LLC Operating Agreements
Believe it or not, LLCs are not actually required by law to have written operating agreements in California (CA Corporations Code §17701.02(s)). Unlike corporations, there are essentially very few requirements of LLCs, and this is viewed as one of benefits of LLCs over corporations. Even though California law does not require a written LLC Operating Agreement, there are plenty of good reasons to have one.
First and foremost, many banks will require you to have an LLC Operating Agreement to be able to open a bank account for your LLC and your LLC must have its own back account. You cannot commingle LLC funds with personal funds. This could result in a loss of the liability protection provided by the LLC. With that being said, the best reason to have an LLC Operating Agreement is to document the ground rules and foundation for (1) relations among the members and the LLC, (2) the rights and duties of the manager, and (3) the activities of the LLC and the conduct of those activities.
It is important to do this with your business partners at the outset of the new venture when everything is fresh, going well and everyone is getting along. This is because people have a tendency to either forget or conveniently modify their understanding of oral agreements over time, whether intentionally or unintentionally. Failing to document your agreement in writing is a recipe for costly litigation in the event that things go sour within the LLC.
Conduct a search online for a “California LLC Operating Agreement,” and you will find dozens of templates that you can download either for free or for a nominal charge. For single-member LLCs, the form of the LLC Operating Agreement is largely unimportant since you are the sole owner (member) and/or manager (if you elected to be a “manager-managed” LLC when your LLC was formed). As the only person involved, you have the ability to make whatever changes you want to the LLC Operating Agreement at any time with virtually no consequences.
However, for LLCs with more than one owner, a written LLC Operating Agreement tailored to your situation is highly important. Each member of the LLC should be represented by separate, independent counsel to ensure that each party’s interests are protected to the extent reasonable under the circumstances. For such companies, simply downloading a template from the internet and using that as the LLC Operating Agreement is kind of like downloading a random set of architectural drawings for the new house you want to build. You will end up with a house, but will it really be the house you wanted? Probably not.
Much like your home, an LLC Operating Agreement really needs to fit your unique situation. The agreement that is offered by LegalZoom, for example, is not tailored to your needs. Instead, it simply provides a summary of the rules on the default California law. In fact, its lack of real substance actually has the potential to hurt your personally and your LLC in the long run.
Such standard agreements do not include items that should be tailored to your situation such as:
- Management matters
- Issues reserved for the unanimous vote of the members
- Fiduciary duties of members and managers
- Transfer restrictions
- Exit clauses
- Additional capital contributions
- Priority as to distributions of profit and loss
- Dispute resolution
- Dissolution of the LLC
So what are your alternatives? Only through specific guidance by an experienced attorney can you be sure to create a well thought out LLC Operating Agreement for your unique business and avoid unnecessary disputes in the future. While the default California laws are still a great starting place, Deen Law can help you build from there, stepping away from the cookie-cutter document and making changes and additions where appropriate for your particular situation.