Create a Free California LLC Operating Agreement (2024 Template)

Welcome to our in-depth guide to making an LLC Operating Agreement in California.

This article delves into the essential aspects of LLC law within the Golden State, providing a comprehensive understanding of various critical areas.

What is an Operating Agreement for an LLC?

California LLC operating agreements serve as a contract among the LLC members (owners), specifying how the business will be run.

It distinctly lays out the agreed terms and responsibilities of the LLC members. Its contents are essential for providing clear instructions on the management and financial arrangements of the LLC.

Importance of Operating Agreements

Although California law does not require a written operating agreement for a limited liability company (Cal. Corp. Code § 17701.02(s)), having a legally binding document is crucial. It acts as a road map for the LLC, clearly outlining the internal rules, operating rules, and operating procedures that govern the legal entity. This document helps avoid conflicts by defining members’ and managers’ rights, responsibilities, and management responsibilities.

A well-drafted operating agreement can also prevent the default legal statutes of California from applying to situations not addressed in the document. For instance, without specifying ownership percentages or profit distribution terms, the default rules might impose terms that are unfavorable to the members.

Furthermore, the operating agreement ensures smooth operations and protects the members’ interests. It formalizes processes such as bank account management, operating procedures, and profit distribution. Even for a sole member LLC, an operating agreement establishes clear guidelines, reducing ambiguity and reinforcing the legal entity’s structure.

In summary, a written operating agreement is an indispensable tool for any LLC, providing clarity, structure, and foundation for business operations.

Contents of an LLC Operating Agreement

1. Ownership Structure:

According to the RULLCA, an LLC operating in California can be a single-member LLC or one with multiple members (LLC owners). The law offers flexibility for different scales and types of businesses.

A member of an LLC is not confined to individual persons but can also encompass a separate legal entity or multiple legal business entities. (Cal. Corp. Code § 17701.02(p), (v)) This flexibility allows for teamwork changes, making it easier for companies to try out setups ways of operating.

2. Capital Contributions and Distribution of Profits

A person can become a member of a California LLC without necessarily making capital contributions or having an obligation to do so unless the operating agreement specifies otherwise (California Revised Uniform LLC Act (CRULLCA), Cal. Corp. Code § 17704.01(d)).

However, it’s important to note that specific responsibilities are attached once a member promises to contribute. Suppose a member, due to circumstances like death, disability, or any other inability, fails to fulfill their agreed-upon contribution. In that case, they (or their estate) are still obligated to meet these commitments.

In such cases, the LLC may require the member (or the member’s estate) to provide a monetary contribution equivalent to the value of the unfulfilled contribution (Cal. Corp. Code § 17704.03(a)). This provision ensures that the LLC’s financial and operational expectations from its members are maintained, even in unexpected situations.

3. Voting Rights and Decision-Making Processes

If the LLC is member-managed, members have voting rights in proportion to their interest in the LLC’s profits unless the articles of organization or a written operating agreement provide otherwise.

A membership interest is what a member owns in an LLC. It includes the following rights: 

1. The right to get paid according to your share (right to receive distributions); 
2. Any right to vote or participate in the management;
3. Any right to information concerning the LLC’s business and affairs provided by RULLCA. (Cal. Corp. Code § 17701.02(r), (aa).)

The following acts are prohibited under the RULLCA and cannot be modified by an operating agreement: 

1. To change the rule on amending the articles of organization by requiring less than 50% of the members. (Cal. Corp. Code § 17704.07(s)). This prohibition upholds the democratic principle on the rule of the majority; and
2. To change how members can vote on ending (dissolving), changing (converting) or merging the LLC (Cal. Corp. Code § 17704.07(t)).

Distribution and Record-Keeping

Ensuring that all LLC members have a copy of the operating agreement is crucial for clarity and accountability. This key internal document outlines the company’s rules, processes, and member responsibilities, helping to prevent disputes and misunderstandings.

We recommend that your operating agreement be securely stored with other essential business records, such as financial statements and meeting minutes, to maintain a complete and organized record of the LLC’s internal operations. Keeping these documents accessible and up-to-date ensures transparency, supports legal compliance, and fosters trust among members.

