Limited Liability Corporations (“LLC”s) are an interesting business entity that allows entrepreneursto operate like a general partnership but retain the majority of protections of a corporation. One of the key components during the formation of an LLC is the Operating Agreement.
Under California Corporation Code§ 17701.10(a), an LLC must have an Operating Agreement that discusses the following:

• Relations among the members as members;
• Relations between the members and the LLC;
• The rights and duties of the manager or managers;
• The LLC’s activities and the conduct of those activities; and
• The method of amending the operating agreement.

The Operating Agreement is a contract between all the various “members” of the LLC that can discuss the following, but is not limited to: how the day to day operations will be run; how profits/losses are distributed; how conflicts will be resolved; and how members can leave the LLC, whether voluntarily or involutarily.

The danger of not having an operating agreement means the LLC will default to state regulations.  Sometimes the state regulations are not favorable to the members of the LLC. 

In one of our cases, we represented a CA LLC with no Operating Agreement.  Two of the members of the LLC refused to pay their contribution that they had agreed to.  Due to the lack of the operating agreement and defaulting to state regulations, the LLC members could not remove them from the LLC and worse yet, had to provide them with a share of the profits from the hard work of the other members!

We were able to resolve this for our client, but it does stress the importance of making sure the proper documentation is in place when a business entity is created.  It goes a long way to help preserve the peace, and give everyone a chance to enjoy the fruits of their labor from their investment and working on the business.

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