What to Include in your LLC’s Operating Agreement – California Startups

When starting a new business, one of the most important decisions that entrepreneurs must make is choosing the type of business entity under which they will operate. Many new businesses form as limited liability companies, or LLCs, as they combine the limited liability offered by corporations with the flexibility and favorable tax treatment of partnerships. The document that governs how an LLC operates is known as its “operating agreement.” While an LLC’s operating agreement does not need to be filed with the Secretary of State, it is still required that every LLC have one and that the document clearly lays out the rights and responsibilities of the company’s members.

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It is highly advisable for anyone in the process of forming an LLC to consult with an attorney to ensure their operating agreement accurately represents the intent of the parties it affects and it contains the necessary provisions. Below is some information about a few of the basic issues any LLC’s operating agreement should address.

The LLC’s Ownership Structure – One of the most important issues that should be addressed in an operating agreement is the ownership of the company. Ownership can be determined either by allocating percentages or by issuing “units,” which are similar to stocks issued by a corporation. In the absence of provisions to the contrary, California’s default LLC rules will apply, which may or may not reflect the intent of the people forming the LLC.

Whether the LLC will be Member-Managed or Manager-Managed – Under the default rules, a California LLC is member-managed, meaning that the members of the LLC are responsible for the daily operations of the business. In manager-managed LLCs, on the other hand, management responsibilities are delegated to individuals who may or may not be members of the LLC.

How profits and losses will be distributed – Under California’s default rules, profits and losses are shared equally among the owners, regardless of their ownership percentage. As a result, it is important for any LLC in which the members do not intend to share profits and losses equally to address this issue in the operating agreement.

How the LLC will be dissolved – It is important to address how a business will be wrapped-up if and when that even occurs. In some cases, the certain parties may want to continue in business while others leave or members may wish to divide the assets in a way that differs from their respective ownership interests. Determining how these issues are handled ahead of time can avoid disputes at a later date.

Contact a San Jose startup law firm today to discuss your legal issues

Obtaining informed legal counsel in the early stages of forming a business can often be critical to the success of your project. In addition, making sure that the way that your business operates is defined from the start can often help avoid conflicts and potentially expensive litigation at a later date. The lawyers of the Structure Law Group understand the legal needs of new businesses and are dedicated to providing solution-based legal counsel and representation. To consult with one of our attorneys, call our office today at 408-441-7500 or send us an email through our online contact form.

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