What is a California LLC Operating Agreement?
A California LLC Operating Agreement is a written contract among the LLC Members (owners) which includes details and information about LLC ownership and management.
Basic Information:
Your Operating Agreement will include basic information about your California LLC. A lot of the information will be the same information listed in your LLC’s Articles of Organization, such as:
- LLC Name
- LLC effective date
- California Registered Agent
- purpose of LLC
- duration of LLC
- and how the LLC will be taxed
LLC Ownership:
Your California LLC Operating Agreement will be a place where all the LLC Members will list how much of the LLC they own and then each Member will sign the Operating Agreement.
How much someone owns is called their “ownership interest”, “ownership percentage”, or “ownership units”. LLC Ownership is most often expressed as a percentage (example, 5%, 50%, 100%, etc.). The terms “shares” or “shareholders” doesn’t apply to LLCs.
Initial Capital Contribution:
One of the first things you’ll do after your LLC filing is approved by the California Secretary of State is have each of the LLC Members (or the sole Member in a Single-Member LLC) make their initial capital contribution. The initial capital contributions will be listed in your California LLC Operating Agreement.
A capital contribution is simply an individual member depositing money into the LLC bank account. The most common way to do this is by each person writing a personal check made out to the LLC. This also creates a nice record of the transaction. If you’re going to use an Operating Agreement template provided below, you’ll want the amount of the initial capital contribution to be proportionate to the ownership percentages.
For example, if it’s a 2-Member LLC with 50/50 ownership, each person should deposit the same amount of money. It doesn’t matter if both Members deposit $500 or $25,000; as long as both amounts are the same. If the 2 Member LLC was owned 70/30, then the deposits should reflect that ratio, such as Member 1 depositing $7,000 and Member 2 depositing $3,000.
Distribution of Profits:
As per the Operating Agreement templates below, when Members take money out of the California LLC’s bank account and distribute profits to themselves, this is called a “capital distribution”.
A capital distribution can be taken by an LLC Member writing a check from the LLC bank account to the LLC Member(s) individually. You could also use a digital bank transfer, bank wire, or any other other means of money transfer that creates a documented record.
In a Multi-Member California LLC, the amount of the capital distributions are proportionate to the percentage of LLC ownership.
Statement about taxes:
A brief statement about how the LLC will be taxed will be made in the California LLC’s Operating Agreement.
Membership Voting:
The rules of membership voting will be spelled out in your California LLC’s Operating Agreement. If you use the template for a Member-Managed LLC below, the voting powers are proportionate to the LLC ownership percentages.
If you use the Manager-Managed Operating Agreement template below, the voting powers are also proportionate to the LLC ownership percentages. Then the Members (by a majority vote) agree to elect a Manager. The Manager then has their own authority to make most decisions on behalf of the LLC (without a vote needed by the Members). However, certain things, like adding a new LLC Member require a vote of the existing Members (and the Manager has no say).
What about Single-Member California LLCs?
Operating Agreements are not only for Multi-Member LLCs.
Even if you are the only Member of your California LLC (a Single-Member LLC), it’s still best practice to have an Operating Agreement.
In case you have to go to court over a lawsuit, having an Operating Agreement will help prove your Single-Member LLC is being run as a separate entity. And therefore, your personal assets remain safe and out of reach of creditors.
Do I have to send my California LLC Operating Agreement to the state?
No, you don’t have to send your California LLC Operating Agreement to the Secretary of State (or to any other government agency for that matter).
As an “Internal Document”, you (and your fellow Members, if applicable) need only keep your California LLC Operating Agreement in your business records and amongst yourselves.
Who needs my LLC Operating Agreement?
The following may need to see a copy of your California LLC Operating Agreement:
- Banks and lending companies
- Title companies
- Accountants, tax professionals, and lawyers
- Investors
- Court (if you ever end up there)
This list is not exhaustive. Other individuals and companies may also request a copy of your California LLC’s Operating Agreement.
