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Tips for Preparing the Operating Agreement in California

Pursuant to California Corporations Code Section 17701.10(a) the limited liability company’s (“LLC”) operating agreement “governs all of the following: (1) Relations among the members as members and between the members and the limited liability company. (2) The rights and duties under

[the California Revised Uniform Limited Liability Company Act] of a person in the capacity of manager. (3) The activities of the limited liability company and the conduct of those activities. (4) The means and conditions for amending the operating agreement.” Although there is a long list of things the operating agreement cannot vary, pursuant to California Corporations Code Section 17701.10(c), such as eliminate the duty of loyalty, care and other fiduciary duties [subparagraph (c)(4)], the fact remains that the operating agreement will control the relationship of the members to the extent it does not conflict with law.So, what should the operating agreement in California contain? To ensure that the members’ relationship proceeds as smoothly as possible, the agreement should contain, or the members should at least consider, the following provisions:

  • The date the LLC is formed
  • The exact name under which the LLC will conduct business
  • The business purpose of the LLC
  • The amount of property, or other “benefit” contributed by each member and its value
  • Whether additional contributions will be required and, if so, what those contributions will be, or how those contributions will be calculated
  • How the profits and/or losses of the LLC will be allocated to each member
  • Provisions relating to the day-to-day management of the LLC
  • Provisions relating to the transfer of membership interests
  • Provisions relating to whether additional members may be admitted and the method for additional members to become members
  • Provisions permitting the transfer of membership interests in the event of a death or disability and the method for calculating the value of the member’s interest
  • The method for dissolution and winding up of the LLC

Of course every LLC formed in California is unique and one cannot begin to consider every provision that will be necessary or proper in every instance. However, these suggestions should provide the members with a simplified list to consider as a starting point.

Each business and business entity is unique. To understand the different options and which direction will be best for your situation, you need to consult with an experienced corporate attorney. Michael Leonard, Esq. of San Diego Corporate Law, named “Best of the Bar” by the San Diego Business Journal in 2016, has the expertise to guide you through everything from forming your business, to creating buy-sell agreements, to executing contracts, and anything in between. To schedule a consultation to discuss any business-related matter, please contact Mr. Leonard by visiting San Diego Corporate Law or by telephone at (858) 483‑9200.

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