What is a California LLC Operating Agreement?
A California LLC Operating Agreement is a document that shows who owns the LLC. It also spells out how much of the LLC each person owns, and how the LLC is managed.
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Operating Agreement for Member-Managed Limited Liability CompanyFOR [LLC NAME]
I. PRELIMINARY PROVISIONS
(1) Effective Date: This operating agreement of [LLC NAME] effective [DATE], is adopted by the members whose signatures appear at the end of this agreement (the "Agreement").
(2) Formation: This limited liability company (LLC) was formed by filing Articles of Organization, a Certificate of Formation or a similar organizational document with the LLC filing office of the state of [STATE] on [DATE]. A copy of this organizational document has been placed in the LLC's records book.
(3) Name: The formal name of this LLC is as stated above. However, this LLC may do business under a different name by complying with the state's fictitious or assumed business name statutes and procedures.
(4) Registered Office and Agent: The registered office of this LLC and the registered agent at this address are as follows:
The registered office and agent may be changed from time to time as the members may see fit, by filing a change of registered agent or office form with the state LLC filing office. It will not be necessary to amend this provision of the operating agreement if and when such a change is made.
(5) Business Purposes: The specific business purposes and activities contemplated by the founders of this LLC at the time of initial signing of this agreement consist of the following:
[BUSINESS PURPOSE]
It is understood that the foregoing statement of purposes shall not serve as a limitation on the powers or abilities of this LLC, which shall be permitted to engage in any and all lawful business activities. If this LLC intends to engage in business activities outside the state of its formation that require the qualification of the LLC in other states, it shall obtain such qualification before engaging in such out-of-state activities.
(6) Duration of LLC: The duration of this LLC shall be Perpetual. Further, this LLC shall terminate when a proposal to dissolve the LLC is adopted by the membership of this LLC or when this LLC is otherwise terminated in accordance with law.
II. MEMBERSHIP PROVISIONS
(1) Non-liability of Members: No member of this LLC shall be personally liable for the expenses, debts, obligations or liabilities of the LLC, or for claims made against it.
(2) Reimbursement for Organizational Costs: Members shall be reimbursed by the LLC for organizational expenses paid by the members. The LLC shall be authorized to elect to deduct organizational expenses and start-up expenditures ratably over a period of time as permitted by the Internal Revenue Code and as may be advised by the LLC's tax advisor.
(3) Management: This LLC shall be managed exclusively by all of its members.
(4) Members' Percentage Interests: A member's percentage interest in this LLC shall be computed as a fraction, the numerator of which is the total of a member's capital account and the denominator of which is the total of all capital accounts of all members. This fraction shall be expressed in this agreement as a percentage, which shall be called each member's "percentage interest" in this LLC.
(5) Membership Voting: Except as otherwise may be required by the Articles of Organization, Certificate of Formation or a similar organizational document, other provisions of this operating agreement, or under the laws of this state, each member shall vote on any matter submitted to the membership for approval in proportion to the member's percentage interest in this LLC. Further, unless defined otherwise for a particular provision of this operating agreement, the phrase "majority of members" means the vote of members whose combined votes equal more than 50% of the votes of all members in this LLC.
(6) Compensation: Members shall not be paid as members of the LLC for performing any duties associated with such membership, including management of the LLC. Members may be paid, however, for any services rendered in any other capacity for the LLC, whether as officers, employees, independent contractors or otherwise.
(7) Members' Meetings: The LLC shall not provide for regular members' meetings. However, any member may call a meeting by communicating his or her wish to schedule a meeting to all other members. Such notification may be in person or in writing, or by telephone, facsimile machine, or other form of electronic communication reasonably expected to be received by a member, and the other members shall then agree, either personally, in writing, or by telephone, facsimile machine or other form of electronic communication to the member calling the meeting, to meet at a mutually acceptable time and place. Notice of the business to be transacted at the meeting need not be given to members by the member calling the meeting, and any business may be discussed and conducted at the meeting. If all members cannot attend a meeting, it shall be postponed to a date and time when all members can attend, unless all members who do not attend have agreed in writing to the holding of the meeting without them. If a meeting is postponed, and the postponed meeting cannot be held either because all members do not attend the postponed meeting or the non-attending members have not signed a written consent to allow the postponed meeting to be held without them, a second postponed meeting may be held at a date and time announced at the first postponed meeting. The date and time of the second postponed meeting shall also be communicated to any members not attending the first postponed meeting. The second postponed meeting may be held without the attendance of all members as long as a majority of the percentage interests of the membership of this LLC is in attendance at the second postponed meeting. Written notice of the decisions or approvals made at this second postponed meeting shall be mailed or delivered to each non-attending member promptly after the holding of the second postponed meeting. Written minutes of the discussions and proposals presented at a members' meeting, and the votes taken and matters approved at such meeting, shall be taken by one of the members or a person designated at the meeting. A copy of the minutes of the meeting shall be placed in the LLC's records book after the meeting.
