California LLC Operating Agreement: Drafting Checklist

When planning on launching a new business, you may need help figuring out where to start paperwork-wise. California law defines the particular responsibilities and obligations of all business owners looking to create an LLC in the state. The website of the California Secretary of State provides a checklist of what you need to gain limited liability status.[1]

The required documentation will include registration with the Secretary of State and the IRS for income tax purposes. The Articles of Organization document, similar to the Articles of Incorporation for corporation formation, will be vital here. You’ll also need to submit a Statement of Information, which can be done online rather than in person.

The mentioned documentation will contain your business name, registered agent name, and other essential information. However, you’ll also need to draft an operating agreement to start an LLC in California.

The mandate for operating agreements is stated on the Secretary of State’s website.[2] While your LLC needs this document, you don’t have to file it with the state authorities. Instead, your agreement should stay within your organization.

You may be wondering what’s so important about the operating agreement that the state of California mandates you to draft the document. This article will explain just that and give you a comprehensive guide to creating a California LLC operating agreement.

Key Takeaways

• An operating agreement is required for all California LLCs and provides a detailed structural definition and outlines critical business processes and operations.

• Through the operating agreement, you can define where company liability ends, and personal liability begins. In other words, the document can protect your personal assets.

• As a critical organizational document, the operating agreement should be drafted carefully. Employing a professional to handle the process or provide advice is highly recommended.

What Is an LLC Operating Agreement?

An operating agreement provides detailed instructions about how your business works. The document defines the company’s management, capital contributions, members’ voting rights, and profit distribution, to name a few.

Your operating agreement will outline the most critical aspects of LLC operation. This is precisely why the agreement is invaluable as an internal document.

State Requirements

According to California Revised Uniform Limited Liability Company Act, all LLCs functioning within the state must have an operating agreement.[3] Rather than exclusively in written form, the state also accepts oral and implied agreements. However, having a written document should be your preferred option. You don’t need to file the document with the state but remain on file internally.

Regardless of what’s mandated by law, oral agreements can quickly prove insufficient in disputes. A signed document removes all uncertainty and makes further obstacles’ solutions much more straightforward.

If your agreement doesn’t cover a particular situation, the state act has specific rules that your LLC must follow. Company operations would default to state-defined rules for better or worse, so having a precise and detailed operating agreement is necessary.

LLC Operating Agreement Benefits

One of the most significant advantages of an operating agreement is how the document treats personal vs. business assets and liability. The agreement defines company liabilities as separate from the member’s assets. If the business entity enters debt, the cost won’t have to come out of your own wallet.

Another benefit lies in how the operating agreement binds and consolidates company resources. The document will outline operational procedures with explicit roles for all stakeholders, managers, and executives.

In addition, you’ll have an easier time getting a loan from certain banks if your LLC has an operating agreement. The document may reassure financial institutions that would otherwise be reluctant to lend you the required funds.

The agreement may also help you tax-wise. You can define the precise form of organization for your business in the document, which could lead to lowered tax rates. Since taxes in California can be particularly burdensome, this aspect is worth considering.

If all these advantages sound great, you’re probably looking forward to drafting an operating agreement for your LLC. However, the document must be precise to give your business the most prominent advantage possible.

A professional service like Swyft Filings can help you draft an accurate operating agreement. With an experienced service taking care of the document, the crucial aspects of your business will be well-defined, working to your utmost benefit.

Who Needs an Operating Agreement?

In California, drafting an operating agreement is necessary when forming an LLC. 

Since the agreement primarily regulates the dynamic between company members, you might think that only multi-member LLCs would need the document. A single-member LLC operating agreement might even be more helpful. Plus, state law mandates the document regardless of how many members the LLC has.

If your LLC consists of a sole member, the company could equate to a sole proprietorship in certain situations. Then, there would be little to no separation between company liabilities and your own. Of course, that won’t be a risk if you have an operating agreement in place.

If you want to avoid operating by default rules, the agreement will give you a foundation to customize how your LLC works.

Drafting Your California LLC Operating Agreement

Drafting your operating agreement consists of several relatively simple steps. Since filing the agreement with the state isn’t necessary, you won’t need to follow a strict format or worry about sending a copy to the Secretary of State. Plus, some of the information in the document will be the same as what you’ve included in the Articles of Organization.

While the drafting process isn’t as complex as some other administrative duties, that doesn’t mean everyone will be comfortable creating an operating agreement from scratch. Fortunately, you won’t need to do that. There are many online LLC operating agreement templates that you can download and either fill out or use as models.

All you’ll need to know is what precisely goes into the agreement. Let’s look at a detailed breakdown of the steps in drafting this essential formative document.

Step 1: Provide Business Information

You’ll start by entering the basic information about your business. This step should be simple for all LLC owners since the info will be well-known and readily available:

• Name of the company

• Name of your registered agent

• Business address

• Employer Identification Number (EIN)

This will be the easiest step in the process. After that, you must include:

• An LLC member list

• Management type

• Administrative operation information

• Procedures for adding and removing members

Step 2: List LLC Members

Since membership plays a crucial role in every LLC, defining a list of members will be critical moving forward. Rather than being a simple list, though, this part of your operating agreement will determine vital factors related to membership:

1. Listing all members of your LLC creates a clear distinction between your company’s assets and the member’s personal assets. With the list in place, LLC members will be protected from potential financial harm from the company’s affairs.

