LLC Operating Agreement Law in California

California law requires every LLC to have an operating agreement. It does not need to be written, witnessed, or notarized to be valid (Cal. Corp. Code § 17701.02(s)). However, certain critical modifications must be in writing.

Does a California LLC need a written operating agreement?

No—California law requires every LLC to have an operating agreement, but it can be oral, written, or even implied from conduct (Cal. Corp. Code § 17701.02(s)). However, modifications to fiduciary duties must be in a written operating agreement with the informed consent of the members (Cal. Corp. Code § 17701.10(e)).

What happens if my California LLC doesn't have an operating agreement?

If you don't have an operating agreement, California's default statutory rules will govern your LLC. This creates significant risk, as the defaults may not align with your business goals. Key defaults include: - Member-managed structure: The LLC is member-managed unless the articles of organization state otherwise (Cal. Corp. Code § 17704.07(a)) - Equal voting rights: In a member-managed LLC, each member has equal rights in management, regardless of capital contribution (Cal. Corp. Code § 17704.07(b)(2)) - Unanimous consent for amendments: Amending the operating agreement requires consent of all members (Cal. Corp. Code §§ 17704.07(b)(5), 17704.07(r)(2)) - Unanimous consent for extraordinary acts: Acts outside the ordinary course of business require consent of all members (Cal. Corp. Code § 17704.07(b)(4))

Can I write my own LLC operating agreement in California?

Yes, you can write your own operating agreement. While oral or implied agreements are valid, a written agreement is strongly recommended to avoid ambiguity and ensure enforceability. Lawyer involvement depends on the complexity of your LLC's structure, the number of members, and specific provisions like tax allocations or transfer restrictions.

What must be in a California LLC operating agreement?

Do I need to designate member-managed or manager-managed?

Yes. The operating agreement must explicitly state whether the LLC is member-managed or manager-managed. This election determines who owes fiduciary duties and which default voting rules apply. - Member-managed default: If the articles of organization do not contain the statement required by § 17702.01(b)(5), the LLC is member-managed by default (Cal. Corp. Code § 17704.07(a)) - Fiduciary duty allocation: In member-managed LLCs, members owe duties of loyalty and care to the LLC and other members; in manager-managed LLCs, only managers owe these duties (Cal. Corp. Code §§ 17704.09(b)–(f)(3))

What voting rules do I need?

The operating agreement should specify voting rules, as default rules may be unsuitable. - Member-managed defaults: Each member has equal rights; ordinary business decisions require majority vote; acts outside ordinary course require unanimous consent (Cal. Corp. Code § 17704.07(b)) - Manager-managed defaults: Managers control day-to-day activities; member consent required for major acts outside ordinary course (Cal. Corp. Code § 17704.07(c)) - Irreducible statutory thresholds: Amending the articles requires at least a majority of members, and dissolution, conversion, or merger requires a member vote, regardless of contrary provisions (Cal. Corp. Code §§ 17704.07(s), 17704.07(t))

How do I set up amendment procedures?

You must specify amendment procedures, as the default rule is strict. Absent contrary provisions, amendments require unanimous member consent (Cal. Corp. Code §§ 17704.07(b)(5), 17704.07(r)(2)). Your agreement should detail who may propose amendments, the voting threshold, notice requirements, and any required manager or third-party approvals.

What are the mandatory information rights?

The operating agreement cannot eliminate member information rights (Cal. Corp. Code § 17704.10(h)). Members have mandatory rights to: - Inspect and copy records for purposes "reasonably related to their interest" (Cal. Corp. Code § 17704.10(a)–(b)) - Receive annual financial reports within 120 days after the fiscal year close for LLCs with more than 35 members (Cal. Corp. Code § 17704.10(c)) - Obtain tax information within 90 days after each taxable year (Cal. Corp. Code § 17704.10(e))

Courts may award attorneys' fees against LLCs that unjustifiably refuse these requests (Cal. Corp. Code § 17704.10(g)).

What distribution rules must I follow?

Your agreement must accommodate California's mandatory solvency test: distributions are prohibited if they would render the LLC unable to pay debts as they become due, or if total assets would be less than total liabilities plus preferential dissolution rights (Cal. Corp. Code § 17704.05(a)). Members and managers who consent to improper distributions face personal liability for the excess amount (Cal. Corp. Code § 17704.06(a), (c)).

For tax-compliant allocations, the agreement should address capital account maintenance, liquidating distributions, deficit restoration or qualified income offset provisions, and minimum gain chargeback requirements per Treasury Regulations (adopted by Cal. Rev. & Tax. Code § 17851).

How do dissolution and buyout procedures work?

The operating agreement may specify dissolution events, but it cannot vary the statutory buyout right that applies in judicial dissolution proceedings. Under Cal. Corp. Code § 17707.03(c), other members may avoid dissolution by purchasing the moving member's interest at fair market value—this procedure is mandatory and unalterable (Cal. Corp. Code § 17701.10(c)(7)).