(8) Membership Certificates: This LLC shall be authorized to obtain and issue certificates representing or certifying membership interests in this LLC. Each certificate shall show the name of the LLC, the name of the member, and state that the person named is a member of the LLC and is entitled to all the rights granted members of the LLC under the Articles of Organization, Certificate of Formation or a similar organizational document, this operating agreement and provisions of law. Each membership certificate shall be consecutively numbered and signed by one or more officers of this LLC. The certificates shall include any additional information considered appropriate for inclusion by the members on membership certificates. In addition to the above information, all membership certificates shall bear a prominent legend on their face or reverse side stating, summarizing or referring to any transfer restrictions that apply to memberships in this LLC under the Articles of Organization, Certificate of Formation or a similar organizational document and/or this operating agreement, and the address where a member may obtain a copy of these restrictions upon request from this LLC. The records book of this LLC shall contain a list of the names and addresses of all persons to whom certificates have been issued, show the date of issuance of each certificate, and record the date of all cancellations or transfers of membership certificates.
(9) Other Business by Members: Each member shall agree not to own an interest in, manage or work for another business, enterprise or endeavor, if such ownership or activities would compete with this LLC's business goals, mission, profitability or productivity, or would diminish or impair the member's ability to provide maximum effort and performance in managing the business of this LLC.
III. TAX AND FINANCIAL PROVISIONS
(1) Tax Classification of LLC: For federal and, if applicable, state income tax purposes, this LLC will be taxed in its default tax classification. Unless the members request an elective tax status from the IRS, the members also reserve the right to change the LLC's tax classification at any time.
(2) 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. Both the tax year and the accounting period of the LLC may be changed with the consent of all members if the LLC qualifies for such change, and may be affected by the filing of appropriate forms with the IRS and state tax authorities.
(3) Tax Matters Partner: If this LLC is required under Internal Revenue Code provisions or regulations, it shall designate from among its members a "tax matters partner" in accordance with Internal Revenue Code Section 6231(a)(7) and corresponding regulations, who will fulfill this role by being the spokesperson for the LLC in dealings with the IRS as required under the Internal Revenue Code and Regulations, and who will report to the members on the progress and outcome of these dealings.
(4) Annual Income Tax Returns and Reports: Within 60 days after the end of each tax year of the LLC, a copy of the LLC's state and federal income tax returns for the preceding tax year shall be mailed or otherwise provided to each member of the LLC, together with any additional information and forms necessary for each member to complete his or her individual state and federal income tax returns. If this LLC is classified as a partnership for income tax purposes, this additional information shall include a federal (and, if applicable, state) Form K-1 (Form 1065 - Partner's Share of Income, Credits, Deductions) or equivalent income tax reporting form. This additional information shall also include a financial report, which shall include a balance sheet and profit and loss statement for the prior tax year of the LLC.
(5) Bank Accounts: The LLC shall designate one or more banks or other institutions for the deposit of the funds of the LLC, and shall establish savings, checking, investment and other such accounts as are reasonable and necessary for its business and investments. One or more members of the LLC shall be designated with the consent of all members to deposit and withdraw funds of the LLC, and to direct the investment of funds from, into and among such accounts. The funds of the LLC, however and wherever deposited or invested, shall not be commingled with the personal funds of any members of the LLC.
(6) Title to Assets: All personal and real property of this LLC shall be held in the name of the LLC, not in the names of individual members.
IV. CAPITAL PROVISIONS
(1) Capital Contributions by Members: Members shall make the following contributions of cash, property or services as shown next to each member's name below. Unless otherwise noted, cash and property described below shall be paid or delivered to the LLC on or by [DATE]. The fair market values of items of property or services as agreed between the LLC and the contributing member are also shown below. The percentage interest in the LLC that each member shall receive in return for his or her capital contribution is also indicated for each member.
| NAME & ADDRESS | CONTRIBUTION | % INTEREST IN LLC |
|---|---|---|
| No members added | ||
(2) Additional Contributions by Members: The members may agree, from time to time by unanimous vote, to require the payment of additional capital contributions by the members, on or by a mutually agreeable date.
(3) Failure to Make Contributions: If a member fails to make a required capital contribution within the time agreed for a member's contribution, the remaining members may, by unanimous vote, agree to reschedule the time for payment of the capital contribution by the late-paying member, setting any additional repayment terms, such as a late payment penalty, rate of interest to be applied to the unpaid balance, or other monetary amount to be paid by the delinquent member, as the remaining members decide. Alternatively, the remaining members may, by unanimous vote, agree to cancel the membership of the delinquent member, provided any prior partial payments of capital made by the delinquent member are refunded promptly by the LLC to the member after the decision is made to terminate the membership of the delinquent member.
(4) No Interest on Capital Contributions: No interest shall be paid on funds or property contributed as capital to this LLC, or on funds reflected in the capital accounts of the members.
(5) Capital Account Bookkeeping: A capital account shall be set up and maintained on the books of the LLC for each member. It shall reflect each member's capital contribution to the LLC, increased by each member's share of profits in the LLC, decreased by each member's share of losses and expenses of the LLC, and adjusted as required in accordance with applicable provisions of the Internal Revenue Code and corresponding income tax regulations.
(6) Consent to Capital Contribution Withdrawals and Distributions: Members shall not be allowed to withdraw any part of their capital contributions or to receive distributions, whether in property or cash, except as otherwise allowed by this agreement and, in any case, only if such withdrawal is made with the written consent of all members.