Legal Requirements for LLC Operating Agreements in California

Below are the legal considerations and requirements concerning California LLC operating agreements. In forming an LLC, it is important to note that there are specific mandatory clauses that an operating agreement cannot alter. (Revised Uniform Limited Liability Company Act (RULLCA)).

The following provisions must not be changed:

• That the LLC has the legal capacity to sue and be sued under its name (Cal. Corp. Code § 17701.05(b)).
• California law shall govern the LLC’s internal affairs, member and manager liabilities, and their authority (Cal. Corp. Code § 17701.06).
• Respecting a court’s power to demand the signing or filing of records as per RULLCA (Cal. Corp. Code § 17702.04).
• Retaining, with specific exceptions, fiduciary duties like loyalty and care and the obligation of good faith and fair dealing in contracts (operating agreement may define performance standards).
• Complying with requirements for designating, maintaining, and changing an office and agent for service of process (Cal. Corp. Code §§ 17701.13 to 17701.16).
• Following court rules in LLC closure issues and preventing court-ordered dissolution (Cal. Corp. Code § 17707.03).
• Following RULLCA’s provisions for LLC formation, dissolution, and winding up (Cal. Corp. Code §§ 17702.01 et seq., 17707.01 et seq.).
• Ensuring members’ rights in class actions and approving mergers or conversions for members with personal liability (Cal. Corp. Code §§ 17709.01, 17710.01 et seq.).
• Protecting the rights of non-members and managers per RULLCA (Cal. Corp. Code § 17701.12(b)).
• Respecting RULLCA’s rules on mergers, conversions, dissenters’ rights, and member classes (Cal. Corp. Code §§ 17710.01 et seq., 17711.01 et seq., 17712.01).
• Safeguarding a member’s duty of loyalty (operating agreement may specify certain permissible activities and approval processes) (Cal. Corp. Code § 17704.09(b)).
• Preserving a member’s duty of care (Cal. Corp. Code § 17704.09(c)).
• Upholding RULLCA’s definitions, except where explicitly allowed (Cal. Corp. Code § 17701.02).
• Guaranteeing members’ rights to information and records (Cal. Corp. Code § 17704.10).
• Observing RULLCA provisions on modifying default rules and their effect on third parties (Cal. Corp. Code §§ 17701.10, 17701.12).
• Ensuring amendments to articles of organization are approved by most members (Cal. Corp. Code § 17704.07(s)).
• Respecting members’ voting rights on dissolution, conversion, or merger (Cal. Corp. Code § 17704.07(t)).
• Prohibiting elimination or limitation of liability for breaches of duty of loyalty, unlawful financial benefits, excess distributions, intentional harm, or criminal law violations (Cal. Corp. Code § 17701.10(c), (d), (g)).

In California, an LLC Operating Agreement can incorporate a variety of optional clauses as long as they do not conflict with the law or the articles of organization. These optional clauses can cover the following:

1. Member Relations: Provisions regarding the interactions among members and between the members and the LLC, allowing for customization of the internal dynamics and governance of the LLC (Cal. Corp. Code § 17701.02(n), (v)).
2. Managerial Rights and Duties: The agreement can specify the duties and powers of managers, who can be individuals or organizations running the LLC. This lets the LLC customize its management structure to fit its unique needs. (Cal. Corp. Code § 17701.02(n), (v)).
3. LLC Activities and Conduct: Rules related to the LLC’s business activities and conduct. These rules must offer flexibility in defining the operational scope and methodologies of the business.
4. Amendment Procedures: The Operating Agreement can outline the amendment process and the conditions under which it can be made. It must ensure that changes to the agreement are managed orderly and are agreed upon (Cal. Corp. Code § 17701.10(a)).
5. Replacing Basic Regulations: In areas covered by the RULLCA’s default provisions, the Operating Agreement’s clauses typically take precedence, allowing members to create a more customized operational structure. However, it’s crucial to note that there are specific non-modifiable RULLCA provisions that the Operating Agreement cannot alter (Cal. Corp. Code § 17701.10(c), (d), (g)).
6. Agreement Before LLC Formation: Even before the formal formation of the LLC, the initial members can agree to terms that will later constitute the Operating Agreement, ensuring that the foundational governance structure is in place from the outset (Cal. Corp. Code § 17701.11(c)).
7. Implicit Acceptance: An LLC is not required to execute the Operating Agreement to be bound by it formally. Additionally, any person who becomes a member is deemed to have agreed to the existing Operating Agreement, streamlining the process of onboarding new members (Cal. Corp. Code § 17701.11(a), (b)).