Operating Agreements don’t need to be notarized
Your California LLC Operating Agreement doesn’t need to be notarized.
Once you (and the other LLC Members, if applicable) sign the Operating Agreement, then it becomes a legally binding document for all of you.
California LLC Operating Agreement (Member-managed)
California LLC Operating Agreement (Manager-managed)
For more information, please see Member-managed vs Manager-managed LLC.
Customized California LLC Operating Agreement
If you want your California LLC’s Operating Agreement customized to you and the other LLC Members’ specifications, we recommend hiring a business attorney.
Make sure all LLC Members have a copy
Once you finalize your California LLC’s Operating Agreement, make sure all Members have a copy.
And keep a copy or two of the Operating Agreement with your business records.
Next Step: California EIN Number
After you’ve completed and signed your California LLC’s Operating Agreement, you can then proceed to the next Lesson: California LLC EIN Number.
References
California Secretary of State: Starting a Business – Entity Types
California Secretary of State: Limited Liability Company Filing Tips
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.
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First, thanks so much for sharing this information. It is truly appreciated. I have a question regarding completing the LLC-1 for a California LLC. Nowhere does it ask if this is a single or multi-member LLC. My intent is to form a single member LLC. Under number 4 on the LLC-1, you mentioned that we should check the box that states Management to be by…. “All LLC Members”; however, would I do this as well since I am wanting to be a single-member LLC?
Last, I am wanting the LLC to be formed on December 18, 2017 and the code allows someone to request a specific date for filing as long as we are within 90-days of that date, which I am. How and where do I specify this? Perhaps on an attachment of some kind? I am doing this so I do not have to pay the $800 for 2017.
Again, THANNKS!
Hey Charles, thanks for the kind words! CA actually doesn’t ask about single-member vs. multi-member on the Articles of Organization, so no need to worry about it. And yes, you’d select “All LLC Members”, even though you are the only member (you’re still “all of them”). You can use a Future File Date Attachment to request a file date of January 1st of the following year. This will help you avoid the dreaded back-to-back annual franchise tax payments. You can also just wait until the 2nd half of December or early January to send your Articles of Organization to the state. And yes, you’re correct; the future file date can’t be more than 90 days forward. Hope that helps!
Will this for a Checkbook Roth IRA LLC?
Hi Len, apologies for the slow reply. No, this Operating Agreement doesn’t contain the additional provisions specific to a checkbook IRA/LLC. We have it on our roadmap though and it will be available in the near future. Thank you.
Do you have a Texas manager-managed LLC operating agreement template you can send over to me?
Hey Mac, I just emailed it over to you. We’ll update this page soon so it’s available for download.
Hi Matt, thank you so much for creating this site. I’ve incorporated before but am in the process of doing it again so it’s very clear how much easier the process has been for me the second time around with the help of this amazing resource.
My question is around the “Records” clause: I’m using a registered agent and have listed the registered agent’s address as my primary business address. The “records” clause in the template indicates that I am going to be storing these records at the primary business address. My business is a partnership with no physical location. I am planning on keeping my records both online in a shared Google Drive as well as hard copies at my primary residence. Would you recommend that I modify the “Records” clause to reflect this, or is this mostly a formality that people tend to ignore in the digital age?
Hi Mike, you’re very welcome! That is wonderful to hear. I would modify the records clause to say exactly as you mentioned: records are kept on John Doe’s Google Drive account as well as stored physically at this address: 123 Main Street, Anytown, US 12345 (your primary residence). Hope that helps :)
Perfect, thanks again Matt!
You’re welcome Mike!
Hi Matt, Thanks for the detailed explanations. I guess my question is more on where to file for LLC because i am expecting address changes soon. My situation is i am in California as of now but will be moving to Texas soon. if i were to file it in California for this year and then file it again in Texas next year. would that be advisable? What would be cost effective and lass hassled solution here?
Hi Sagar, if possible, I’d recommend waiting. California is very aggressive when it comes to foreign LLC registration and taxation. Do you know approximately when you’ll move to Texas?