What follows are our general observations and opinions about California LLC operating agreements. This is not legal advice, it is not a definitive statement of California law, and every company depends on its own facts.
An operating agreement is the contract among an LLC’s members about how the company is run, who decides what, how money moves, and what happens when someone wants out. As we read California’s LLC statute, if you do not write one, the statute’s default rules fill the gap — and those defaults are rarely what a working business would have chosen.
That is the practical point we make most often. The choice is not between having an operating agreement and having no rules. It is between rules you negotiated and rules the Legislature wrote for a generic company that is not yours. Filing Articles of Organization creates the entity; it says almost nothing about how the owners deal with each other.
What the defaults give you, and why that matters
Our general understanding of the default position is that an LLC is member-managed unless the articles say otherwise, that many decisions run on member majorities, and that distributions and voting follow the statutory scheme rather than any particular deal the founders had in mind. For a single-member LLC that is mostly harmless. For two people who put in different amounts of money and different amounts of work, it is frequently a poor match for what they actually agreed.
The situation we see repeatedly: two members, one funded the business and one runs it, and they agreed informally on a split that the paperwork never captured. Everything is fine until it is not, and then the only written record is a form filed with the Secretary of State.
The provisions that do the real work
- Management structure. Member-managed or manager-managed, and if manager-managed, who appoints and removes the manager. This also affects who has authority to bind the company, which matters to banks and counterparties.
- Voting and reserved matters. Which decisions need unanimity rather than a majority — taking on debt, admitting a member, selling substantially all assets, changing the business, distributions above a threshold. Getting this list right protects a minority member more than almost anything else.
- Capital contributions and what happens if more is needed. Is there an obligation to fund? If a member will not or cannot, is there dilution, a member loan, or nothing? Silence here produces genuinely bitter disputes.
- Distributions. Distinguish tax distributions — so members can pay tax on income allocated to them — from discretionary profit distributions. Members are frequently surprised to owe tax on income they never received.
- Transfer restrictions. Rights of first refusal, tag-along and drag-along rights, and a flat prohibition on transfers to competitors. Without these, a member can sell to someone the others would never have gone into business with.
- Buy-sell provisions. What happens on death, disability, divorce, bankruptcy, or a member simply wanting out — and critically, how the interest is valued and paid.
- Deadlock. On a 50/50 company, what breaks a tie. Without a mechanism the practical answer is dissolution litigation.
Valuation is where buy-sell clauses fail
Almost every operating agreement we review has a buy-sell provision. A great many of them are unusable, because the valuation method is either undefined, or defined as an annually agreed figure that nobody has updated since the year it was signed.
The workable approaches are a formula tied to something objective, or an appraisal process with the mechanics spelled out — how appraisers are chosen, what standard of value applies, whether minority and marketability discounts are taken, and who pays. The discount question is worth real attention: whether a departing 30% member is bought out at 30% of enterprise value or something materially less is a large number, and it should be decided when everyone is friendly rather than when they are not.
Payment terms matter as much as price. A buyout the company cannot fund is not a solution, so promissory note terms, security and interest all belong in the clause.
Fiduciary duties and what can be modified
California’s LLC statute addresses the duties members and managers owe, and our reading is that while the agreement can define and limit certain duties, there are limits on how far that can go — the good-faith and fair-dealing obligation in particular is not something we would expect to contract away entirely. Where members have outside businesses that might compete or take opportunities the LLC could have pursued, we think it is far better to address that expressly than to leave it to argument later.
Practical suggestions
Write it at formation, when everyone is aligned and nobody is negotiating against a known problem. Revisit it when the facts change — a new member, a significant capital raise, a change in who actually runs the business. And make sure it matches reality: an agreement saying the company is manager-managed when in practice both members sign contracts is a document that will not help you.
Single-member LLCs should still have one. It reinforces the separateness of the entity, which matters if anyone ever argues the company is an alter ego of its owner, and it lets you address succession on death or incapacity.
Talk to us
If you are forming a California LLC, bringing in a new member, or looking at an agreement that no longer matches how the business runs, call us at (310) 556-9692. This is transactional work, so we handle it on an hourly or flat-fee basis rather than on contingency, and we will give you a cost estimate before we begin.
Related reading: our contract review and drafting resources, plus personal guarantees in commercial leases, assignment and consent clauses, and commercial lease negotiation.
This article reflects our own general views and opinions and is offered for information only. It is not legal advice, it is not a definitive statement of California law, and reading it does not create an attorney-client relationship between you and our firm. If you are putting an operating agreement in place, please speak with a lawyer about your particular company.
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