What is an Operating Agreement?
Your operating agreement is your LLC’s rulebook. It clarifies ownership, management, money matters, and what happens if someone leaves. Under California’s Revised Uniform Limited Liability Company Act (RULLCA), an operating agreement can be written, oral, implied, or a combination, but a signed written agreement is the practical standard. It helps avoid misunderstandings, shows that your LLC is separate from you personally (supporting limited liability), and allows you to replace most default rules under RULLCA with terms that actually fit your business.
Should a Single-Member LLC Have an Operating Agreement?
California does not require a written agreement, but in practice, not having one can lead to unnecessary conflicts and risks. Having a signed written operating agreement helps ensure smoother banking and vendor onboarding, clearer tax coordination, better succession planning, and provides a stronger record that your LLC is a separate legal entity.
What Should the Operating Agreement Address?
There are several core topics your operating agreement should cover, including the following:
- Management – Choose between member-managed (owners run operations) or manager-managed (one or more appointed managers run operations). Unless your articles or organization say otherwise, California treats the LLC as member-managed by default. Ensure that your articles of organization, operating agreement, and banking records all convey the same management story.
- Members – Decide how members are admitted into the LLC. By default, after formation, all members must consent to admit a new member unless your operating agreement provides a different process.
- Meetings – Decide whether you will hold annual or special meeting, how notice works for such meetings, and when written actions without a meeting are permitted.
- Voting Rights – Separate everyday decisions from major actions. Routine items should not require a meeting. However, big decisions, such as bringing in investors, taking on significant debt, selling substantially all assets, or amending the agreement, should meet a higher threshold (e.g., supermajority or unanimous approval). If your formation documents are silent, California’s default rules may apply in ways you might not want.
- Allocations and Distributions – Determine how the operating agreement will allocate net profits and net losses, how distributions will be made (e.g., ownership percentage), whether the distribution of securities and other LLC property will be permitted, and whether you want restrictions on distributions (e.g., LLC would be unable to pay its debts). Coordinate this with your CPA to avoid mismatches and surprises.
- Transfers of Interest – Protect your LLC from unwanted co-owners by setting transfer restrictions, a right of first refusal, and straightforward buy-out mechanisms. Including transfer restrictions allows LLC members to control who owns equity and has management rights in the LLC.
- Dissociation of a Member – Address voluntary dissociation (i.e., a member leaving by express will) and automatic events triggering dissociation (e.g., death, disability, certain bankruptcies), and explain the consequences. Under RULLCA, a member can dissociate at any time, but it may be wrongful depending on your operating agreement and can carry consequences.
- Disputes – Choose the governing law (California law) and venue (e.g., Los Angeles County) decide whether mediation comes first, and set a clear path for arbitration or court, if needed. Keep the framework focused on speed, confidentiality, and cost control.
- Amendments – Explain how the operating agreement can be changed. Sometimes, the agreement can authorize the manager (if any) to make administrative changes at their discretion, while requiring approval from a certain percentage of membership interests for other modifications. If your formation documents are silent, California’s default rules may require unanimous member approval on specific amendments.
When Should an Operating Agreement be Adopted?
You should adopt an operating agreement at formation and revisit it when ownership or management changes, before securing financing or taking major actions, and during scheduled yearly check-ups of the LLC to ensure names, roles, and financial decisions are aligned.
Work With a California Business Formation Attorney
At Endeavor Law, we assist entrepreneurs, professionals, and small business owners in making informed decisions about creating a California-compliant operating agreement that matches with how you actually want to run the business.
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This article is for general informational purposes only and is not legal or tax advice. Consult an attorney and your tax professional about your specific situation.