The following information is provided for educational purposes only and in no way constitutes legal, tax, or financial advice. For legal, tax, or financial advice specific to your business needs, we encourage you to consult with a licensed attorney and/or CPA in your state. The following information is copyright protected. No part of this lesson may be redistributed, copied, modified or adapted without prior written consent of the author. An Operating Agreement is an agreement between the members of the LLC that sets forth how the LLC will be managed both financially and operationally. Unlike your LLC Formation Documents, the Operating Agreement does not need to be mailed in to the State. It is an “internal document”, meaning you’ll just need to keep a copy with your business records. The purpose of an Operating Agreement is to spell out who the members are and what percentage of the LLC they own (also known as their membership interest). It also defines how the LLC is managed, how taxes are paid, and how profits and losses are distributed amongst the members. You will find both the PDF and the Microsoft Word versions below this video in the download Section. You can print these out and fill them out by hand, or type directly in them with your computer (whatever is most convenient for you). We will show you how to complete your Operating Agreement regardless if you are a single-member LLC (with just 1 member) or if you are multi-member LLC (with 2 or more members). The Operating Agreement that is provided as a generic Operating Agreement that will work for the majority of businesses. If your business requires industry-specific management, complex ownership agreements, has multiple investors or a large amount of members, we recommend getting the help of an attorney. You can complete the Operating Agreement provided as a base for your initial conversation with your attorney. This may save you time and money. If you are single-member LLC or a family-owned LLC, this may be less of an issue for you (unless you have a crazy family)… then we recommend you seek legal advice to prepare this document. You may need to provide a copy of your Operating Agreement to: a lender if you are obtaining financing; a title company if you are purchasing real estate; accounting and tax professionals for financial assistance; lawyers for legal advice or potential investors or partners have an interest in your business. Also, if you find yourself a party to a legal action, the court will likely ask for a copy of your LLC’s Operating Agreement. This can help document to the court that you have a well-organized structure for handling issues that arise in relation to your LLC. One of the benefits of forming an LLC is the flexibility of managing your business. The Operating Agreement is a working document that is meant to be fluid and allow for changes as your business grows. If you make simple changes such as a change of address for a member, or you change your Registered Office or Registered Agent, open the original Operating Agreement, make the changes you need and then save the document as a new version. For complex changes to your LLC, for example 1 member purchases the interest of another member, or you decide to raise financing with investors, it is best to hire an attorney as this is not something we recommend you do yourself. If changes are made, you’ll need to print out the new Operating Agreement and have all the members sign. It is best practice to keep a copy of all previous versions on file in order to complete your Operating Agreement. In order to complete your Operating Agreement, you will need some basic information. It is easiest to grab a copy of your LLC Formation Documents as it already has most of the information you will need such as: the formation date of your LLC, the name and address of the Registered Office and Registered Agent, the general business purpose of the LLC, the members, percentages of ownership, and the names of the members and their addresses. We are now ready to fill out the Operating Agreement. You can download this document below the video. Let’s get started. Here we are in the Operating Agreement. Please note that I’m using Microsoft Word to edit this document. If you don’t have Microsoft Office, you can use similar and free software called Open Office, or you can use Google Docs. If you prefer to just print and fill out by hand, we’ve also included this document in PDF format. You can then open this document on your computer, print it, and then fill it out by hand using blue or black ink. Let’s get started. In Section 1, I’m going to list the name of the LLC, and the date in which I mailed in the LLC Formation Documents. Again, it’s easiest to reference your Formation Documents as most of the information can be found there. I’m going to now fill out Section 1. Alright, let’s move down to Section 2. Please note in this video example, I’m going to be filling out this Operating Agreement for a Texas LLC. This Operating Agreement will work for all 50 states, so no matter what state you’re forming your LLC in, everything for the most part is going to be pretty much the same. You’re just going to adapt it, change it, for your State. In Section 2 on the 1st line, I’m going to fill in the State in which the LLC was formed, and then I’m going to write the Effective Date. This is going to be the same date as in Paragraph 1. Let’s now go down to Section 4, where we’re going to list the Registered Office and Registered Agent. This will either be yourself, someone you know, or a Commercial Registered Agent. This information will be identical to the Registered Office and Registered Agent that you have listed in your LLC Formation Documents. In this example, we hired a Commercial Registered Agent. I’m now going to fill in Section 4. Don’t worry that in my example the address looks a little funny. Northwest Registered Agent is an approved Registered Agent within all 50 states, so their addresses are formatted a bit differently than we’re used to seeing. Let’s scroll down to Number 5. Number 5 is where we’re going to list the business purpose of the LLC. This can be a few words or a few sentences that describe the purpose of the LLC. Now many people do ask those questions of how specific they need to be, and if they mention something here, if they’re going to be pigeonholed and forced to do that forever. No you’re not. Remember, this is a fluid document and you can make changes, and it’s best to usually