Operating Agreement LLC California

What Is an LLC?

Before we jump right into what an operating agreement for an LLC is, we need to cover exactly what an LLC is.

An LLC (limited liability company) is a legal entity for a business. It creates a separate entity from the members of an LLC to keep their personal assets safe. This means that there is less risk associated with personal assets being liquidated in the event of a lawsuit.

For this reason, an LLC must have its own employer identification number (EIN) to pay taxes. You also need other documents, like the articles of organization and operating agreement, to remain compliant.

LLCs tend to be more flexible than sole proprietorships and partnerships. An LLC can be a single-member LLC, which consists of just one person. Or, it can be a multi-member LLC, which has many members who all contribute different things to the business.

People start LLCs because they’re useful for liability protection, and they can be advantageous for tax purposes. There are many types of LLCs in California, so it’s important to understand which option works best for you before you get started.

What Is an Operating Agreement?

Operating agreements are important legal documents. Their purpose is to outline how decisions are made within an LLC. For example, if you have several members of your LLC, an operating agreement is useful because it determines how the group will make decisions.

Not only does an operating agreement help with decisions between members, but it’s also useful for handling the businesses’ financials. It can outline how an LLC in California will spend its money, who the money goes to, and how revenue is distributed.

Operating agreements also cover the roles of members, any regulations for the business, and ensuring that everyone is following the rules agreed upon by the members. Ultimately, the operating agreement is there to make sure members of an LLC cooperate with one another and that the process for cooperation and problem-solving is simple.

What Businesses Need an Operating Agreement?

Only LLCs need to have an operating agreement. Sole proprietorships, partnerships, and limited partnerships don’t need an operating agreement to function. However, that doesn’t mean you shouldn’t have some type of agreement in writing; the only difference is that it won’t have the same formality as an operating agreement for LLCs.

Additionally, corporations don’t need an operating agreement either. Instead of operating agreements, corporations in California need bylaws. These are rules and regulations that govern how a corporation will be managed, so bylaws are similar to an operating agreement.

Benefits of an Operating Agreement for LLCs in California

Operating agreements come with many benefits and very few drawbacks, aside from the time or money it takes to create them. It’s important to consider these benefits, even if you have a single-member LLC, because some of them are useful for solo entrepreneurs as well. Learn more about the benefits of an operating agreement for LLCs in California below.

Helps With Liability

LLCs are popular because of their liability protection; liability protection is usually the reason for the formation of these companies. When you create an operating agreement, it helps you separate your assets from the company’s assets. In the event of a lawsuit, referring to this operating agreement can help members of the LLC shield themselves from legal problems.

Establishes Clear Procedures and Rules for LLCs

Every LLC needs rules and procedures in place to handle challenges that may arise. Operating agreements do exactly that, but they also explain how companies will be managed, who manages them, and much more. While the articles of organization can help with organization, the operating agreement is what holds members of an LLC accountable.

What Is a Default Operating Agreement in California?

California has default rules for LLCs that operate in the state. According to state law, any LLC that doesn’t have an operating agreement is governed under these rules and regulations.

Additionally, any gaps in the operating agreement can be filled by these default rules, so ensuring that an operating agreement is written properly is essential. The more comprehensive the operating agreement, the better.

Do LLCs Need an Operating Agreement in California?

According to the California Secretary of State, California does require LLCs to maintain an operating agreement. However, you don’t have to file it with the state, so LLCs don’t usually run into any legal problems for not having one until it’s too late.

While you’re required to file things like the articles of organization by law, California does not place the same level of scrutiny on the operating agreement. In fact, the state won’t let you file an operating agreement, even if you send them a copy.

Still, that doesn’t mean you should avoid drafting one until it’s too late. Failing to have one can result in disagreements that don’t get solved, or worse, legal problems. Additionally, you may run into problems handling financial assets or revenue between members of an LLC.

Can you imagine dealing with 100 members who don’t know what the rules and regulations of an LLC are? Drafting one of these documents is essential for the success of your LLC.

California LLC Operating Agreement Requirements

California requires operating agreements to meet a set of requirements before they’re considered valid. While you need to have an operating agreement that meets these standards to adhere to state law, you also need them to ensure the smooth operation of your LLC.

While you need to include the basic information about your business, like its name, members, and formation date, you also have to include more nuanced topics. These might include how votes are handled, how the LLC can be closed, and much more.

Learn more about operating agreement requirements in California below.