(7) Allocations of Profits and Losses: No member shall be given priority or preference with respect to other members in obtaining a return of capital contributions, distributions or allocations of the income, gains, losses, deductions, credits or other items of the LLC. The profits and losses of the LLC, and all items of its income, gain, loss, deduction and credit shall be allocated to members according to each member's percentage interest in this LLC.
(8) Allocation and Distribution of Cash to Members: Cash from LLC business operations, as well as cash from a sale or other disposition of LLC capital assets, may be distributed from time to time to members in accordance with each member's percentage interest in the LLC, as may be decided by all of the members.
(9) Allocation of Noncash Distributions: If proceeds consist of property other than cash, the members shall decide the value of the property and allocate such value among the members in accordance with each member's percentage interest in the LLC. If such noncash proceeds are later reduced to cash, such cash may be distributed among the members as otherwise provided in this agreement.
(10) Allocation and Distribution of Liquidation Proceeds: Regardless of any other provision in this agreement, if there is a distribution in liquidation of this LLC, or when any member's interest is liquidated, all items of income and loss shall be allocated to the members' capital accounts, and all appropriate credits and deductions shall then be made to these capital accounts before any final distribution is made. A final distribution shall be made to members only to the extent of, and in proportion to, any positive balance in each member's capital account.
V. MEMBERSHIP WITHDRAWAL AND TRANSFER PROVISIONS
(1) Withdrawal of Members: A member may withdraw from this LLC by giving written notice to all other members at least 60 days before the date the withdrawal is to be effective.
(2) Restrictions on the Transfer of Membership: A member shall not transfer his or her membership in the LLC unless all non-transferring members in the LLC first agree to approve the admission of the transferee into this LLC. Further, no member may encumber a part or all of his or her membership in the LLC by mortgage, pledge, granting of a security interest, lien or otherwise, unless the encumbrance has first been approved in writing by all other members of the LLC. Notwithstanding the above provision, any member shall be allowed to assign an economic interest in his or her membership to another person without the approval of the other members. Such an assignment shall not include a transfer of the member's voting or management rights in this LLC, and the assignee shall not become a member of the LLC.
VI. DISSOLUTION PROVISIONS
(1) Events That Trigger Dissolution of the LLC: The following events shall trigger dissolution of the LLC, except as provided:
(a) the death, permanent incapacity, bankruptcy, retirement, resignation or expulsion of a member, except that within 60 days of the happening of any of these events, all remaining members of the LLC may vote to continue the legal existence of the LLC, in which case the LLC shall not dissolve;
(b) the expiration of the term of existence of the LLC if such term is specified in the Articles of Organization, Certificate of Formation or a similar organizational document, or this operating agreement;
(c) the written agreement of all members to dissolve the LLC;
(d) entry of a decree of dissolution of the LLC under state law.
VII. GENERAL PROVISIONS
(1) Officers: The LLC may designate one or more officers, such as a President, Vice President, Secretary and Treasurer. Persons who fill these positions need not be members of the LLC. Such positions may be compensated or non-compensated according to the nature and extent of the services rendered for the LLC as a part of the duties of each office. Ministerial services only as a part of any officer position will normally not be compensated, such as the performance of officer duties specified in this agreement, but any officer may be reimbursed by the LLC for out-of-pocket expenses paid by the officer in carrying out the duties of his or her office.
(2) Records: The LLC shall keep at its principal business address a copy of all proceedings of membership meetings, as well as books of account of the LLC's financial transactions. A list of the names and addresses of the current membership of the LLC also shall be maintained at this address, with notations on any transfers of members' interests to nonmembers or persons being admitted into membership in the LLC.
Copies of the LLC's Articles of Organization, Certificate of Formation or a similar organizational document, a signed copy of this operating agreement, and the LLC's tax returns for the preceding three tax years shall be kept at the principal business address of the LLC. A statement also shall be kept at this address containing any of the following information that is applicable to this LLC:
- the amount of cash or a description and value of property contributed or agreed to be contributed as capital to the LLC by each member;
- a schedule showing when any additional capital contributions are to be made by members to this LLC;
- a statement or schedule, if appropriate, showing the rights of members to receive distributions representing a return of part or all of members' capital contributions; and
- a description of, or date when, the legal existence of the LLC will terminate under provisions in the LLC's Articles of Organization, Certificate of Formation or a similar organizational document, or this operating agreement.
If one or more of the above items is included or listed in this operating agreement, it will be sufficient to keep a copy of this agreement at the principal business address of the LLC without having to prepare and keep a separate record of such item or items at this address. Any member may inspect any and all records maintained by the LLC upon reasonable notice to the LLC. Copying of the LLC's records by members is allowed, but copying costs shall be paid for by the requesting member.
(3) All Necessary Acts: The members and officers of this LLC are authorized to perform all acts necessary to perfect the organization of this LLC and to carry out its business operations expeditiously and efficiently. The Secretary of the LLC, or other officers, or all members of the LLC, may certify to other businesses, financial institutions and individuals as to the authority of one or more members or officers of this LLC to transact specific items of business on behalf of the LLC.
