operating agreements for california limited liability companies ("llcs"): why your business LIKELY NEEDS AN OPERATING AGREEMENT

An operating agreement is a contract between owners of a limited liability company (“LLC”) which governs the relationship of the members of the LLC with each other and with the company itself.  It addresses the way in which the business is run, from a financial and functional perspective; as well as the members’ needs and duties to the LLC.  While the California Secretary of State does not require an LLC to file an operating agreement during the process of entity formation, it is nevertheless prudent for a business to have an operating agreement in place from the moment the LLC is formed in order to mitigate financial risk and prevent against subsequent disputes and/or litigation among the owners regarding the ownership or operation of the LLC.

A tailored operating agreement additionally ensures that the terms that govern the LLC’s operations are those upon which the parties specifically agreed, rather than terms imposed by California law.  The California Revised Uniform Limited Liability Company Act, codified as Title 2.6 of the California Corporations Code starting at Section 17701, provides for certain default “rules” regarding management, fiduciary duties, voting, etc. in cases where an operating agreement does not exist or is silent as to the terms.  These default provisions may or may not be appropriate depending on the nature and operations of the business, and therefore, a carefully-crafted operating agreement is key to making certain that only the parties’ agreed-upon terms govern the inner workings of the business.

Most operating agreements addresses important topics including but not limited to LLC members’:

• Interest;
• Rights and responsibilities, including fiduciary duties;
• Voting rights;
• Share in profits and losses;
• Management of the LLC;
• Meetings; and
• Buy-sell or buy-out schemes, either by a provision or an addendum to the operating agreement.

While businesses can find template forms for LLC operating agreements online, forms are not always appropriate.  They are not tailored to reflect the particular circumstances of the business, including considerations such as present state of the business and growth potential; and do not reflect the full discussions between the LLC members regarding organization and operations of the LLC at the time of formation.  For that reason, even if a business feels absolutely confident about the types of terms it would like to include in a standard LLC operating agreement, it is imperative to consult with a business attorney and possibly, an accountant regarding legal and tax ramifications of the agreement.  At the very least, an attorney and accountant can review a draft of an LLC operating agreement, and provide the business owners with some peace of mind that the contemplated draft is appropriate for their specific business needs.

Smith Shapourian & Mignano, LLP is available to answer any questions or concerns you may have regarding your LLC’s operating agreement, as well as to litigate any disputes arising from an operating agreement.  Please contact us for a consultation.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.