Naming a California LLC

An LLC name must include the words limited liability company or “LLC/L.L.C.” with options to abbreviate “limited” and “company” as “Ltd.” and “Co.” respectively.

The name should avoid terms like “bank,” “trust,” or “insurance company.” Per the California Secretary of State’s guidelines, it must be unique and not misleading, ensuring distinguishability from other LLCs and reserved names under RULLCA (Cal. Corp. Code § 17701.08).

Modifying an LLC Operating Agreement in California

Amending the articles of organization requires unanimous member approval unless the articles or a written operating agreement provide otherwise. Still, the operating agreement may not permit approval by less than a majority (Cal. Corp. Code §§ 17704.07(r)(2), (s) and 17701.10(d)(4)).

The fee for filing the certificate of amendment to articles of organization is $30 (Cal. Gov’t Code § 12190(d)).

Procedures for Amending Your Agreement

No filing with the Secretary of State (SOS) is required to amend the operating agreement. The law contains no default provisions regarding filing an amendment to the operating agreement.

Still, to avoid disputes and to keep required records, parties should:

1. Put the amendment into writing, making sure it follows the rules in the operating agreement;
2. Record the amendment’s approval in the meeting minutes or in written contracts from the members (and managers, if needed);
3. Complete the amendment process by signing an updated operating agreement;
4. Store the original formation documents and any LLC records amendments, as California law requires (Cal. Corp. Code §17701.13(d)).

Dispute Resolution and Dissolution Provisions

Handling Internal Disputes:

In a California LLC Operating Agreement, solving internal disagreements usually means having a straightforward dispute resolution process. This often starts with steps like mediation or arbitration. It might also involve special voting rules or agreements on buying and selling shares if conflicts can’t be resolved directly. These provisions are designed to resolve disagreements efficiently and amicably, minimizing disruption to LLC operations.

Dissolution and Winding Up of a California LLC:

A California LLC can be dissolved and its business activities concluded if over half of its members agree to it (or more, if the papers say so) if it goes 90 days without any members (except for businesses with just one owner), or if a court orders it to be dissolved under California law (Cal. Corp. Code § 17707.01 and § 17707.03).

When a California LLC decides to dissolve, it must file a certificate of dissolution with the SOS, except in some instances, such as:

(a) when the LLC opts to file a short-form certificate of cancellation -or-
(b) when all members vote for dissolution – a decision that must be stated in the certificate of cancellation.

The certificate of dissolution should include the LLC’s name, SOS file number, and the event causing the dissolution. The certificate may also contain any additional information the members wish to include, although this is typically optional. Notably, the certificate of dissolution must be filed before or simultaneously with the certificate of cancellation, per the California SOS requirements.

Sample Operating Agreement Templates

Sample operating agreement templates are invaluable resources for LLC owners looking to streamline the creation of their limited liability company operating agreement while ensuring compliance with the California LLC Act.

These templates are available in various formats, including free operating agreement templates tailored for different management structures, such as manager-managed LLC operating agreements and single-member LLC operating agreements.

• Single-Member LLC Operating Agreement Template
• Manager-Managed LLC Operating Agreement Template

A comprehensive LLC kit typically includes these templates, guiding members on critical sections like allocations and distributions and the management of internal company records. By using a well-structured California LLC operating agreement, businesses can customize their agreements to meet specific needs while adhering to legal requirements, fostering clarity and efficiency in LLC operations.

Types of California LLC Operating Agreements

1. Member-Managed LLC

In a member-managed LLC, the ownership interest percentages determine each member’s decision-making power, aligning with the LLC’s ownership structure. Members are actively involved in the management structure, handling day-to-day operations and key decisions. (Cal. Corp. Code § 17704.07(b)).

The member-managed LLC operating agreement or articles of organization can be customized to include buy-out provisions, adjust voting rights, or accommodate unique management needs. This flexibility is particularly beneficial in a multi-member LLC operating agreement, ensuring that the decision-making process aligns with the LLC’s specific goals.

