California LLC Operating Agreement

Jeramie Fortenberry, J.D., LL.M.

Jeramie Fortenberry, J.D., LL.M.

Attorney

Published Jun 26, 2023 Last updated Jul 10, 2023

A California operating agreement is one of the two essential governing documents that an LLC creates during the California LLC formation process. An operating agreement is essentially an agreement between an LLC’s owners (called members) about how their business will be run and how it will operate.1 An operating agreement is like the LLC’s constitution—customizing the company’s management structure and affairs to the members’ preferences and business plan.

An LLC’s other key governing document—the California articles of organization—officially creates the company and registers it in the California Secretary of State’s records but does little else to structure the company.

What Issues Do California Operating Agreements Address?

The California Revised Uniform Limited Liability Company Act is the principal law governing LLCs in California.2 The California law declares that a company’s operating agreement governs:

  • Relations among members and between members and the LLC;
  • Managers’ rights and duties;
  • LLC activities and how they are conducted; and
  • Procedures and conditions for amending an LLC’s operating agreement.3

In practice, these broad categories can include a multitude of subjects, and California law gives LLC owners considerable flexibility to create an operating agreement tailored to their specific company.4 A California LLC’s operating agreement commonly records the members’ decisions about any or all of these important matters:

  • Management structure. A California LLC may be managed by the members (a member-managed LLC), or by appointed managers (a manager-managed LLC).5
  • Rules for profit and loss allocation. The operating agreement should specify the members’ economic rights—including profit and loss allocation and rights to distributions—and how factors like additional contributions may affect economic rights in the future.6
  • Liability provisions. The operating agreement should be designed to provide maximum protection to each member and to the LLC itself. The operating agreement should reflect the LLC’s substantive business arrangement and protect owners’ interests if a creditor dispute arises. Adequate documentation helps to prevent veil piercing claims.
  • Equity classes. If a California LLC has multiple classes of ownership interests that differ in either economic or voting rights (this is not required), the equity classes should be created and clearly defined in the operating agreement.7
  • Transfer of membership interests. An operating agreement should establish agreed rules for when and how members may transfer their ownership interests in the California LLC.
  • Provisions for member death or divorce. A member’s spouse or heirs may acquire an interest in an LLC as a result of the member’s death or divorce. Other members may want to avoid a situation where they find themselves in business with a member’s ex-spouse or heir who is unfamiliar with the company. An operating agreement can address these issues to protect other members and the company while treating members’ family members fairly.
  • Fiduciary duties. An operating agreement should include customized fiduciary duty provisions that clarify the duties that members and/or managers owe to the LLC.8
  • Tax classification. The operating agreement should specify the most efficient tax classification for the company. IRS rules let LLCs choose to be taxed like partnerships (income passes through to members) or like S corporations (LLC files its own tax return).

Advance planning through a well-thought-out operating agreement helps ensure the LLC’s smooth management and operations in the future. Under California law, new members are deemed to have consented to the operating agreement when accepting membership in a company.9 A detailed operating agreement lets new members (and existing members) know precisely the duties, obligations, and benefits they are undertaking when joining the LLC as a member.

Is an Operating Agreement Required to Form a California LLC?

California law assumes that an LLC will have an operating agreement that governs important matters about the company. Statutes addressing specific topics often refer to the LLC’s operating agreement—whether requiring the company to act in accordance with the operating agreement or establishing a rule that applies unless the LLC’s operating agreement says otherwise.10

While it is not technically mandatory for a California LLC to have a written operating agreement, proceeding without one is unwise. An operating agreement lets members take advantage of the LLC structure’s legal benefits and flexibility and limit members’ potential risk exposure. Developing a gameplan for addressing potential issues early helps the business navigate future complications with minimal disruption.

How Does an Operating Agreement Relate to California LLC Law?

The California LLC law aims to give members substantial flexibility to manage their business’s affairs in their preferred manner.11 Members can take advantage of the flexibility by adopting a customized operating agreement. If members fail to adopt an operating agreement—or if their operating agreement is silent on an issue—California has numerous default rules to fill the gap.12 That means that, in most cases, an LLC’s operating agreement takes precedence over California default LLC rules if both address a topic.

Are There California LLC Laws that an Operating Agreement Cannot Waive or Modify?