(4) Indemnification: The LLC shall indemnify the Member and those authorized officers, agents, and employees of the LLC identified in writing by the Member as entitled to being indemnified under this section for all costs, losses, liabilities and damages paid or accrued by the Member (as the Member or officer, agent, or employee) or any such officer, agent, or employee in connection with the business of the LLC, except to the extent prohibited by the laws of the state that governs this Agreement. In addition, the LLC may advance costs of defense of any proceeding to the Member or any such officer, agent, or employee upon receipt by the LLC of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that the person is not entitled to be indemnified by the LLC.
(5) Mediation and Arbitration of Disputes Among Members: In any dispute over the provisions of this operating agreement and in other disputes among the members, if the members cannot resolve the dispute to their mutual satisfaction, the matter shall be submitted to mediation. The terms and procedure for mediation shall be arranged by the parties to the dispute. If good-faith mediation of a dispute proves impossible or if an agreed-upon mediation outcome cannot be obtained by the members who are parties to the dispute, the dispute may be submitted to arbitration in accordance with the rules of the American Arbitration Association. Any party may commence arbitration of the dispute by sending a written request for arbitration to all other parties to the dispute. The request shall state the nature of the dispute to be resolved by arbitration, and, if all parties to the dispute agree to arbitration, arbitration shall be commenced as soon as practical after such parties receive a copy of the written request. All parties shall initially share the cost of arbitration, but the prevailing party or parties may be awarded attorney fees, costs and other expenses of arbitration. All arbitration decisions shall be final, binding and conclusive on all the parties to arbitration, and legal judgment may be entered based upon such decision in accordance with applicable law in any court having jurisdiction to do so.
(6) Governing Law: This Agreement shall be governed by, and interpreted and enforced in accordance with, the substantive laws of the State in which the LLC was formed, without reference to the conflicts of law rules of that or any other jurisdiction.
(7) Entire Agreement: This operating agreement represents the entire agreement among the members of this LLC, and it shall not be amended, modified or replaced except by a written instrument executed by all the parties to this agreement who are current members of this LLC as well as any and all additional parties who became members of this LLC after the adoption of this agreement. This agreement replaces and supersedes all prior written and oral agreements among any and all members of this LLC.
(8) Severability: If any provision of this agreement is determined by a court or arbitrator to be invalid, unenforceable or otherwise ineffective, that provision shall be severed from the rest of this agreement, and the remaining provisions shall remain in effect and enforceable.
VIII. SIGNATURES OF MEMBERS
Execution of Agreement: In witness whereof, the members of this LLC sign and adopt this agreement as the operating agreement of this LLC.
Signatures will appear here.
LIMITED LIABILITY COMPANY OPERATING AGREEMENT FOR
[LLC NAME]
A MANAGER-MANAGED LIMITED LIABILITY COMPANY
ARTICLE I
Company Formation
1.1 FORMATION. The Members have formed a Limited Liability Company ("Company") subject to the laws of the state in which it was formed. This operating agreement is entered into and effective upon adoption by the Member(s).
1.2 REGISTERED AGENT. The name and location of the Company's registered agent will be as stated in the formation documents.
1.3 TERM. The Company will continue perpetually unless, (a) Members unanimously vote for dissolution; or (b) An event occurs which causes the Company's business to become unlawful; or (c) Any other event causing the Company's dissolution under state laws.
1.4 CONTINUANCE OF COMPANY. In the event of an occurrence described in ARTICLE 1.3(c), if there is at least one remaining Member, the Member has the right to continue the Company's business.
1.5 BUSINESS PURPOSE. The purpose of the Company is to conduct any and all lawful business activities appropriate in carrying out the company's objectives.
1.6 PRINCIPAL PLACE OF BUSINESS. The location of the Company's principal place of business will be as stated in the formation documents or as selected by the Managers.
1.7 THE MEMBERS. The name and address of each Member is contained in Exhibit 2, attached to this Agreement.
1.8 ADMISSION OF ADDITIONAL MEMBERS. Members may only be admitted to the Company through issuance of a new interest in the company with unanimous written consent of the Members or the sale of a Member's current interest, except as otherwise expressly provided in the Agreement.
ARTICLE II
Capital Contributions
2.1 INITIAL CONTRIBUTIONS. The Members will contribute the Company's initial capital as described in Exhibit 3 attached to this Agreement. The agreed total value of such property and cash is $[TOTAL CAPITAL] USD.
2.2 ADDITIONAL CONTRIBUTIONS. Except as provided in ARTICLE 6.2, no Member is obligated to make any additional contribution to the Company's capital.
ARTICLE III
Profits, Losses and Distributions
3.1 PROFITS/LOSSES. For financial accounting and tax purposes the Company's net profits or net losses will be determined annually. Profits and losses will be allocated to the Members in proportion to each Member's relative capital interest in the Company as set forth in Exhibit 2 as amended and in accordance with Treasury Regulation 1.704-1.
3.2 DISTRIBUTIONS. The Members may determine and distribute available funds annually or more frequently as the Members see fit. "Available funds" refers to the net cash of the Company available after expenses and liabilities, as determined by the Managers. Upon liquidation of the Company or of a Member's interest, distributions must be made according to the positive capital or pursuant to Treasury Regulation 1.704-l(b)(2)(ii)(b)(2). To the extent a Member has a negative capital account balance, there must be a qualified income offset, as set forth in Treasury Regulation 1.704-l(b)(2)(ii)(d).
