When creating an LLC in California, you must draft an operating agreement. (single-member LLCs do not need an operating agreement but having one is still valuable.) If you take anything away from this blog, make sure it is this: your operating agreement is vitally important to your business. We want to stress this because some people may view it as a formality. For example, think of two people that have been friends throughout their lives and go into business with one another. After discovering that their LLC needs an operating agreement, they may run a basic search for templates to use. Because they know each other so well, they view the operating agreement as a step they must take because of state law.
But business partnerships have a higher failure rate than first-time marriages. Regardless of how strong you think your relationship is with your business partner, a solid operating agreement is the foundation your business needs to avoid useless in-fighting and litigation. Corporations don’t run without bylaws, and LLCs don’t survive without operating agreements.
The Purpose of an Operating Agreement
Your operating agreement is like the blueprint for your business. It outlines the following:
- How your business is structured and organized.
- Who the members are, how much ownership they possess, and how much they have invested in the business.
- How decisions and votes are handled.
- How profits are distributed.
- The process for when a member leaves the business.
- How the company will be dissolved.
The Power of an LLC
The operating agreement is a set of rules to which each LLC member is bound. The agreement is signed by each member and can even serve as proof of ownership. (California’s Articles of Organization will not identify each member.) A series of default rules govern any LLC in California. These are identified in the California Revised Uniform Limited Liability Company Act. However, you can address these default rules and substitute your own. Unless this is specified in your operating agreement, these default rules apply.
Most importantly, having one is a prerequisite for limiting your liability. People create LLCs to protect their personal assets from the business’s creditors. When you have a professional and experienced business law attorney draft one, they will write in such a way that is a defined line between your personal assets and your business. You must continue to separate the two and adhere to how the operating agreement is written.
Speak with a Business Litigation Attorney
Foldenauer Law Group, APLC, develops innovative solutions for business owners’ challenges. If you have questions on this topic, feel free to call us. We can help or point you in the right direction.