2. Manager-Managed LLC

In contrast, a manager-managed LLC delegates operational control to designated managers, often suited for members who prefer a passive/investor role. Managers have exclusive authority to make decisions about the LLC’s activities, while members retain limited involvement. (Cal. Corp. Code § 17704.07(c)).

The manager-managed LLC operating agreement can further refine this structure, specifying the decision-making authority of each manager and addressing scenarios like a qualified joint venture LLC. This approach is ideal for members who want to minimize direct management involvement while still benefiting from their investment.

Member and Manager Duties:

• Both members and managers in California LLCs must uphold their fiduciary responsibilities, including loyalty to the company and adherence to the duty of care. They must avoid conflicts of interest, manage profits responsibly, and refrain from competing against the LLC. (Cal. Corp. Code § 17704.09).
• These duties also apply to single-member LLC operating agreements, ensuring that even sole proprietors manage their business with integrity. California’s status as a community property state further underscores the importance of clearly defining roles and responsibilities within the operating agreement to avoid complications in ownership or management disputes.

By addressing these elements, a well-drafted operating agreement protects the LLC’s interests and ensures smooth operations, regardless of the chosen management structure.

LLC Operating Agreement Generator

Online platforms like FormPros allow you to create your own LLC operating agreement in just a few clicks. This will help you eliminate common mistakes and avoid legal fees.

An LLC operating agreement generator offers a user-friendly interface and an intuitive step-by-step process that guides you through the customization of your agreement.

With a generator, you can quickly and effortlessly generate a personalized, legally binding document that meets the specific needs of your LLC.

Why Use Our LLC Operating Agreement Generator?

Our form generator simplifies creating an LLC operating agreement by guiding you through customizable items, ensuring all critical details are included and minimizing errors.

With FormPros’ free LLC operating agreement template generator, you can easily create legally binding documents without needing a lawyer, accountant, or notary, while enjoying privacy, security, and cost savings, as no additional software installation is required.

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Create A California LLC Operating Agreement Now

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California LLC Operating Agreement FAQs

• Can I use the same operating agreement template for different types of LLCs?
  Yes, but you must customize the template to reflect the specific management structure (e.g., single-member or manager-managed) and operational needs of your LLC.
• Do I need to file my LLC Operating Agreement with the state of California?
  No, the operating agreement is an internal document and does not need to be filed with the state. However, you should keep a signed copy in your business records.
• Can a single-member LLC have an operating agreement?
  Yes, single-member LLCs benefit from operating agreements as they provide legal clarity, especially in distinguishing the LLC as a separate entity from the owner.
• What happens if I don’t have an operating agreement for my LLC?
  Without an operating agreement, your LLC will default to California's state laws, which may not align with your business's specific needs or preferences.
• Can I amend my LLC Operating Agreement?
  Yes, amendments are possible but should follow the procedures outlined in the agreement itself. Be sure to document and file changes internally.
• What should I include in my LLC Operating Agreement?
  It should outline ownership percentages, management roles, voting rights, profit distribution, capital contributions, and dispute resolution processes.
• Do operating agreements protect personal assets?
  Yes, they help reinforce the separation between personal and business assets, reducing the risk of personal liability for business debts.
• Are operating agreements legally binding?
  Yes, they are considered contracts among LLC members and can be enforced in legal disputes.
• Can I use a free template without modifications?
  While templates provide a good starting point, you should customize them to comply with your LLC’s unique requirements and California laws.
• What is the difference between a member-managed and a manager-managed LLC?
  In a member-managed LLC, all members share management responsibilities, while in a manager-managed LLC, designated managers handle day-to-day operations.
• Is a notarized operating agreement required in California?
  Notarization is not required, but having it notarized can add an extra layer of authenticity and enforceability.
• How does an operating agreement help in resolving disputes?
  It provides predefined rules and procedures for resolving conflicts, minimizing misunderstandings among members.
• Can I draft an operating agreement without legal help?
  Yes, but consulting an attorney ensures the agreement complies with California laws and fully addresses your LLC's needs.
• Does an operating agreement affect my LLC’s tax status?
  While it doesn’t directly affect tax status, it can document decisions like electing S-Corp taxation, which impacts how taxes are filed.
• What happens to the operating agreement if an LLC member leaves or passes away?
  The agreement should include provisions for such events, like buyout procedures or transferring ownership to heirs, to ensure continuity.