ARTICLE IV
Management
4.1 MANAGEMENT OF THE BUSINESS. The Company is managed by a Manager or Managers. The Manager(s) may be Members or Non-Members. The name and address of each Manager is attached as Exhibit 1 of this Agreement. The Manager(s) will be elected by a majority vote of the Members.
4.2 MEMBERS. The liability of the Members is limited pursuant to applicable state law. Members that are not Managers may not take any part in the control, management, direction, or operation of the Company's affairs and have no power to bind the Company. The Members may advise the Managers, but Managers are not required to accept such advice. The Managers have the exclusive right to control and manage the Company. No Member will be an agent of any other Member of the Company solely by reason of being a Member.
4.3 POWERS OF MANAGERS. The Managers are authorized to make all decisions regarding the Company's operations and legal affairs, including but not limited to:
(a) the sale, development, lease or other disposition of the Company's assets;
(b) the purchase or other acquisition of other assets of all kinds;
(c) the management of all or any part of the Company's assets;
(d) the borrowing of money and the granting of security interests in the Company's assets;
(e) the pre-payment, refinancing or extension of any loan affecting the Company's assets;
(f) the compromise or release of any of the Company's claims or debts; and,
(g) the employment of persons, firms or corporations for the operation and management of the Company's business. Managers are authorized to execute and deliver (1) all contracts, conveyances, assignments leases, sub-leases, franchise agreements, licensing agreements, management contracts and maintenance contracts covering or affecting the Company's assets; (2) all checks, drafts and other orders for the payment of the Company's funds; (3) all promissory notes, loans, security agreements and other similar documents; and, (4) all other instruments of any other kind relating to the Company's business.
4.4 NOMINEE. Title to the Company's assets will be held in the Company's name or in the name of any nominee that the Managers may designate. The Managers will have power to enter into a nominee agreement with any person, and such agreement may contain provisions indemnifying the nominee, except for his or her willful misconduct.
4.5 COMPANY INFORMATION. Upon request, the Managers will supply to any member, information regarding the Company or its activities. Any Member or a member's authorized representative may access, inspect, and copy all books, records and materials in the Manager's possession regarding the Company or its activities. These rights may be exercised at the requesting Member's expense.
4.6 EXCULPATION. Any act or omission of the Managers, the effect of which may cause or result in loss or damage to the Company or the Members, if done in good faith to promote the best interests of the Company, will not subject the Managers to any liability.
4.7 INDEMNIFICATION. The Company will indemnify any person who was or is a party defendant or is threatened to be made a party defendant, in a pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Company) by reason of the fact that the person is or was a Member of the Company, employee, or agent of the Company, or is or was serving at the request of the Company. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of "no lo Contendere" does not imply that the party did or did not act in good faith and in a manner which he/she reasonably believed to be lawful and in the best interest of the Company.
4.8 RECORDS. The Managers must keep the following at the Company's principal place of business: (a) A copy of all formation documents, the operating agreement, and any amendments; (b) A current list of the full name and the last known street address of each Member; (c) Copies of the Company's federal, state and local income tax returns and reports, if any, for the three most recent years; (d) Copies of the Company's financial statements for the three most recent years.
ARTICLE V
Compensation
5.1 MANAGEMENT FEE. Any Manager rendering services to the Company is entitled to compensation equal to the value of those services.
5.2 REIMBURSEMENT. The Company will reimburse the Managers or Members for all direct out-of-pocket expenses incurred in managing the Company.
ARTICLE VI
Bookkeeping
6.1 BOOKS. The Managers will keep complete and accurate accounting of the Company's affairs at the Company's principal place of business or other location agreed upon by the Managers. The Managers will choose the method of accounting and the Company's accounting period will be the calendar year.
6.2 MEMBER'S ACCOUNTS. The Managers must maintain separate capital and distribution accounts for each Member. Each Member's capital account must be determined and maintained in the manner set forth in Treasury Regulation 1.704-l(b)(2)(iv) and will consist of the Member's initial capital contribution increased by:
(a) Any additional capital contribution made by the Member;
(b) Credit balances transferred from the member's distribution account to the member's capital account;
and decreased by:
(1) Distributions to the Member in reduction of Company capital;
(2) The Member's share of Company losses if charged to the Member's capital account.
6.3 REPORTS. When the Managers close the books at the close of each calendar year, the Managers will prepare and send to each Member, a statement of that Member's distributive share of income and expense for income tax reporting purposes.
ARTICLE VII
Transfers
7.1 ASSIGNMENT. If a Member proposes to sell, assign or otherwise dispose of all or part of the Member's interest in the Company, he or she must comply with the following procedures:
(a) First make a written offer, including the price, to sell such interest to the other Member(s). The exiting Member may only advertise the sale if the other Members decline or fail to elect such interest within 60 days after the offer.
(b) If the exiting member has a buyer of interest, the other current Member(s) have first right of refusal to purchase the exiting Member's interest for the agreed purchase price. If there is more than one current remaining Member, the remaining Members may combine funds to purchase the exiting Members' interest. The exiting Member must show that potential purchaser has full certified funds, or the ability to get full certified funds before the 60 day right of first refusal period ends.