A California LLC’s members can modify most provisions of the California LLC statute that govern the company by adopting a customized written operating agreement. However, the authority that California gives LLC’s to modify state law is relatively limited compared to states like Delaware and Texas. A California LLC cannot use its operating agreement to modify or override any non-waivable provisions listed in California law.13 A California LLC’s operating agreement cannot do any of the following:

  • Vary the LLC’s capacity to sue and be sued in its own name;14
  • Declare that the laws of a state other than California govern the LLC’s internal affairs, member or manager liability for the LLC’s obligations, or members’ or agents’ authority;15
  • Limit a court’s power to order a person required to sign and deliver a record to the California Secretary of State to do so;16
  • Eliminate the duty of loyalty, the duty of care, or any other fiduciary duty except as expressly permitted by the California LLC Act;
  • Eliminate the contractual obligation of good faith and fair dealing except as expressly permitted by the California LLC Act–though an operating agreement may adopt standards for measuring the performance of the obligation;17
  • Vary the provisions of the California LLC Act that govern registered agents and foreign limited liability companies;18
  • Vary a court’s power to decree dissolution of an LLC or the provisions allowing a company to avoid dissolution;19
  • Vary the requirements relating to the formation, dissolution, or winding-up of an LLC;20
  • Unreasonably restrict a member’s right to maintain a class action on behalf of other members;21
  • Restrict a member’s right to approve a merger or conversion if the member will have personal liability with respect to the surviving or converted organization;22
  • Restrict rights under the California LLC Act of a person other than a member or manager—except that an LLC’s obligations to a transferee or dissociated member are governed by the operating agreement;23
  • Vary any provisions relating to mergers and conversions unless expressly permitted under the California LLC Act’s provisions governing mergers and conversions;
  • Vary any provision of Article 11 (governing dissenter’s rights), Article 12 (allowing the articles of organization or operating agreement to create classes of interests), or Article 13 (miscellaneous provisions relating to application, construction, administration, and procedure);24
  • Eliminate the duty of loyalty–except that an operating agreement may (i) identify activities that do not violate the duty of loyalty or (ii) specify member approval needed to authorize an act or transaction that would otherwise violate the duty of loyalty;25
  • Unreasonably reduce the duty of care.26

California law also prohibits operating agreements from doing any of the following:27

  • Changing statutory definitions that apply to LLCs;28
  • Restricting a member’s rights to information;29
  • Vary any provisions of Section 17701.12 of the California LLC Act relating to third-party approval, rights of transferees and dissociated members, and interpretation of operating agreements;
  • Allow amendment of the articles of organization by a vote of less than a majority of the members;30
  • Restrict member’s right to vote on a dissolution, conversion or domestication, or merger of the LLC.31
  1. Cal. Corp. Code § 17701.02(s).
  2. Cal. Corp. Code §§ 17701.01 et seq.
  3. Cal. Corp. Code § 17701.10(a).
  4. Cal. Corp. Code § 17701.10(b).
  5. Cal. Corp. Code §§ 17701.02(o) and (q). When structured properly, a manager-managed structure provides enhanced protection against creditors and helps to avoid losing control of an LLC’s management.
  6. See Cal. Corp. Code § 17704.04.
  7. See Cal. Corp. Code § 17704.07(r).
  8. See Cal. Corp. Code § 17704.09.
  9. Cal. Corp. Code § 17701.11(b).
  10. See, e.g., Cal. Corp. Code §§ 17704.04; 17704.07; 17710.02.
  11. Cal. Corp. Code § 17701.07(a).
  12. See Cal. Corp. Code § 17701.10(b) (“To the extent the operating agreement does not otherwise provide for a matter … this title governs the matter”).
  13. Cal. Corp. Code §§ 17701.10(c)(1 – 15).
  14. Cal. Corp. Code § 17701.05.
  15. Cal. Corp. Code § 17701.06.
  16. Cal. Corp. Code § 17702.04.
  17. Cal. Corp. Code § 17704.09.
  18. See Cal. Corp. Code §§ 17701.13 – 17701.16 and 17708.01 – 17708.09.
  19. Cal. Corp. Code § 17707.03(a) and (c).
  20. Cal. Corp. Code §§ 17702.01; 17707.01.
  21. Cal. Corp. Code § 17709.01.
  22. Cal. Corp. Code §§ 17710.01 – 17710.19.
  23. Cal. Corp. Code § 17701.12(b).
  24. Cal. Corp. Code §§ 17711.01; 17712.01; and 17713.01.
  25. Cal. Corp. Code § 17704.09(b).
  26. Cal. Corp. Code § 17704.09(c).
  27. Cal. Corp. Code § 17701.10(d).
  28. Cal. Corp. Code § 17701.02.
  29. Cal. Corp. Code § 17704.10.
  30. Cal. Corp. Code § 17704.07(s).
  31. Cal. Corp. Code § 17704.07(t).