As LLC attorneys who have been contacted by countless numbers of people who formed LLCs, but never signed Operating Agreements we learned long ago that EVERY California limited liability company must have a good custom Operating Agreement signed by all the members. For the reasons stated below we also recommend that every single member LLC have a signed Operating Agreement.
The California Revised Uniform Limited Liability Company Act is California’s LLC law (the “New LLC Law”). It became effective on January 1, 2014, and applies to all California LLCs regardless of when the LLC was formed.
Our Operating Agreements contain a statement that the members agree that the Operating Agreement is the sole agreement among the members as to matters affecting its operation and management, that no oral or implied agreement or understanding is binding on any of the members of the LLC and the only way the Operating Agreement can be amended is by the approval of the required number of members. All California LLC Operating Agreemetns should prevent oral and implied Operating Agreements and changes the Operating Agreement
- The Articles of Organization filed with the California Secretary of State must state that the LLC has a sole manager or more than one manager.
- The LLC must have an Operating Agreement that states the LLC is manager managed. California RULLCA Section 17704.07(a).
Warning: If you want your California LLC to be manager managed it will not be manager managed unless you satisfy both of the above requirement.
A California LLC is formed by filing Articles of Organization with the California Secretary of State. The Articles of Organization of a California LLC does not disclose any of the owners of the LLC so it is not possible to prove to a third party who owns the California LLC by reviewing the filed Articles of Organization.
Every California LLC must file a Statement of Information within 90 days of the date of filing the Articles of Organization. If the California LLC is a member managed LLC then the name and address of all members of the LLC must be stated in the Statement of Information. If the LLC is manager managed the name and address of the managers must be disclosed in the Statement of Information instead of the names and addresses of the members.
There are two ways to file a Statement of Information:
Unfortunately, the names and addresses of members and managers of a California LLC set forth in its Statement of Information are not available to the public. The following statement is taken from the California Secretary of State’s website:
Owner . . . information for a business entity is not made of record with the California Secretary of State. Requests for information should be directed to the business entity itself.
Thus, because there is no public record that discloses the names of the members of a California LLC, the only way to prove who owns the LLC is to review a written Operating Agreement signed by all of the members.
If two or more people form a California LLC and they do not sign an Operating Agreement that states how profits and losses are allocated, the members are asking for trouble? If a California LLC has two members are the profits allocated 50/50 or does one member get a greater percentage of profits than the other member? The only way to prove how profits and losses are allocated is by a written Operating Agreement that states how profits and losses are allocated signed by all of the members.
The failure of the members to sign an Operating Agreement that specifies how profits and losses are allocated is a big deal because you don’t want members of your LLC fighting about how the LLC’s profits will be allocated. Fights over money are one of the most common reasons LLC members have a company divorce.
The following is a list of common transfer restrictions most members of California LLCs want in their Operating Agreement:
- A general rule that no member can transfer all or a portion of the member’s interest in the LLC without the prior approval of the members.
- A right of first refusal that gives the LLC the option to match the terms and conditions of a proposed transfer of a membership interest. For example, if Homer Simpson wants to transfer his 25% membership interest to Ned Flanders for $10,000 payable $5,000 at the time of transfer and $5,000 one year later, the LLC might have the option for ten days to acquire the 25% membership interest on the same terms and conditions.
- A second right of first refusal for the other members if the LLC does not exercise its right of first refusal.
- Reduce the percentage membership interest of a member who defaults on an obligation to pay money to the LLC.
- Allow a nondefaulting member to loan to the LLC the amount of money a defaulting member fails to pay and have the LLC repay the loan with interest from distributions that would otherwise have gone to the defaulting member.
- Give the LLC an option to purchase the entire membership interest of the defaulting member for its fair market value or an amount that is substantially less than its fair market value.
- If the LLC declines to purchase the membership interest of the deafaulting member then give the nondefaulting members an option to purchase the entire membership interest of the defaulting member for its fair market value or an amount that is substantially less than its fair market value.
For example, Home Simpson can include a statement in the written Operating Agreement of his California LLC that says that when he dies his 50% of the LLC will go to his wife Marge Simpson, but if she is deceased then it will go to Bart Simpson, but not his two daughters.
We put this type of provision in all California LLCs we form unless all of the people who are members tell us they do not want it. P.S. It doesn’t make sense for a person who owns an interest in a Californnia LLC to decline to have this provision in his or her Operating Agreement.
The written Operating Agreement of a California LLC should contain a list of common acts that the members or managers can take without getting the prior approval of the members. Common examples of actions that can be taken without getting members prior approval are:
- buying equipment for less than a stated dollar amount
- signing a contract that obligates the LLC to spend money that is less than a state dollar amount.
- selling merchandise in the ordinary course of the LLC’s business.
The following is a list of some of the major decisions I include in every Operating Agreement I prepare:
- Admitting a new member and determining the terms and conditions of the addition of the new member.
- Spending more than a specified dollar amount.
- Signing a contract that obligates the LLC to pay more than a specified dollar amount.
- Buying or selling real estate.
- Hiring, setting the compensation or changing the compensation of a person who is a family member of any member.
- Altering the percentage membership interests of any member.
- Merging with another entity.
- Filing for bankruptcy.
As LLC attorneys who have formed 4,600+ LLCs we recommend that the members of EVERY LLC, including single member LLCs, sign a comprehensive written Operating Agreement. If you hire us to form your California LLC we will prepare and deliver to you our state of the art California LLC Operating Agreement.