(c) Current Members must unanimously approve the sale of exiting Members' interests to grant full membership benefits and functionality to the new Member. If the current remaining Members do not unanimously approve the sale, the purchaser or assignee will have no management or voting rights. The purchaser or assignee is only entitled to receive the share of the profits or other compensation by way of income and the return of contributions to which that Member would otherwise be entitled. The exiting Member must disclose to the buyer or assignee if the current Members will not approve the sale.
7.2 VALUATION OF EXITING MEMBERS INTEREST. If a Member wants to exit the LLC, and does not have a buyer of its membership interest, exiting Member will assign its interest to current Members according to the following procedures:
(a) A value must be placed upon this membership interest before being assigned.
(b) If the exiting Member and the current Members do not agree on the value of the membership interest, the exiting Member must pay for a certified appraiser to assess the Company's value. The appraiser will assign the exiting Members' interest a value according to the exiting Members' interest percentage.
(c) The current Members must approve the certified appraiser used by exiting Member. Current Members have 30 days to approve the exiting Members certified appraiser. If current Members disapprove the certified appraiser, they must show evidence to support their disapproval of the certified appraiser as a vendor qualified to appraise the company. Current Members may not stall the process by disapproving all certified appraisers.
(d) When a certified appraiser places a value on the Company, a value will be placed on the exiting Members' interest according to exiting Members' percentage of membership interest.
(e) If current Members disagree with the value placed on exiting Members' interest, current Members must pay for a certified appraiser to value the company and the exiting Members' interest according to the same terms.
(f) Current Members' appraisal must be completed within 60 days or right of current Members to dispute the value of exiting Member's interest expires.
(g) Upon completion of current Members' appraisal, the exiting Member must approve the value placed on exiting Members' interest. Exiting Member has 30 days to approve this value.
(h) If the exiting Member does not approve the current Members' appraised value, then the value of the Company will be determined by adding both parties' appraised values, then dividing that value in half, creating the value of the exiting Members' interest.
7.3 DISTRIBUTION OF EXITING MEMBERS INTEREST. Upon determination of exiting Members' interest value, the value will be a debt of the Company. The exiting Member will only be able to demand payment of this debt at dissolution of the Company or by the following method:
(a) The Company will make timely payments.
(b) The Company will only be required to make payments towards exiting Member's debt if the Company is profitable and passes income to current Members.
(c) The Company must make a debt payment to the exiting Member if the Company's income surpassed 50% of the total determined value of the exiting Members' interest in one taxable year. (Example: If exiting Members' value was $100,000 and current Member(s) received over $50,000 taxable income in the taxable year, the LLC would owe a debt payment to exiting Member. If current Member(s) only received $40,000 in passed income, there would be no payment due.)
(d) The debt payment must be at least 10% of the value of the passed income to current Members.
(e) The company must make payment to exiting Member within 60 days of the end of the company's taxable year.
(f) The payment schedule will continue until the exiting Member's debt is paid.
(g) If the Company dissolves, the exiting Member will be a regular debtor and payment will follow normal dissolution payment statutes.
(h) The exiting Member's value of membership interest assigned current Members may NOT accrue interest.
(i) The Company may pay the amount owed to the exiting Member at any time.
ARTICLE VIII
Dissolution
8.1 DISSOLUTION. The Member(s) may dissolve the LLC at any time. The Member(s) may NOT dissolve the LLC for a loss of membership interests. Upon dissolution the LLC must pay its debts first before distributing cash, assets, and/or initial capital to the Member or the Members interests. The dissolution may only be ordered by the Member(s), not by the owner of the Member's interests.
CERTIFICATION OF MEMBERS
The undersigned hereby agree, acknowledge, and certify that the foregoing operating agreement is adopted and approved by each Member, the agreement consisting of ## pages, constitutes, together with Exhibit 1, Exhibit 2, and Exhibit 3, the Operating Agreement of [LLC NAME], adopted by the Members as of [DATE].
* Page count will be calculated when generating the document.
Members:
_________________________
[Member 1]
Membership interest: 0%
EXHIBIT 1
LIMITED LIABILITY COMPANY OPERATING AGREEMENT FOR
[LLC NAME]
LISTING OF MANAGERS
By a majority vote of the Members the following Managers were elected to operate the Company pursuant to ARTICLE 4 of the Agreement:
_________________________
[Manager 1], Manager
[Address]
[City], [State] [Zip]
The above listed Manager(s) will serve in their capacities until they are removed for any reason by a majority vote of the Members as defined by ARTICLE 4 or upon their voluntary resignation.
Signed and agreed on [DATE].
_________________________
[Member 1], Member
EXHIBIT 2
LIMITED LIABILITY COMPANY OPERATING AGREEMENT FOR
[LLC NAME]
LISTING OF MEMBERS
As of [DATE], the following is a list of Members of the Company:
| Name: | [Member 1] |
| Membership interest: | 0% |
| Address: | [Address, City, State, and Zip] |
Authorized by Member(s) to provide Member Listing as of [DATE].
