California LLC Operating Agreement: Why and How to Get One

Does a California LLC need an operating agreement?

Yes. Under the California Revised Uniform Limited Liability Company Act (RULLCA), LLCs are required to have an operating agreement, among other documents. Unlike your articles of organization, you don’t need to file your LLC operating agreement with the California Secretary of State—you just need to keep it in your records.

Remember that only a limited liability company will have an operating agreement. If you’re forming a corporation, you’ll need bylaws, which set out rules for board meetings, creating committees, issuing and transferring shares, and other corporate matters. Partnerships typically use a partnership agreement, which is similar to an LLC operating agreement. 

Benefits of having a California LLC operating agreement

A California operating agreement is more than just a legal requirement—it’s a valuable tool that helps protect your business and keeps it running smoothly. Here are some key benefits:

• Liability protection. An operating agreement reinforces the limited liability status of your California LLC by establishing a clear distinction between the business and its owners. Without an agreement, members’ personal assets could be at risk.
• Formalized verbal agreements. Many business partners discuss and agree on responsibilities and profit-sharing arrangements verbally. Without a written operating agreement, misunderstandings and disputes are more likely.
• Decision-making guidance. The LLC operating agreement outlines how decisions are made, from everyday management to handling major financial and operational changes, to how profits and losses are distributed.
• Banking and financial transactions. Many banks and financial institutions require an LLC operating agreement to open a business bank account or secure loans.
• Customized operational processes. A customized LLC operating agreement is specific to your wishes. While an operating agreement can’t change certain rules under the California Revised Uniform Limited Liability Company Act (such as fiduciary duties), it can change other aspects of your company operations.

Key components of a California LLC operating agreement

It’s important for your operating agreement document to follow a clear structure and include all relevant information. A strong California LLC operating agreement will typically include the following elements:

Formation information

The first items you’ll need are the fundamental details of your LLC. You can find most of them in the articles of organization you filed with the California Secretary of State.

• LLC name: The exact name registered with the California Secretary of State, not a “doing business as” (DBA) name.
• LLC effective date: The date your LLC was officially formed with the Secretary of State.
• Registered agent: California requires you to have a registered agent who is authorized to receive legal documents for your LLC. Your operating agreement should list their information.
• Purpose of your LLC: A general statement about the business activities your LLC will engage in.
• Duration of your LLC: Whether your California LLC is perpetual or set to dissolve on a certain date.
• How your LLC will be taxed: Whether it is a disregarded entity (for single-member LLCs), partnership, or electing to be taxed as an S corporation or C corporation.

Member information

This section defines LLC ownership: Who are the members and what are their roles in the business? The exact details in this section vary depending on your structure:

• Single-member LLC. The operating agreement will simply list the sole member/owner.
• Multi-member LLC. The operating agreement will list all the members and their information.

This section should also cover how members contribute and manage capital, listing initial capital contributions, additional contributions, and who has ownership interest. It should outline rules for withdrawing funds and what happens if a member fails to meet their financial commitment.

Management structure

Your California operating agreement should outline how your LLC will be managed. This section should define manager responsibilities, how they are selected, and how they can be removed. The options for the management structure include the following:

• Single-member LLC. If there’s only one member, they typically have full control over all operations and decisions.
• Member-managed LLC. All members have a say in daily operations and decision-making.
• Manager-managed LLC. Members designate one or more managers to handle company operations.

Profit and loss distribution

The LLC operating agreement should clearly state how profits and losses will be shared among members. For a California LLC, profits and losses are usually divided based on each member’s percentage of ownership. Your agreement should specify:

• How and when profits are distributed
• Whether distributions are automatic or require a vote
• How losses are allocated among members

Meetings and voting procedures

Unlike a corporation, a California LLC is not required to hold annual meetings for shareholders, but you’ll probably still want to meet to vote on important matters. An LLC operating agreement for a California business entity should outline the following:

• When and how meetings are held
• Membership voting process for key issues like amending the agreement or bringing in new members
• Voting powers and the percentage of votes required for different decisions

Decision-making powers

The LLC operating agreement will define how decisions are made, including voting powers for day-to-day operations and major business changes. It will outline:

• What kinds of decisions require a majority vote versus unanimous consent
• Who has authority to sign contracts and make financial commitments
• How disputes between members are resolved

Transfer of membership interests

Under the law, California LLC members can transfer their ownership interests. Many LLCs use the operating agreement to place restrictions on things like the following:

• Whether members can transfer their shares freely or need approval from other members
• What happens if a member wants to sell or give their shares to another person
• Whether the LLC has the right to buy back shares before they are sold to an outside party

Dissolution procedures

A California LLC can be dissolved voluntarily by the members or involuntarily by court order. This part of the operating agreement outlines how to dissolve the LLC and what happens next. Your operating agreement should cover:

• The steps for voting to dissolve the LLC
• How remaining assets and debts will be handled
• How final tax returns and filings with the California Secretary of State will be completed

How to create a California LLC operating agreement

An operating agreement is a must-have for any California LLC, but it will only hold up against disputes if it’s properly created. Follow these steps to help make your LLC operating agreement airtight.

