Forming a California LLC takes a lot of planning. Between the Certificate of Formation, business licenses, franchise taxes, and more, there’s a lot to consider. And paperwork and startup costs aren’t the only necessary tasks.
You’ll also want to set up your LLC to run smoothly and avoid legal troubles after it’s been registered with the state.
That’s where the LLC operating agreement comes in.
Time-Saving Hack: There are a handful of LLC creation websites that can form an LLC for you and also offer a customizable operating agreement. ZenBusiness and Northwest are two great examples of this.
What is an LLC Operating Agreement?
An operating agreement gives your business structure and official procedures. It designates ownership, establishes operations, defines member responsibilities, and provides legal protection. Essentially, it lays out everything someone might need to know about your LLC. And it’s an internal document, so there’s no filing or fees involved.
Whether you’re starting a multi-member or single-member LLC, we strongly recommend completing an operating agreement. It’ll benefit and protect you for as long as you’re in business.
Am I Required to Have an Operating Agreement in California?
No, the operating agreement isn’t a mandatory document in California. The Secretary of State website states that “Operating Agreements are to be maintained by the limited liability company and are not filed with the California Secretary of State.”
That said, we strongly recommend creating one anyway. Operating agreements help your LLC run smoothly and give it legal protection, so it’s worth taking the time to draft one during the LLC formation process. Otherwise, you could find your company in trouble if a dispute arises down the road.
Benefits of Creating an Operating Agreement
You want what’s best for your business. Months or years in the future, you want it to be a profitable and thriving endeavor. Having an operating agreement in place will set up your LLC for sustained success.
It requires some legwork, but it’s well worth it. Just look at some of the benefits:
- Officially designates how the ownership is split up (the percentage each member/manager owns), so there are no disputes.
- Standardizes office and company operations to improve efficiency
- Outlines the procedures for member additions and resignations, agent for service of process changes, dissolutions, and more, so there is no confusion.
- Avoids California’s “default rules,” which define baseline procedures for any LLC without an operating agreement and aren’t necessarily the best for your business.
- Grants you greater respect from California courts.
Free California LLC Operating Agreement
So, you’ve decided to use an operating agreement, but you can’t find an official form on the Secretary of State’s forms page. That’s because it doesn’t exist. Since it’s not a required filing, the state doesn’t maintain an official form or template.
So, you’ll need to create your own, but don’t be intimidated! You don’t need to be an attorney or expert writer to draft an effective agreement. Plus, you can find plenty of free templates online to help you with the structure and legal terminology. While most of these templates are good options, a great starting point is one that you can get free through an affordable LLC service like ZenBusiness or Northwest Registered Agent.
Whether you’re using a template or starting from scratch, here’s a quick and easy guide for what to include:
Owner or Member Information: Names and mailing addresses.
Company Information: Your LLC’s name, registered office, and principal office.
Agent for Service of Process Information: The name of your agent for service of process, their address, and contact information.
LLC Formation: The date you filed or will file your Articles of Organization with the Secretary of State.
Business Purpose: The type(s) of business your LLC will be doing in California.
Term: How long your LLC in California will be valid, typically until you file for termination.
Capital Contributions: The amount of money each member has invested in the LLC.
Profits, Losses, and Distributions: How income and debts are allocated among members and methods for distributing funds.
Ownership Percentage: How much of the company each member owns.
Management and Roles: The managerial structure and decision-making processes, naming who is in charge or certain operations.
Compensation: How members/managers are compensated and reimbursed.
Bookkeeping: Accounting procedures and member account policies.
Tax Treatment: Whether your LLC will be taxed as a Sole Proprietorship, Partnership, S-Corporation, or C-Corporation.
Member Additions: The procedure for bringing on new members – how they will be admitted, if they’re entitled to income, any expenses they will owe, their roles, etc.
Member Withdrawal: Procedures for the resignation, expulsion, retirement, or death of an existing member.
Amendment Procedures: How your LLC will approve changes to the operating agreement. Usually, it’s through a majority vote by the members.
Dissolution: What happens when you terminate your LLC. How your members will split up the remaining assets or debts.
You don’t always need to include all of the above. If any don’t apply to your LLC, feel free to leave them out. Still, it’s a good idea to cover as many bases as possible. Even if you’re a single-member LLC, you should consider including as many sections as possible to accommodate future changes. Otherwise, years into the life of your business, you may run into a dispute over something you didn’t include, and you won’t be able to fall back on the operating agreement.
When you’ve finished your draft, look it over again to make sure you haven’t missed anything. You’ll then need to get it approved and signed by each of your LLC’s members. After that, keep it somewhere safe for easy reference later on. There’s no need to submit it to the Secretary of State, so storing it in your own files is perfectly fine.
Making Changes to Your Operating Agreement
For better or worse, your business is going to change. As you begin doing business in California and, hopefully, raking in profits, the LLC will grow and evolve. It will develop different needs and more complicated processes. Keep everything running smoothly but updating your operating agreement as changes occur.
First, all LLC managers/members must approve the change. To seek approval, follow the guidelines you already outlined in your operating agreement for ratifying amendments.
Because it isn’t recorded with the state, modifying your agreement is as simple as making changes to the Word document or PDF you keep in your own files.
For example: your agent for service of process resigns and, following California law, you appoint a registered agent service to take their place. Simply pull up your electronic file, enter the new agent information, save it, and print a copy. Make sure you keep a draft of the previous document as well so you can track the changes you’ve made, just in case the state ever has any questions.
Hiring an Attorney
Worried that you might miss a critical detail? Uncomfortable with legal minutiae? If you want to ensure your operating agreement provides for all possible outcomes and disputes, you might consider hiring an attorney to review it or write it entirely.
Some attorneys have a flat rate for drafting an operating agreement; others bill by the hour. Either way, you’ll only need their assistance for a limited period of time. Use a site like Avvo to find the right fit for your business. Avvo’s database lets you sort by location, rate, and more – it even shows California lawyers that specialize in LLCs.
Hiring an LLC Formation Service
The LLC formation process, with its forms and fees, might make you want to throw up your hands and surrender. Don’t do that! Instead, consider hiring an online service like ZenBusiness or Northwest Registered Agent.
An online service like we mentioned earlier can quickly take care of all your necessary filings. Plus, they’ll create a customized operating agreement for you!
Given the amount of time you would spend drafting an agreement from scratch, a formation service is worth it. Not only will you receive a meticulously researched and crafted operating agreement, but you’ll also be able to spend more time growing your business, planning your next move, or just relaxing.
While the operating agreement isn’t mandatory, California state law (Corp Code 17701.10) still dictates what they can and cannot do.
By the state’s definition, a California operating agreement can:
- Define relations between LLC members and between the members and the company
- Define the rights and duties of a member/manager
- Direct the LLC’s activities and procedures
- Explain how the LLC makes decisions and amends the agreement
Anything not covered in the operating agreement, however, is dictated by the state’s default laws, so you’ll want to make your document as detailed as possible. Default laws were not created with your specific LLC in mind, and will likely not provide the best outcome, so it’s best to avoid them.
While the operating agreement defines how an LLC runs, it’s not all-powerful. State law takes precedence over LLC rules. For example, if you fail to file your Biennial Statement of Information or maintain a valid agent for service of process, your operating agreement cannot protect you from losing good standing or being administratively dissolved. Nor can the agreement approve activities that are against state or federal law. For more details and additional restrictions, see California’s Corporate Code 17701.10.
When drafting your operating agreement, be sure to stay within the state’s boundaries and make it as detailed as possible (so there’s no room for interpretation) and you’ll be good to go!