use something a little bit more generic here. This LLC is a marketing agency, so I’m going to list that in Section 5. Under Number 6, the duration of the LLC, you’re going to list “Perpetual”. “Perpetual” means that the LLC will be in existence, until the members decide to close (also known as “dissolve”) the LLC. All right, let’s scroll down and go to the next Section. We’re going to continue scrolling through Page 1, we’re going to go to Page 2, and we’re actually going to end up at the bottom of Page 2 underneath “Tax and Financial Provisions Number1” (the tax classification of the LLC). If you are single-member LLC, for tax purposes the IRS is going to tax your LLC just like a Sole Proprietorship. So in this case, if you’re a single-member LLC, we’re going to list “Sole Proprietorship”. Now, if you’re a multi-member LLC with 2 or more members, the IRS is going to tax your LLC just like it would tax a Partnership. So if you’re multi-member LLC, you’re not going to put the word “Sole Proprietorship”, you’re going to put “Partnership”. Let’s move forward. Here we are at the top of Page 3, Number 2 (the “Tax Year and Accounting Method”). The tax year of this LLC shall be the “calendar year”. The LLC shall use the “cash method” of accounting. And that completes Number 2. Let’s go down further. Here we are in Section 4 (“Capital Provisions”). Under Number 1, we’re going to list the date in which all members made their contribution to the LLC. This will most likely be the date that the LLC was formed, or that it became effective. Feel free to use the same date that you used at the top of Page 1 under Number 1. Let’s move on and list the names, addresses, contribution, and percentage of interest in the LLC for all the LLC’s members). For this example, this is going to be a multi-member LLC owned by a husband and wife. If you are a single-member LLC, you’re just going to list your name and your address, the contribution, and then under “Percent Interest”, you’re going to put a hundred percent. In this document, we have 3 areas where you can list the names and addresses of the LLC’s members. If you have more than 3 members feel free to add additional lines below. For our example, I’m going to put the name and address of a husband-and-wife-owned LLC where each member owns 50 percent interest. If you or the members of the LLC did not make an actual cash contribution, feel free to simply lists $100. Let’s move forward. Let’s scroll down to Page 4 where we’re going to go to Number 8 (“Allocation and Distribution of Cash”). In this blank line, you’re simply going to put “all of the members”. Under Section 5 (“Membership, Withdrawal and Transfer Provisions”), in this blank line you’re going to put “60” for 60 days. 60 days is the amount of days that we recommend. However, if your business needs more or less time, this is flexible, so feel free to make those adjustments as needed. Let’s scroll down to Page 5. Underneath Section 6 (“Dissolution Provisions”), where it says “except that within blank”, I’m going to list “60 days”. Again, this is flexible, so feel free to adjust for your business if needed. All right, let’s move forward. We’re nearly complete with the Operating Agreement. We’re going to scroll through Page 5 and go to Page 6, and only thing that we have left to do is list the members, sign, and date the Operating Agreement. If you just have 1 member, you’re simply going to put the date that you’re signing this document. After you print it out, you’ll sign on the 2nd line, and then you’re going to put your name on the 3rd line. Again for this example, this is a multi-member husband-and-wife LLC, so I’m going fill out this Section real quick. So in my example, I’ve listed “1/1/2014, wrote “John Doe”, and the same thing on Page 7 (“1/1/2014 and Mary Doe”). All they would need to do is simply print this document, and sign on both of those lines. In this sample document, we have 3 areas for members. If you’re not using any signature blocks, feel free to just simply put an “X” through them if you’re filling this document out by hand, or if you’re on the computer you can simply highlight and delete them. Also, if you have more than 3 members, feel free to add additional lines and signature blocks below. Please note: the LLC Operating Agreement does not need to be notarized. You’ll simply print out the document, have all members sign, and then you’ll just keep a copy with your business records. And this completes the LLC Operating Agreement.
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:
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.)
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.
Note: A capital contribution is not considered a salary.
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. So if the Operating Agreement calls for a “majority vote” the Member (or Members) that own 50% or more are the “majority” and can vote on decisions.
If you are the only Member of the LLC, there’s nothing to worry about, since you are the majority vote as well as the unanimous vote.
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 requires 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
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)
Our California LLC Member-managed Operating Agreement is available in 3 formats:
A Member-managed California LLC is where all the owners (LLC Members) have the ability to bind the LLC in contracts and agreements. And the California LLC Members also run the business and the day-to-day operations.
Most people choose to have their California LLC be Member-managed.
California LLC Operating Agreement (Manager-managed)
If your California LLC will be Manager-managed, you can download the Operating Agreement below, courtesy of Northwest Registered Agent. Their California LLC Manager-managed Operating Agreement is available in 2 formats:
A Manager-managed California LLC is where only one, or a few designated people (called “Managers”), have the ability to bind the LLC in contracts and agreements. The California LLC Managers also run the business and the day-to-day operations, while the other Members can’t bind the LLC in contracts and agreements, and they don’t take part in running the business and day-to-day operations. Instead, they take a passive/investor role. The Members however do vote the Manager into their position and also are required to vote on certain items, like adding or removing an LLC Member.
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