In 2014, California revised its laws governing limited liability companies (LLCs) under the Revised Uniform Limited Liability Company Act (RULLCA). These rules apply to all LLCs. However, if some of these laws do not reflect the members’ wishes for their LLC, an operating agreement can establish their goals and help settle future disputes.
California requires an operating agreement for an LLC. Although it does not have to be in writing (meaning it can be oral or implied), it is highly recommended that members work with a skilled attorney to draft a document. Without the rules in writing, misunderstandings are bound to occur. A California operating agreements lawyer at Sparks Law could further explain how your LLC can benefit from a written contract between members.
The LLC is the most popular business vehicle in America because it has advantageous aspects of both corporations and partnerships. Members can choose pass-through taxation to avoid double taxation or a traditional corporate tax structure. Owners’ liability for company debts and exposure to lawsuits is limited, and filing requirements are less stringent than those governing corporations.
An operating agreement is the road map for how the members want the business to move forward. Some of the points covered in an operating agreement include:
Because California does not require a written operating agreement, members may believe they are okay with verbally agreeing on operations, especially if the business is a family one. However, our experienced local attorneys strongly recommend memorializing these agreed-upon terms in an operating agreement to avoid future conflicts. Disputes can land everyone in court and lead to the dissolution of the business if members cannot resolve problems.
Older LLCs without written operating agreements may remember that before enacting the RULLCA, the default rule for voting about a merger, sale of LLC property, or dissolution required the majority of members to approve the action. Currently, under Section 17704.07(c) of the RULLCA, the vote to merge, sell property, or liquidate must be unanimous.
State law allows the requirement for voter unanimity to be changed as long as it is a provision of a written operating agreement. Without the written rules, one member could undermine a lucrative merger or asset sale because the action will default to current California law. The experienced attorneys at our firm can help prevent devastating problems and protect the members’ wishes by drafting a written operating agreement.
LLCs are suitable for one or many members who can benefit from an advantageous tax structure, relaxed reporting rules, and a shield from liability for company debts and lawsuits. However, does a sole-member LLC need a written operating agreement?
The answer is yes. If a sole member envisions company growth, it will probably come from admitting new members who contribute capital in the form of money, property, or services. Detailed provisions for this move should be in writing. Although voting rights issues will not arise with a sole member, there could be issues later on with new members. A dedicated operating agreements lawyer can draft a document to suit the specific needs of a California LLC, whether the company is owned by one person or multiple members.
As an entrepreneur, you make many crucial decisions in building a profitable enterprise. If you have chosen an LLC structure, there are specific actions you should take. One of them is to adopt a written operating agreement.
By adopting this contract between members, you establish guiding principles for your business’s success and avoid possible future conflicts. Contact Sparks Law to learn how one of our California operating agreements lawyers could provide a contract tailored to your specific needs and goals.