An operating agreement is an essential document for any limited liability company (LLC). It governs the organizational structure and internal operations of the business and defines the rights, duties and obligations of each member (owner) within the company. A well-crafted agreement promotes smooth management, lessens potential for disputes and provides legal protections for the LLC and its members.

California’s Revised Uniform Limited Liability Company Act requires every LLC to have an operating agreement, even if it has only one member. Regardless of the LLC’s size or type of business, the following are among the most important provisions:

  1. Formation and ownership — A section of the agreement should detail how the LLC was formed, the identities of the members and how ownership is divided among them. If there are different classes of membership (e.g., voting and non-voting members), the specifics must be made clear.

  2. Contributions and distributions — The agreement should clarify the financial responsibilities of members, including how much each will contribute at the onset and whether additional capital may be required. It should also define how profits and losses will be distributed among the members and when those distributions will occur. 

  3. Management roles and responsibilities — An LLC can be member-managed or run by an appointed manager. If more than one manager will be overseeing daily operations, their authority, duties and compensation should be defined. For an LLC that is managed by members, their mutual responsibilities should likewise be clearly laid out.

  4. Indemnification — Indemnification provisions protect the members and managers from personal liability for actions taken on behalf of the LLC. This section specifies when and how the company will defend and indemnify its members or managers for actions taken in good faith while running the business.

  5. Member voting rights and access to records — A section of the agreement should specify how voting will take place on major business decisions, including the percentage of votes required. Examples are decisions to take out a significant line of credit or to acquire expensive assets. The agreement should set out members' rights to access business records and financial statements.

  6. Membership changes and buyouts — One of the most important functions of an operating agreement is providing for membership changes. It should establish rules for addition of new members and for what happens if a member leaves, whether voluntarily or not. There should be terms set for how a new member joining will affect the rights of existing members. There should be a process for removing a member for cause and for buying out a member’s interest.

  7. Dispute resolution — Conflicts are inevitable in any business. A section of the agreement should lay out the process for resolving disagreements between members, such as mediation or arbitration, which can help avoid costly and disruptive litigation.

  8. Dissolution — The operating agreement should specify how a decision can be made to dissolve the LLC, including the conditions that must be met and the percentage of votes required. It should lay out the process for winding down operations, liquidating assets and distributing remaining funds to members.

An operating agreement can be customized to suit the specific needs and priorities of the business. For example, it can define, alter or eliminate aspects of members’ fiduciary duty. In limited circumstances, it can relieve members from liability for damages for breach of duty. An experienced California corporate law attorney can make sure that your agreement sufficiently protects the LLC and its members.

Garcia & Gurney, A Law Corporation offers comprehensive corporate counsel for small to mid-sized companies in and around the Tri-Valley and throughout Alameda and Contra Costa counties. Call us today at 925-468-0400 or contact us online.