California LLC Operating Agreement Template

In California, your limited liability company (LLC) is required to have an operating agreement in place. An effective operating agreement can also help avoid disputes and lawsuits that could threaten the stability of your LLC. 

What is an LLC Operating Agreement?

A California LLC operating agreement is an important legal document that details who owns the business and provides essential information pertaining to member duties. An LLC operating agreement establishes the financial relationship between members and the basics of the working relationships between those members and the managers who oversee daily operations. 

The operating agreement is not filed with the state, but instead remains private. It’s advisable to hire an attorney to ensure your operating agreement is thorough and legally binding.

What Should Your California LLC’s Operating Agreement Include?

The operating agreement should clearly define:

• Ownership structure: Clearly define the ownership percentage of each member (owner) of the LLC. This should include details about the members’ capital contributions, whether they are monetary, property, or services.
• Distribution of profits and losses: Outline how the LLC will distribute profits and losses among members. You can choose to distribute them based on ownership percentages or another agreed-upon method.
• Management structure: Specify whether the LLC will be managed by its members (member-managed) or by appointed managers (manager-managed). Clearly define the roles, responsibilities, and authority of the managers or managing members.
• Voting rights and decision-making: Define the voting rights of each member and the decision-making process. This may include the percentage of votes required for specific decisions, such as major business decisions, amendments to the operating agreement, or admitting new members.
• Meeting requirements: Establish rules for holding and conducting regular and special meetings, including notice requirements, quorum, and voting procedures.
• Admission and withdrawal of members: Specify the process for admitting new members, including any required capital contributions, and outline the procedures for members who wish to leave or transfer their ownership interest in the LLC.
• Dissolution: Describe the circumstances under which the LLC may be dissolved, as well as the process for winding up the company’s affairs, including the distribution of assets.
• Record-keeping: State the requirement for maintaining accurate financial and operational records, including accounting and bookkeeping methods.
• Non-compete, non-solicitation, and confidentiality clauses: If desired, include provisions to protect the company’s interests by preventing members from competing with the business, soliciting employees or customers, or disclosing confidential information.
• Dispute resolution: Establish a process for resolving disputes among members, which may include mediation, arbitration, or litigation.
• Amendment process: Define the process for amending the operating agreement, including the required approval percentage and procedures for proposing and adopting changes.
• Governing law: Specify that the operating agreement will be governed by and interpreted under California law.

If the LLC has a board of directors, the operating agreement will also include the role and responsibilities of the board members and how they are compensated. 

An LLC operating agreement provides legal and financial recourse for a number of situations. If conflicts arise between LLC owners pertaining to any of the above issues, the operating agreement will provide clarity. 

The specific language of the operating agreement lays out exactly how such conflicts will be resolved, how the business is structured, the dynamics of operations, and more. 

Though California has default rules on the books that address some of the issues that might arise between LLC members, your LLC operating agreement would override these default laws and give you greater control.  

How Much Does an Operating Agreement Cost? 

Creating an operating agreement is free if you just draw it up yourself. Alternatively, you can pay for guidance from an online business advisory like ZenBusiness.

This is an extremely important document, so it’s recommended that you hire a professional service or law firm. If you choose to use an attorney to help you create this document, the price will be around $500 for a single-member LLC and $2,500 for a multi-member LLC. 

Who Needs my LLC Operating Agreement?

One of the key reasons to have an operating agreement in place is that it makes your LLC more appealing to financial backers. Banks are likely to request to see your operating agreement when you apply for a loan. If you seek funding from investors, they will also want to see your operating agreement. 

Conclusion 

An operating agreement is legally required in California, and is a crucial document for LLC operations, ensuring your company is able to access adequate financing and settle any disputes. Keep in mind, you do not need to file your operating agreement with any state body. You simply need to take certain steps to ensure it’s legally binding and keep it in your records.