1. Gather your formation information

Before you start your California operating agreement, get your LLC’s key details in order. You’ll need the official registered name of your business, which has to match what’s on file with the California Secretary of State. If you use a DBA (doing business as) name, remember that it’s separate from your LLC’s registered name. Also remember that your principal place of business must be a physical address, not a P.O. box. Finally, have each member provide their name, address, and initial investment in the company.

2. Decide on the management structure

A California LLC can be either member-managed or manager-managed, and your choice affects how decisions get made. In a member-managed LLC, the owners handle daily operations and make business decisions themselves. Smaller businesses and single-member LLCs go this route because it keeps things simple. In a manager-managed California LLC, the members pick one or more managers—who may or may not be owners—to run the business. This setup works well for larger LLCs or those with passive investors.

3. Draft the California operating agreement

Once you’ve gathered your details and picked a management structure, it’s time to write your California operating agreement. You may be able to find a free operating agreement template that covers the essentials, but it might not be state-specific or fit your unique circumstances—and it may not hold up to legal scrutiny. For peace of mind, you might want to use a service like LegalZoom to make sure your operating agreement includes all the details. A clear, well-written LLC operating agreement sets expectations and protects your business.

4. Review carefully

Before you finalize the agreement, go through it with the other members to make sure everything is correct. Make sure the details match your articles of organization and double-check ownership percentages, capital contributions, and voting rights. If anything looks off or needs more details included, make the changes to your LLC operating agreement before everyone signs. It’s much easier to fix problems now than to deal with disputes later.

At this stage, you may also wish to have an attorney review it if you did not use an attorney to help draft the agreement.

5. Sign and store copies

Once everyone is happy with the agreement, all members need to sign it. While California LLC operating agreements don’t need to be notarized, you might choose to get it notarized anyway for extra peace of mind. Give each member a copy and keep one in a safe place along with your articles of organization so everyone can easily reference the documents.

Get a California LLC operating agreement with LegalZoom

Skipping an operating agreement or creating one that misses key details can put your business at risk. Remember, without a customized LLC operating agreement, California’s default laws kick in, which might not work in your favor. A solid operating agreement helps prevent misunderstandings and legal trouble—but it needs to be created correctly. LegalZoom’s standalone operating agreement services make it easy to create an LLC operating agreement that meets California’s requirements, 

The process is simple. First, answer a few questions online and provide all the necessary details about your business and members. Then, we’ll draft the document and one of our attorneys will double-check everything before sending it to you. Once you get it, all members need to sign to make it official. This service takes the guesswork out of writing an operating agreement and gives you peace of mind that everything is covered.

FAQs

Does a single-member California LLC need an operating agreement?

Yes, all LLCs in the state of California are required to have an operating agreement. Even if you're the only member in your LLC, you still need an operating agreement to prove that your business is a separate legal entity, which protects your personal assets. Banks, investors, and even the Internal Revenue Service (IRS) may ask for one when you open an account or file taxes. It also helps avoid legal headaches if you ever bring on new members or sell the business.

Can I change my operating agreement after forming my limited liability company?

Yes. You can change an operating agreement for a limited liability company by following the rules you put in place for making amendments. Typically, a member will propose a change and other members vote according to the procedure outlined in the operating agreement. Making the change may require a majority vote or unanimous agreement, depending on the rules for voting. Put any changes in writing and have all members sign to make them official.

Can I write my own operating agreement for my California LLC?

Yes. You don’t need a lawyer to write a California operating agreement for a limited liability company, but it’s important that you don’t miss key details. Using an LLC operating agreement template can help, but you should still have an attorney review your DIY document. If your business has multiple owners or complex financial arrangements, getting legal help can save trouble and headaches down the road.

What happens if you don’t have a California LLC operating agreement?

If you don’t have an LLC operating agreement, the rules in the California Revised Uniform Limited Liability Company Act (RULLCA) will apply, which might not match how you want to run your business. Banks and courts may also question your LLC’s legitimacy without an agreement in place. Writing one now protects your business in the long run.