California LLC Operating Agreement

Last updated on: June 30, 2021

Creating a company is a process that warrants a careful approach and special attention to detail—after all, there is no element too small when it comes to LLC formation. Among other things, you will need to develop your strategic profile, prepare and file documents for your registration, and obtain relevant licenses or permits.

But balancing all paperwork and startup costs won’t be your only problem when managing a company. There is also the defining step of obtaining the Certificate of Formation that legally declares your company open for business and therefore ready for new opportunities.

No less important is the maintenance of your LLC that will define its success both in the nearest future and long-term. How will it operate and who will be running it? How will the profits and losses be allocated? All of these and other operational aspects should be detailed in your LLC operating agreement.

What is an LLC Operating Agreement?

When it comes to the LLC operating agreement, California defines it as an internal document aimed to outline the following:

  • guidelines for primary business activities;
  • operational hierarchy and internal structure;
  • responsibilities of all members.

An operating agreement and the articles of organization are two very different documents. Unlike your articles of organization, the agreement is an internal document meant to provide structure for the company owners and members. After an operating agreement is drafted and signed, it should be kept in a safe location along with other company documentation.

Despite its nature, the document is no less important: whether you plan on starting a multi-member or single-member LLC, you will still need to draft an operating agreement as mandated by California state law.

Does the LLC need to have an operating agreement in California?

A California LLC operating agreement is a formation step required by the state if you want to run a business. Unlike other documents involved in the LLC formation process, you don’t need to submit the agreement with The Secretary of State or other government bodies, nor do you have to notarize it.

The agreement takes effect as soon as all company members sign it. It could be done orally or in writing, though the former comes with a few drawbacks. Some of them are:

  • lack of written proof of ownership;
  • lack to show clear proof of separation between LLC assets and its owners’ personal assets;
  • inability to provide written agreement for third-party examination.

Following this, the most natural question you may have regarding potential vulnerabilities is, “Who would even need to check your operating agreement?”

There are quite a few possibilities, including: 

  • court of law;
  • bank representatives;
  • investors;
  • attorneys and accountants.

As you can see, although it’s permissible to simply acknowledge the agreement in oral form, it would still be more beneficial to put it in writing. The long-term stability of the company is more than worth the time you might spend on drafting the agreement and getting it approved.

Benefits of Creating an Operating Agreement

The main reason for creating an operating agreement is, of course, the fact that the state requires you to do so. But there’s more to it than following a mandate. Some of its benefits for you and your business include:

  • proof of LLC status and protection of personal assets in case a lawsuit is brought against the company;
  • insurance against default rules;
  • minimizing internal disputes by clearly outlining owner responsibilities and allocating shares among members;
  • ability to provide information about the company’s structure for outside assessment (banks, potential partners, or investors);
  • having a set of guidelines on hand in cases of letting go of and admitting new members, agent for service of process changes, or voluntary LLC dissolution. 

It’s hard to predict what the future may bring when you are only starting your journey. But the purpose of the operating agreement is to provide guidelines for almost anything in order to ensure your company stays protected from the majority of legal issues that may arise along the way.

Free California LLC Operating Agreement

An operating agreement to a company is what a stable foundation is to a house. Even a single-member LLC requires one, not to mention large companies operated by dozens of members. 

But considering that the agreement is an internal document, there is no single state-approved template for the LLC operating agreement form in California, meaning that the decision on what to include in it is up to you.

It may seem like an arduous task at first, but there are a couple of ways to make this process easier:

  • using an operating agreement template free of charge since dozens of them are available online;
  • hiring a formation service to draft your LLC operating agreement for you.

Let’s examine both options. 

Handling this step on your own is a more frugal option since you can choose between fairly decent free LLC operating agreement templates or hire an attorney to verify it. Plus you don’t even need to have a law degree since most templates will help you deal with company structure and legal terminology.

Still, it’s impossible to find a universally applicable template that will fit your company’s needs to the last detail.

The best way to ensure the operating agreement functions with utmost efficiency is to hire an LLC service provider like ZenBusiness or Northwest Registered Agent.

Both formation companies will not only offer a range of other useful services at a discount but also provide free operating agreement form templates in your industry as well as templates of other documents.