2. Besides listing the existing members, this part of the document will also define their ownership interests, bringing much-needed clarity regarding what the members own within the organization. This aspect will be just as valuable for sole members, too.

3. The list of LLC members will define each member’s role within the company. Knowing what everyone needs to contribute to the organization will help in daily and long-term operations, making the business more efficient.

Step 3: Decide Member-managed vs Manager-managed

You can have a member or manager-managed LLC regarding regular operations. Both structures have certain advantages and shortcomings, particularly fitting for specific organizations.

A member-managed LLC puts one or several members in the leading operational role. This can be useful since members as main stakeholders will also be directly involved in business operations. This organizational type is often a good fit for small LLCs.

A manager-managed LLC will employ a dedicated professional to manage the company’s processes. The advantage of this system is that the members can stay focused on large-scale strategies while the manager handles daily business.

Step 4: Lay Out Administrative Operations

Operating agreements include a detailed layout of the business’s administrative operations. This section of the document will detail what goes into the daily and long-term admin in your LLC, making regular operations smoother:

• Capital contributions

• Allocation

• Internal revenue service

• Distribution

• Member voting rights

Defining the administrative activities through the operating agreement will prove helpful in critical aspects like tax returns, state and legal dealings, and operations related to the LLCs bank account. The agreement will also define one or more individuals handling the admin.

Your administrative executive could be a company employee or a dedicated expert. Of course, whoever takes over administrative responsibilities will need approval from the LLC members as the primary decision-makers in the organization.

Step 5: Add and Remove LLC Members

The final part of your operating agreement will deal with what happens when old members leave the LLC or new members come in. Membership changes are expected as an LLC grows and develops, so the operating agreement needs a dedicated chapter.

This section will define precise procedures related to leaving or upcoming members, including, but not limited to:

• Membership interest

• Percentages of ownership

• Indemnification

The more these procedures are defined, the more accessible new members can assume their roles. In other words, onboarding will become relatively straightforward.

Single-member LLCs will also benefit from defining this section of the operating agreement. As your LLC grows, it will be natural to want to expand its memberships. If your operating agreement doesn’t propose a straightforward solution for onboarding, the default state rules might prove unfit for your purposes, hindering your growth.

Of course, if you define how membership is handled in your organization, accepting new members will be seamless. It’s worth mentioning that whether your business has one or more members, membership dealings can be legally complex. That’s why you would do well asking for legal advice when drafting this section.

Create Your Operating Agreement Through a Filing Service

Each step in the drafting process for an operating agreement seems relatively uncomplicated. Yet, the process can be daunting due to the sheer amount of moving parts. Swyft Filings can remove all the guesswork and uncertainty to ensure your operating agreement is put together optimally. Our reliable, professional service specializes in helping launch new companies in California and countrywide. 

Firstly, we help new LLC owners get their bearings and avoid common beginner pitfalls to start your business off on the right foot. File for your LLC through us today and include our LLC operating agreement add-on in your cart to ensure you have all your necessary documents at the beginning.

If you’re looking for the next step after already forming your LLC, our LLC operating agreement service ensures you have a compliant document for conducting business in California. We can help you wrap up your legal documents so you can get going as soon as possible.

If you’re ready to launch your California LLC, why not leave the heavy lifting to trusted professionals? Swyft Filings will care for all your filing needs while you dedicate your full attention to what you do best: growing your business.

FAQs

Is an LLC Operating Agreement required in California?

According to the California Secretary of State, an operating agreement is necessary for all LLCs in the state. However, you don’t need to file the document with state authorities but rather keep it on file within your internal business documentation.

How does an LLC Operating Agreement help protect my assets?

A limited liability company operating agreement means the state will view your personal funds and liabilities separately from business liabilities. In other words, disputes won’t jeopardize the members due to company debt. Instead, your personal assets will be safe if the LLC falls into financial trouble.

Who needs access to this document once it’s drafted?

LLC members should have unhindered access to your operating agreement. This is important when decision-makers need to consult the guidelines to determine the company’s direction. Likewise, access to the document will make handling particular business situations easier by avoiding guesswork.

How do I edit information on this document if membership changes?

Members of your LLC can vote on implementing particular changes in the operating agreement. The voting mechanic is put in place so that no individual member can edit the document without input from other shareholders. This system helps protect ownership interests and keeps all members up to date with company operations.

What other legal documents do I need to draft for my California LLC?

To start an LLC in California, you must submit several documents as mandated by state law. These will include business registration, Employer Identification Number (EIN), Statement of Information, registration for tax purposes, and any required permits. Additionally, you may need to register a fictitious business name.

Bibliography

1. California Secretary of State. “Starting a New Business Checklist.” Accessed June 20, 2023.

2. California Secretary of State. “Starting a Business - Entity Types - Limited Liability Company.” Accessed June 20, 2023.

3. California Limited Liability Company Law. “Why All California LLCs Need a Written Operating Agreement.” Accessed June 20, 2023.