There are a number of important steps required to successfully register a Limited Liability Company (LLC) in California. Hiring an experienced attorney will help ensure each of these steps is completed properly.

One important step is to prepare an operating agreement. While this step is not mandatory to form an LLC in California, it is very helpful as it blueprints the structure and operation of the LLC and may help avoid other legal disputes in the future.

What Is an Operating Agreement?

An operating agreement is a legally enforceable contract detailing how an LLC will be structured and how it will operate. In creating an operating agreement, LLC owners have a significant amount of freedom in determining how they would like the LLC to be structured and function.

What Information Goes Into an Operating Agreement?

A number of issues arise when an LLC is created – especially when there are multiple owners. To resolve these issues, most operating agreements will detail:

  • Power Structure: The power structure of the operating agreement will define the roles and powers of the owners and management. Here, owners of small LLCs may choose to share equal power and management responsibilities. However, other LLCs may benefit from a well-defined hierarchy of duties, powers, and authority for different owners and members.
  • Percentages of Ownership: The operating agreement will state who owns what percentage of the LLC. Commonly, each owner’s ownership amount is equal to the percentage of capital they contributed to the LLC. However, ownership may be divided evenly or in any other way determined by the owners.
  • How Decisions Will be Made: The operating agreement will specify how decisions will be made. This may identify the amount of voting power each owner has or detail other decision-making mechanisms the LLC will use to resolve disputes.
  • How Funds Will be Managed: The operating agreement will specify how LLC income and losses will be managed. This includes what income will be reinvested in the company and what income will be allocated to owners and membership. Further, to the extent there are company losses, the operating agreement can specify how those burdens will be allocated.
  • Buy-ins and Sell-Outs: Here, operating agreement will detail the process by which an owner can sell their share of the company, or what happens if an owner passes away or becomes incapacitated. Further, it may provide mechanisms by which new owners can buy into the LLC.

Why Is an Operating Agreement Beneficial?

Preparing an operating agreement has many significant benefits. As detailed above, the operating agreement will eliminate any confusion about how the LLC will be managed and function. Further, it strengthens the legitimacy of the LLC entity and may protect owner’s limited liability status if any legal disputes arise.

Contacting an Attorney

While some portions of an operating agreement are relatively straight forward, an experienced business attorney will help identify less intuitive issues that may need to be addressed for different types of LLCs. Additionally, an experienced attorney can help match best LLC practices to meet the specific needs of an LLC to help it be successful in its operation.