Critical limitation: This buyout right applies only to judicial dissolution, not voluntary dissolution. In Friend of Camden, Inc. v. Barbara Brandt, No. B309746 (Cal. Ct. App. Aug. 3, 2022), the Court of Appeal held that members holding 50% of voting interests can extinguish buyout rights by voting to dissolve under § 17707.01(b) before a court orders a stay.

What provisions are illegal in a California LLC operating agreement?

Elimination of Core Fiduciary Duties

California prohibits elimination of: - The duty of loyalty (Cal. Corp. Code § 17701.10(c)(4)) - The duty of care (Cal. Corp. Code § 17701.10(c)(4)) - The contractual obligation of good faith and fair dealing (Cal. Corp. Code § 17701.10(c)(5))

The duty of care may not be unreasonably reduced (Cal. Corp. Code § 17701.10(c)(15)). Modifications to the duty of loyalty must identify specific activities that do not violate the duty and must not be "manifestly unreasonable" (Cal. Corp. Code § 17701.10(c)(14)).

Liability Limitations for Specified Conduct

Operating agreements limiting liability must expressly exclude: - Breach of the duty of loyalty - Receipt of financial benefit to which the person is not entitled - Liability for improper distributions (Cal. Corp. Code § 17704.06) - Intentional infliction of harm on the LLC or a member - Intentional violation of criminal law (Cal. Corp. Code § 17701.10(g))

Unreasonable Restrictions on Litigation Rights

The agreement shall not "unreasonably restrict" the right to maintain direct or derivative actions (Cal. Corp. Code § 17701.10(c)(9)), nor restrict a member's right to approve merger or conversion (Cal. Corp. Code § 17701.10(c)(10)).

Information Rights Waivers

Any waiver of § 17704.10 information rights is unenforceable (Cal. Corp. Code § 17704.10(h)).

Non-Compete Provisions (Generally Void)

California's broad prohibition against non-compete agreements (Bus. & Prof. Code § 16600) voids contractual restrictions on engaging in lawful business, with only a narrow sale-of-business exception under § 16601 for complete transfers of membership interests. The statutory duty of loyalty requires members to refrain from competing during membership, but post-departure non-competes in operating agreements are generally unenforceable unless they qualify under § 16601.

What makes a California LLC operating agreement legally binding?

Writing Requirements

While operating agreements may be oral, written, or implied (Cal. Corp. Code § 17701.02(s)), fiduciary duty modifications must be in writing with informed consent—mere deemed assent upon becoming a member is insufficient (Cal. Corp. Code § 17701.10(e)).

"Informed Consent" Standard

For modifications to fiduciary duties, members must provide informed consent through a process that goes beyond routine assent to the operating agreement. The statute does not define the precise content or procedural steps required.

"Manifestly Unreasonable" Limitation

Modifications to fiduciary duties and standards for good faith performance are valid only if not "manifestly unreasonable" (Cal. Corp. Code §§ 17701.10(c)(5), (c)(14)). No California case law defines this standard.

Notice and Ratification

Meeting notice must be given not less than 10 days nor more than 60 days before the meeting, stating the general nature of business (Cal. Corp. Code § 17704.07(h)(1)). Actions taken with defective notice may be ratified at a subsequent properly noticed meeting (Camden Systems, LLC v. 409 North Camden, LLC, No. B324716 (Cal. Ct. App. July 23, 2024)).

How is California LLC law different from other states?

What mistakes should I avoid in my California LLC operating agreement?

"Informed Consent" Deficiency

Attempting to modify fiduciary duties through boilerplate language or deemed assent risks unenforceability. The modification must be in writing with informed consent—a higher standard than general agreement execution.

Management Structure Ambiguity

Hybrid provisions creating uncertainty about member vs. manager authority trigger deadlock disputes and unauthorized action claims. Explicitly designate the structure and exhaustively list major decisions requiring member approval in manager-managed LLCs.

Amendment Procedure Failure

Failure to specify amendment procedures triggers the unanimous consent default, making amendments practically impossible in large LLCs.

Buyout Trigger Confusion

Operating agreements purporting to create buyout rights on voluntary dissolution conflict with California law. The statutory buyout under § 17707.03(c) applies only to judicial dissolution (Friend of Camden).

Transfer Restriction Notice Gaps

Transfer restrictions are enforceable only against persons with notice of the restriction (Cal. Corp. Code § 17705.02(f)). Failure to document notice in accessible records may defeat enforcement.

Derivative Action Security Exposure

Well-capitalized plaintiffs may post the $50,000 bond to defeat security-for-expenses motions entirely (Cal. Corp. Code § 17709.02(d)).

Because the "manifestly unreasonable" standard and "informed consent" requirements lack definitive California case law, Ask Sawyer researches actual statutes and judicial decisions to answer questions about whether specific operating agreement provisions will be enforceable under your facts.