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.
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
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.
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
- 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.