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Do you need an Operating Agreement for your California LLC?

If you are starting a new business, you might be wondering about the requirements to set up this business entity, including whether you need an operating agreement. The formation steps you take to create your business are important and can protect you for years to come. If you need help with your California LLC operating agreement, consider reaching out to Von Rock Law by calling (866) 720-0195

What Is an LLC?

An LLC is a limited liability company. Some of the characteristics of this type of business include:

  • It is owned by “members”
  • This type of business is formed by state statute
  • Domestic LLCs are managed by one or more members or managers
  • It offers protection from personal liability similar to a corporation
  • It is usually taxed on a pass-through basis, meaning that members report profits and losses on their individual tax returns

What Is an Operating Agreement?

A California LLC operating agreement is a legal document that governs how an LLC will be managed and describes its internal structure. Specifically, this written contract regulates the following:

  • The business’ activities
  • Financial decisions
  • Internal management
  • The ownership structure
  • The identity of the LLC’s owners
  • How the LLC is to be managed

Does a California LLC Need an Operating Agreement?

Yes. California law requires LLCs to create an operating agreement during their initial registration process. The LLC does not have to file the operating agreement with the Secretary of State. Instead, the finished agreement is stored at the company’s designated office where its records are kept.

Benefits of a California LLC Operating Agreement

Some of the reasons why having a California LLC operating agreement is a good idea are:

  • It is required by state law – CA Corporations Code Section 17701.02(s) requires every California LLC to have an operating agreement. Therefore, having this agreement can help ensure you comply with the law.
  • An operating agreement establishes the business as a separate entity – One of the most important
  • Operating agreements set clear expectations – Having a written agreement can help establish expectations at the inception of your business. This can help prevent misunderstandings and conflict among business owners. Your operating agreement can provide clear details about each member’s role and responsibilities.

What Are The Requirements of a California LLC Operating Agreement?

California LLC operating agreements can be customized to your particular business. Some information you may wish to include follows:

Business Name

Before you open a new business in California, you will need to check that your preferred business name is available and register it. Your operating agreement will identify your business name, along with any “doing business as” name.

Effective Date

The operating agreement may contain a date when official business transactions will flow from the business.

Registered Agent

A registered agent who can receive legal notices and communications on behalf of the business may be identified. 

Ownership Information

The operating agreement should list all current members of the LLC, along with the percentage of the business each member owns.

Initial Contributions

The members’ initial contributions to start the business may be identified, including financial and nonfinancial contributions.

Voting Rights and Decision-Making Powers

The operating agreement should also state whether it will be managed by members or an appointed manager. It should also identify how members will vote on important matters pertaining to the business. Members may have an equal vote, have a certain number of votes based on the percentage of the business they own, or have a different number of votes based on the operating agreement’s terms. Annual meetings might also be discussed in the agreement.

Transfer of Membership Interest

The agreement may indicate how a member’s interest may be transferred to the remaining members or a third party if they no longer want to be involved in the business. 

Activities and Purpose of the LLC

The LLC may identify the purpose and activities of the LLC, possibly taking this information out of your business plan.

Profits, Losses, and Distributions

Before any distribution or assumption of debt, the members should be clear about how their profits and losses will be divided among the members.

Management

Additional details regarding how the LLC may be managed might be included in the operating agreement.

Compensation

Additional terms regarding compensation for members or managers may also be discussed in the agreement.

Taxing Structure

How the company plans to report taxes might also be identified in the operating agreement.

Bookkeeping Procedures

The operating agreement may also indicate how records will be maintained for the LLC and the accounting method the business will adopt.

Limited Liability

The operating agreement may include a clause that states the business shall be a separate legal entity of the owner so that the owner’s personal liability is limited.

Dissolution

The operating agreement might also provide instructions about what will happen to ownership of the business if a member dies, divorces, or becomes disabled.

Does an LLC Operating Agreement Need to Be Notarized in California?

No, an LLC operating agreement does not legally have to be notarized. However, having notarization can potentially limit any future arguments about coercion or misunderstandings.

Can I Create My Own Operating Agreement for My LLC?

While you can create your own operating agreement for your LLC, you may want to hire an experienced business lawyer to help you with this process. A lawyer can create a draft of your members’ understanding and review any current agreements. A lawyer can also advise you of your ongoing responsibilities to ensure that your business remains a separate legal entity. A dedicated San Francisco business lawyer with Von Rock Law can discuss your objectives and concerns during a confidential consultation. 

Contact a Business Lawyer for Help with Your California LLC Operating Agreement

If you would like to establish clear expectations about your business, protect your limited liability status, and comply with state laws, you must create a California LLC operating agreement. The legal team at Von Rock Law knows how to complete these types of agreements and what kind of information to include to protect your business. If you need help with your agreement, consider contacting Von Rock Law by calling (866) 720-0195. 

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