Limited Liability Company (LLC) owners in California need an operating agreement to establish how they plan to operate their business. Our professionals have extensive experience with this topic and help LLC owners and members achieve their business formation goals.
We’ve created this Go Vitru guide to give you a solid understanding about the purpose of an LLC operating agreement, types of information it should contain and benefits of keeping this legal document on file and updating it when necessary.
WHAT IS AN OPERATING AGREEMENT FOR AN LLC?
In simple terms, an operating agreement is a legally binding promise by a single managing member of an LLC or between members to operate the LLC in specific ways. It outlines everything relevant to the LLC’s operation, including finances, voting rights and even member exit/withdrawal and LLC dissolution details.
For example, with a single-member LLC, it details the separation between the business and the owner and outlines succession. It describes in detail all business operations, including how records must be kept and who handles them. With a multi-member LLC, it also notes the person or persons responsible for opening and managing bank accounts.
The operating agreement is incredibly detailed so that there are no future legal questions or disagreements about business operations. Many business experts agree that multi-member LLCs especially benefit from an operating agreement because it guarantees that every member is in agreement about business operations and their rights and responsibilities from the start. A single-member LLC owner benefits because the agreement serves as a reminder and guidance so that they always control and manage their operations as planned.
WHAT SHOULD AN OPERATING AGREEMENT MENTION?
No matter if you’re setting up a single- or multi-member LLC, your California LLC operating agreement should include at least the following details for legal reasons:
Basics: It needs to provide all information about the formation and organization of the Limited Liability Company, including the date of formation, the names of the member or members, the dates they became members and the type and per member level of division of ownership. It also needs to mention the types and number of capital contributions by each member. The agreement might also contain other additional details, such as the intended length of membership for each member and any special instructions related to a specific member leaving by a certain date.
Management: It needs to outline all details pertaining to LLC management, including if it is managed by one member or several and their names, steps for transference of ownership or roles within the company if a member leaves or wants a new role, respectively, and replacement and buyout processes. Since voting is a critical part of the management process, the document also needs to outline how members vote and detail the weight of each member’s vote.
Funds: Once you have the basic capital contributions listed, you also need to discuss future methods for raising funds and how you plan to divide profits and losses to each member. This portion is especially important if any member has agreed to not receive an equal share of profits because of a lower capital contribution or for other reasons.
Changes: It also needs to outline when to update the agreement and how to dissolve the LLC no matter the reason with clear member expectations and steps. An agreement amendment typically becomes necessary after the loss of a member who decides they want a new role or leaves or the addition of a new member. This section needs to also outline how many members are necessary to approve changes or complete the dissolution of the company.
WHY DO I NEED A California OPERATING AGREEMENT?
California recommends that LLC owners create and agree upon the use of an operating agreement on its LLC Operating Agreements. It’s simple business common sense. When you have a legal document that requires agreement about the operations of the LLC, you have a tool that can help prevent future misunderstandings, disagreements and conflicts.
Beyond this benefit, an LLC operating agreement in California makes your business more credible and acts as proof its limited liability status in state and federal courts. Without this agreement, you look less professional and credible. You also risk the chance of a lawsuit. If you have an operating agreement, you can easily handle and legally manage many areas of conflict without disagreements ever reaching a court room.
Even if a member or third party feels that legal proceedings are necessary and make a claim that goes against past agreements, the physical operating agreement document can act as evidence in support of your stance.
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