Basic Information About the LLC

First and foremost, you need to include basic information about the LLC in California. You need to include the name of the business, which you have to register with the California Secretary of State, along with any fictitious names.

From there, you need to include the Effective Date, which is the first day that transactions can flow through a business.

Ownership information and details about the registered agent should also be included in the operating agreement. Along with this information, names, addresses, and contact information for the members need to be listed in the articles of organization and the operating agreement.

Member Rights and Decision-Making Rules

One of the most important parts of an operating agreement is how voting is handled. Some multi-member LLCs like to have equal voting rights, while others may have voting rights that are based on initial contributions. Regardless, you also need to include it in your operating agreement.

Aside from handling the voting power, the operating agreement should also handle when voting occurs, the transfer of membership interest, and how roles are determined. For example, it doesn’t always have to be financially-based.

How members are compensated if they leave the LLC is also important. Plus, your members should have a plan in place for dissolution and how it’s handled.

Activities of Your LLC

An operating agreement should also cover the activities of your LLC. These include what your company offers, how you conduct business, and who you intend to conduct business with.

Activities can also include industries you plan to enter, how you’ll market your products/services, and much more. Ultimately, you should include any activities your LLC will be doing.

Financial Information

How profits, losses, and distributions are handled also needs to be included in your operating agreement. You should highlight what will be done with the company’s revenue, where it will be directed, and what plans for expansion might look like as well. Information about how debt is handled can also be useful to include in an operating agreement.

Aside from company financials, you also need to include tax information. The operating agreement needs to determine how taxes are handled, who pays the taxes, and what will be deducted. Make sure you cover the financials in the operating agreement to prevent any disputes over money.

FAQ’s About California Operating Agreements

Have questions about how to handle operating agreements in California? If so, find answers to some of the most commonly asked questions below.

Does a California LLC Operating Agreement Need to Be Notarized?

According to California’s state laws, no, an operating agreement doesn’t need to be notarized. Since the state doesn’t force LLCs to file an operating agreement, you don’t have to have one notarized by a professional.

That said, we always recommend notarizing important documents. Sure, it might be an additional step, but having the document notarized can help its contents hold up better in court. So, it’s worth the extra attention.

If you do notarize your operating agreement, you might have to spend a few bucks, so keep this in mind. Still, it’s worth every penny for the peace of mind working with a notary can bring.

Should I Write My Own Operating Agreement?

We don’t recommend writing your own operating agreement. While you can write your own operating agreement, doing so can be a hassle, and there’s a chance that you may miss something.

For this reason, many law firms help LLCs write operating agreements, and the cost isn’t all that high. Plus, spending the extra money is usually worth it if you know your operating agreement is bulletproof.

If you do plan on writing your own operating agreement, we recommend using a template. You can find an operating agreement LLC California template for free by visiting SEC websites. For example, the state has a template/example of a single-member LLC operating agreement.

There are lots of templates available for multi-member LLC operating agreement California requirements. You can find other templates for other types of LLCs as well.

Do You Need an Operating Agreement for a Single-Member LLC in California?

You don’t need an operating agreement for a single-member LLC in California, but that doesn’t mean you shouldn’t have one.

While it might sound silly to write an agreement with yourself, it can help you stick to the rules and regulations you’ve created. For instance, if you forget how something is supposed to be handled, you can always go back and reference the operating agreement.

Operating agreements can also come in handy if you plan on adding more members to the business later. Instead of having to start from scratch, you’ll already have a nice operating agreement template to start with.

How Much Is an Operating Agreement for an LLC in California?

Operating agreements for LLCs in California tend to cost a few hundred dollars if you have them written with help from a law firm.

That price will come down if you purchase a template, and some operating agreement templates for LLCs in California are free. So, you can usually get away with making an operating agreement for free, even if you need help from outside sources.

We do recommend getting assistance with your LLC’s operating agreement. It’s one of the most important documents for your business and ensures that everyone follows the appropriate rules.

Messing it up can cost you more than paying for a professional operating agreement.

Create Your Operating Agreement for a California LLC Today!

Every multi-member LLC in California needs an operating agreement. Without one, business decision-making is handicapped and the organization necessary to thrive likely won’t be there.

Furthermore, operating agreements are required by state law in California. While you don’t have to file with the state, you do have to keep the operating agreement handy just in case something comes up.

While you can write an operating agreement yourself, we always recommend getting some help with this type of document. Whenever you’re outlining important details about decision-making or determining someone’s role in the company, there’s nothing wrong with getting a little help, and we’re here to provide exactly that.