_________________________
[Member 1], Member
EXHIBIT 3
LIMITED LIABILITY COMPANY OPERATING AGREEMENT FOR
[LLC NAME]
CAPITAL CONTRIBUTIONS
Pursuant to ARTICLE 2, the Members' initial contribution to the Company capital is stated to be $[TOTAL CAPITAL] USD. The description and each individual portion of this initial contribution is as follows:
| [Member 1], by cash/check/money order: | $0 USD |
SIGNED AND AGREED on [DATE].
_________________________
[Member 1], Member
California LLC Operating Agreement (Member-managed)
California LLC Operating Agreement (Manager-managed)
What should be included in LLC Operating Agreements?
Basic Information
Your LLC Operating Agreement will include basic information about your Limited Liability Company. Some of the information will be the same as what is listed in your California LLC Articles of Organization. Operating Agreements should include:
- LLC Name
- LLC effective date
- California Registered Agent (if applicable)
- purpose of your LLC
- duration of your LLC
- and how your LLC will be taxed
Limited Liability Company Ownership
Your Operating Agreement will list all the LLC Members and how much of the Limited Liability Company they each own.
How much of the LLC someone owns is called their “LLC Membership Interest”.
LLC Membership Interest is most often expressed as a percentage (like 5%, 50%, 100%, etc.).
Initial Capital Contributions (putting money into your LLC)
After your LLC is approved, you should open an LLC bank account and put money into that account.
Each of the LLC Members makes an initial capital contribution. Capital contribution simply means a deposit of money into the LLC bank account.
You will list the initial capital contributions in your LLC’s Operating Agreement.
Pro tip: If you complete your Operating Agreement before you have opened an LLC bank account, just enter the amount the Members plan to deposit. If the amount of your deposit changes, it’s okay to edit your LLC Operating Agreement with the actual amounts later.
Statement about taxes
You will list how your LLC will be taxed in your California Operating Agreement. There are four common ways a Limited Liability Company can be taxed:
- LLC taxed as a Sole Proprietorship
- LLC taxed as a Partnership
- LLC taxed as an S-Corporation
- LLC taxed as a C-Corporation
Voting Rights of LLC Members
The rules of membership voting will be spelled out in your California LLC’s Operating Agreement.
If you use the Member-managed Operating Agreement, the voting powers are proportionate to the LLC Membership Interest.
If you use the Manager-managed Operating Agreement, the voting powers are also proportionate to the LLC Membership Interest. Then the Members vote to elect one or more Managers. The Manager(s) then has authority to make certain decisions on behalf of the LLC (without needing a vote by the Members).
However, certain things, like adding or removing an LLC Member, require a vote of the Members (and the Manager has no say).
Make sure all LLC Members have a copy
Once you finalize your Operating Agreement, make sure all the Members have a copy.
We recommend keeping a copy of the Operating Agreement with your LLC business records.
Operating Agreement FAQs
Is an Operating Agreement required for an LLC in California?
As per the definition of “operating agreement” in Section 17701.02 of the California Limited Liability Company Act, an Operating Agreement isn’t required for an LLC in California.
But while it’s not required for a Limited Liability Company pursuant to California law in order to conduct business (and you don’t have to send a copy to the California Secretary of State), we strongly recommend having an Operating Agreement for your LLC.
Additionally, financial institutions (like banks) and other organizations may need to see a copy of this paperwork in order for you to do business with them.
Why should an LLC with only one Member still have an Operating Agreement?
It’s best to have an Operating Agreement, even if you are the sole Member of your California LLC (a Single-Member LLC).
If you go to court, an Operating Agreement helps prove that your Single-Member LLC is being run as a separate legal entity. This confirms the company’s limited liability status, and that is what protects your personal assets.
Does a Multi-Member LLC need an Operating Agreement?
It’s best to have an Operating Agreement, especially for an LLC with multiple members (a Multi-Member LLC). This document will spell out ownership percentages, profit distribution, operating procedures / company operations, and management responsibilities.
If you go to court, an Operating Agreement helps prove that your Multi-member LLC is being run as a separate legal entity.
Do I have to send my Operating Agreement to the state?
No, you don’t have to send your Operating Agreement to the California Secretary of State, or any other government agency. (That’s why there is no “filing fee” for an Operating Agreement.)
California LLC Operating Agreements are “internal documents” for business entities. Meaning, the Members just need to keep a copy with their business records.
The Operating Agreement is a legally binding document upon the LLC Members because of the Members’ signatures. It doesn’t need a government stamp of approval.
However, in the future, if your company were involved in a lawsuit or an audit, a court or government agency might ask to see a copy of your Operating Agreement.
Additionally, you may also need to show this document to:
- financial institutions when you open a business bank account
- financial institutions if you apply for a loan for the LLC
- a title company if your LLC is buying real estate
Does my LLC Operating Agreement need to be notarized?
No, your Operating Agreement doesn’t need to be notarized. Each Member just needs to sign it.
Once you (and the other LLC Members, if applicable) sign the Operating Agreement, then it becomes a legal document.
Can I write my own Operating Agreement?
Yes, but we recommend using an Operating Agreement template.
An Operating Agreement is a legal document. You don’t have to hire an attorney to write one, though. Using a template helps make sure you cover everything you need to.