Whether you choose to draft the agreement yourself or seek outside assistance, the document should include the following information:

  • entity’s name, address, and the date when you file your Articles of Organization;
  • business type;
  • period of validity and date of dissolution i.e. whether the company operation is indefinite or temporary;
  • owner information (names, addresses);
  • share allocation, namely the outline of the shares each owner/member holds of the total capital;
  • future investments policy;
  • operational structure (manager- or owner-run);
  • voting rules i.e. which actions warrant a vote and the voting margin required to approve a motion;
  • allocation of profits and losses; 
  • tax policy;
  • guidelines for managing company members, including the process of selling member shares as well as rules for accepting new members and dismissing or replacing existing members; 
  • agent for service of process information (name, address, contact info)
  • process of introducing changes to the operating agreement; 
  • company dissolution, including the voting procedure to pass the motion, allocation of remaining assets, and debt settlement; 
  • member signatures.

Some of the information listed above may not be applicable to all LLCs and can therefore be omitted but it’s generally better to cover all bases. After all, this document is part of your entity’s foundation and should be as detailed and personalized as possible.

This is also true for single-member companies given that an operating agreement is designed to outline procedures for business activities that could happen rather unexpectedly whether you planned for them during formation or not.

Despite the fairly lax regulations for the operating agreement, it absolutely cannot go against the legal requirements set by the state. In other words, you can’t include internal regulations that would break state law. For instance, you can’t exempt yourself from the requirement to file annual reports or designate a registered agent, nor can you limit the authority of the state court. 

Making Changes to Your Operating Agreement

Predicting the rapid changes that could befall your business is near impossible. The best you can do is try to plan for possible contingencies and expect that future changes to the operating agreement are unavoidable.

After all, your company will inevitably grow, bringing more complexity to its structure, changes in its preferred field of operation, and shuffling of its members and staff. All of this should be noted in the operating agreement.

If, for instance, your agent for service of process resigns, you will be required to designate a new one following California law. If you plan to hire a registered agent service, it’s important to make the necessary changes in your operating agreement. 

When it comes to amending an operating agreement LLC, California does not review or approve the changes. The procedure is completely for you to oversee and control as long as you follow the state law and can work with text editing software. 

After you’ve made the necessary changes in the agreement, its printed copies should be sent to all LLC members doing business in California to approve the amendments. 

Engaging a specialist outside the company

Drafting an operating agreement can be quite a handful given the sheer vastness pf subject matters it’s supposed to cover, especially if you lack experience with this type of documentation.

So if you’d rather avoid clerical errors by trying to tackle all documents by yourself, it would be a good idea to hire a third-party specialist to do this work for you.

Hiring an Attorney

Running a stable company without the help of a reliable business attorney is near impossible. Whether they are a permanent member of staff or contractor, an attorney who regularly works with the company’s legal paperwork will be able to draft a more detailed operating agreement or proofread an existing one, ensuring that everything is in order and minimizing potential disputes in the future. 

If you’re not sure where to start looking for a reputable attorney, try checking services like Avvo that offer extensive listings of California lawyers that specialize in LLCs. Avvo’s user-friendly interface allows you to filter your search by various categories in order to narrow down your options.

Hiring an attorney is obviously a costly affair but ensuring the stability of your business and its successful growth are more than worth it. 

Hiring an LLC Formation Service

Forming an LLC can be a rather lengthy and stressful process, forcing many novice entrepreneurs to grapple with unfamiliar obstacles. While some of the issues that newcomers face are the result of inexperience or skill, other problems are caused by the lack of time.

Not to mention the lack of funds—a common dilemma that plagues many startups who cannot afford to hire a reputable attorney.

But there is another way to process your paperwork and get it approved. Hiring a professional formation service will likely save you money and grant ease of mind, plus their prices are pretty friendly, namely those of ZenBusiness or Northwest Registered Agent.

These service providers are within the price range of an average startup, while the quality of their services can rival many industry giants. For a fairly reasonable price, an online formation service can provide templates required for entity registration as well as draft an operating agreement with your company in mind.

This document will be personalized according to the specifics of your entity’s structure, making for an excellent investment in the future of your company.

Senior Business Tax Writer, etc
Jean Wilson Murray
(323) 789-5289
Senior Business Tax Writer, etc
Jean Wilson Murray

In this IncFile vs ZenBusiness review, we're going to compare two of the most popular LLC formation services based on pricing, features, and drawing out differences and similarities to let you see which is most suitable for you and your business.

You can learn more about @Mike here.

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