in the state of California.
The members must first possess a verified business name before proceeding with the following steps:
Article of organization
The member(s) begins with applying with the secretary of state in California. Domestic LLC entities are registered using Articles of Organization, while foreign LLCs have to be registered as foreign LLC. In addition, foreign LLCs will require a registered agent with a physical address in California. Applications can be mailed or delivered in person.
When applying to operate an LLC in California, an application fee of $70 (both domestic and foreign LLCs) must be paid to the secretary of state by check, money order, or credit card. In-person applications will attract an additional $15 fee which can be paid by a credit card. Additionally, all foreign LLC applications will have to attach a Certificate of Good Standing that can be dated as far back as 6 (six) months.
Report annual franchise tax
Once the LLC has been registered, California LLC owners are required to submit an initial report within 90 days after filing with the California Secretary of state. In addition, LLC owners must also pay an Annual Franchise Tax by the 15th of the 4th month into the tax year. Failure to meet the two requirements is punishable with late fees and applicable penalties.
The next step is to create a California LLC operating agreement. The state of California requires all LLC entities under its jurisdiction to have an operating agreement.
The agreement can be verbal or written. A written operating agreement is more preferred as it is more effective. However, a verbal operating agreement is equally enforceable under state laws in California. The document is signed, each member is given a copy, and a copy is kept with company records.
Lastly, members should apply for an Employer Identification Number (EIN) for tax purposes once their registration documents have been filed with the state. Application for an EIN can be done through Form SS-4 or filed online.
Frequently Asked Questions
A single-member California LLC is an LLC company that a single individual owns. The sole owner has full ownership of the LLC.
No. an LLC operating agreement does not have to be filed with the state in California. However, it is an internal document held by the member(s) and the LLC.
The LLC members and managers of an LLC need the operating agreement to run the LLC. Also, external parties such as banks, courts, lawyers, and investors can request the document for distinct reasons.
The state of California does not require that LLC operating agreements be notarized. Therefore, the document becomes enforceable once all the required parties (LLC members) sign the document.
Yes. Through the California RULLCA (Revised Uniform Limited Liability Company Act), all-oral, recorded, or implied operating agreements are legally binding in California.
It is not a state requirement that a lawyer drafts an operating agreement. However, due to the technicalities associated with the document, it is best to have a lawyer craft one or review it before signing.
No. California LLC operating agreements are internal documents that do not have to be filed with any public agency. However, external parties such as banks, state agencies, etc., can request the agreement be submitted depending on the situation.
No, it is not. An operating agreement is an internal document used to outline the critical policies and structure of an LLC. In contrast, the Articles of Organization is a registration document filed with the secretary of state.