LLC University® offers free Operating Agreement templates that you can download. Using the free Operating Agreement template, you can customize it and write your own Limited Liability Company Operating Agreement.
How do you write a simple Operating Agreement?
If you wanted to write a simple California Operating Agreement without using a template, you could. You’d need to check with the California LLC Act to make sure it meets all the requirements.
For example, at a minimum, you’d want your California LLC name, your Registered Agent information, your business purpose, the names of the LLC Members, and information about initial capital contributions.
However, there is a lot more information that is important to document about your LLC.
It’s probably a lot easier to start with an existing template. We have a free LLC Operating Agreement template you can download on this page.
What is the difference between an LLC and an Operating Agreement?
An LLC (Limited Liability Company) is a type of business structure. It’s a legal business entity that you form by filing a document called the Articles of Organization with the state.
An LLC Operating Agreement is an internal document that governs how your LLC is run. It contains rules about how much of the company each Member of the LLC owns, and other details about management and taxes.
Said another way, the LLC is your legal entity. And the Operating Agreement is a written set of rules for how the LLC will operate.
You could have an LLC without an Operating Agreement (but you shouldn’t). But you can’t have an Operating Agreement without an LLC.
How do I set up an LLC in California?
Here are the steps to starting an LLC in California:
- Choose an LLC name and make sure it’s available
- Choose who will be your California Registered Agent
- File the California LLC Articles of Organization
- Complete and sign an LLC Operating Agreement
- Get an Employer Identification Number (EIN) from the Internal Revenue Service
- Submit your LLC Statement of Information
- Research business license requirements
- Open an LLC bank account
References
California LLC Act
IRS: Paying Yourself
California Secretary of State: Starting a Business Entity Guide
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.
California LLC Guide
Looking for an overview? See California LLC
Hi Matt!
I venture to guess you are a very busy human and so I apologize and just disregard. But in case you’d like to know about possible errors needing updating there are some below I’d like to mention… So, do with it what you may :)
Regarding the Members-Managed Operating Agreement (Google Docs version)…FYI: I did not look at the word or PDF versions.
Page 3 (Section 3, #2) Has the word “effected” and it’s showing it needs to be
updated to “affected”.
Page 5 (Section 7) Looks like the title of section 7 needs a space between the two words “GENERAL PROVISIONS”.
Page 6 (Section 7, #6) The word “an enforced” needs to be replaced with “and enforced”.
No disrespect. I know if I had something out on the internet, I’d want to know if there were any items I should update or correct. Obviously I know it’s easy enough for each of us using the template to make the necessary updates. Just wanted to let you know in case it’s never been brought up.
Ultimately, thank you for providing this wealth of information. It is very helpful and informative. Take care!
Hey Kim! Thanks so much for your very helpful comment. We appreciate you! All the Member-Managed Operating Agreements have been updated. Thanks so much. And you’re very welcome :)
Hi Mark,
I’m an International student who has work permit for a year in the U.S. I want to start an Airbnb business with the property that I’m renting right now. The landlord allows me to do the business here with part of the house. I will manage myself for now until my work permit expired. My question is “can I change the Operating Agreement. It seems like I will fill “member manage” for now. But when my work permit expired, I will hire someone to takeover my day by day management work, so my income can become passive income. Can I change the Agreement to “manager manage” later? Thank you!
Hi R, yes, you can change the Operating Agreement whenever you’d like, and as many times as you’d like. Hope that helps.
Hi Matt. Thanks for your helpful information. My husband and I just started an LLC and trying to put together an operating agreement. We’re multi-member LLC with both of us acting as co-managers with two additional general members (our two children- one is still a minor at 17). How is a Manager-managed operating agreement different from the member operated one? Could you please share the Manager-managed agreement template? Do you have any advice regarding our agreement in light of a member who is a minor? TIA
Hi Kim, you can find both the Member-managed and Manager-managed Operating Agreements above on this page. The different between the who is that in a Member-managed Operating Agreement, only the Members (owners) have the capacity to bind the LLC into agreement and run the day-to-day operations. There are no separate LLC Managers. In a Manager-managed Operating Agreement, there is a clear distinction between Members (owners) and Managers (those with fiduciary duties to the LLC, who have the power to bind the entity and run the day-to-day operations; which may or may not be Members). It might not be advisable to enter a contract with a minor, but since they are your children (and they’ll soon be 18), I personally wouldn’t worry about it.
Just wanted to thank you for sharing your knowledge! The clear, concise, and free help is truly appreciated!
You’re very welcome Cheryl! We’re happy to help :-)
My brother and I are starting a new family property management business. We are creating an s-corp as a holding company which will hold one llc per property. Should we have three different operating agreements per legal entity or just one for the s-corp which spells out the running of the LLCs? Thanks.
Hi Mark, each entity should have its own Operating Agreement, EIN, bank account, set of books, etc., even if owned by an LLC taxed as an S-Corp.
Outstanding tutorial. Saved me time and money. Can’t thank you enough!!
You’re very welcome!
Hi Matt, thank you so much for all the information on your website. I am one step closer to my goal.
You’re very welcome Ana :) That’s so great to hear!
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?
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!
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.
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.
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!