What is a California LLC Operating Agreement?
A Limited Liability Company operating agreement is a contract between the members of an LLC that governs the rights and duties of the members and the LLC. The operating agreement should set forth the purpose of the LLC, how it will be managed, and the rights and obligations of the members. It is important to have an operating agreement in place so that all members understand their roles and responsibilities within the LLC.
Why is an operating agreement important?
There are a number of reasons why the operating agreement is important for an LLC in California. A few of which include:
– In the event of a legal dispute, an LLC without an operating agreement may have to follow generic state rules which may not negatively impact the member’s personal asset protection.
– The roles, responsibilities, and expectations of the members are in writing which will reduce future conflicts.
– As a single-member LLC, having an operating agreement may help to better protect the entity’s limited liability status.
– When applying for financing, a lender will often want to see one before opening a business bank account to ensure the members have the authority to borrow on behalf of the entity.
– Potential investors and partners will request one when evaluating a business.
Is an operating agreement required in California?
California Corporate Code 17701.10, states that every California LLC is required to have an operating agreement, whether it is written or verbal.
Currently, only six states require an operating agreement – California, Delaware, Maine, Missouri, Nebraska, and New York.
What should be included in an operating agreement?
An operating agreement can be as structured or unstructured as the members deem necessary. Some elements to consider putting in an operating agreement include:
– Business information such as the LLC’s name, principal office address, the purpose of the business, duration of the LLC, etc.
– Ownership structure
– Name and address of the California registered agent
– Amount of each member’s share of capital contribution and the percentage of their ownership interest
– Management – member-managed vs member-managed
– Scope of the manager’s authority
– Fiscal year of the LLC
– Bank account information for the LLC
– Employer Identification Number (EIN) of the LLC
– Entity tax election
– Roles of the members (including financial authority, signing contracts, etc.)
– Names and addresses of the LLC members
– When and how members receive compensation and distributions
– Meeting information and voting rights
– Procedures for adding a new member, removing a current member, and the resignation of a member
– Process for the amendment of the operating agreement
– Process regarding the dissolution or bankruptcy of the LLC
– How any remaining assets will be divided after the liquidation of the LLC
Where is an operating agreement filed?
The operating agreement isn’t filed with the state of California. While a verbal operating agreement is legal in California, verbal agreements are hard to defend. A signed copy should be kept where the company records are stored in addition to each LLC member having one as well.
Does an operating agreement need to be notarized?
An operating agreement doesn’t have to be notarized in California to be legally binding, however, having the operating agreement notarized can be helpful as it proves the document existed on a certain date.
Instead of notarization, it is generally recommended that all members sign and date the operating agreement. This will help to acknowledge the agreement has been received and reviewed by the LLC member.
Is the Operating Agreement the same as the Articles of Organization?
No. The Articles of Organization are a formation document that is used to create the business entity with the California Secretary of State. The operating agreement is an internal document that outlines the governing structure and operating guidelines of the entity along with the responsibilities of the members.
Related: How to form an LLC in California
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