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We’ve covered the unanimous consent trap created by California’s RULLCA and the importance of a well-drafted operating agreement. This post goes deeper — providing a comprehensive guide to what a California LLC operating agreement should contain, what the most common drafting failures are, and what the consequences of those failures look like in practice.
The Management Structure Decision
Every California LLC must determine whether it will be member-managed or manager-managed — a decision that has significant practical and legal implications. In a member-managed LLC, all members have authority to bind the LLC in ordinary business transactions, and management decisions are made by the members collectively. In a manager-managed LLC, one or more designated managers (who may or may not be members) have authority to bind the LLC and make day-to-day management decisions, while non-managing members have limited roles. For LLCs with multiple members and concentrated management authority in one person, manager-managed structure is almost always more appropriate — it clearly establishes who has authority to act without requiring member approval for routine decisions.
Voting Rights and Thresholds
A properly drafted operating agreement establishes clear voting thresholds for different categories of decisions. Routine business decisions should require only manager approval (in a manager-managed LLC) or majority member vote (in a member-managed LLC). Significant transactions — asset sales above a defined threshold, new member admissions, debt obligations above a defined amount — should require a supermajority (typically 66.7% or 75%). Fundamental changes — dissolution, merger, amendment of the operating agreement itself — may appropriately require a higher supermajority or unanimous consent for matters where protection of minority members is justified. The key is that every category of decision has an explicit threshold that is appropriate for that category — not a blanket unanimous consent requirement that subjects routine decisions to minority veto.
Capital Accounts and Distributions
The operating agreement must clearly establish how capital contributions are recorded, how profits and losses are allocated among members, and how and when distributions are made. California tax law requires that LLC tax items be allocated in accordance with the economic arrangement of the members — which means the allocation provisions in the operating agreement must reflect the actual economic deal. Allocations that don’t reflect economic reality can be recharacterized by the IRS and the FTB, creating unexpected tax consequences. Get a CPA involved in drafting or reviewing the economic provisions of your operating agreement.
Transfer Restrictions and Buy-Sell Provisions
Without transfer restrictions, an LLC member can potentially transfer their membership interest to anyone — including competitors, creditors, or strangers who become unwanted business partners. A properly drafted operating agreement includes right of first refusal provisions (requiring a selling member to offer their interest to existing members before selling to outsiders), right of first offer provisions, drag-along rights (allowing a majority to compel minority participation in an approved sale), and tag-along rights (allowing minority members to participate in a majority sale on the same terms). Buy-sell provisions — establishing price and procedure for compulsory buyouts triggered by events like death, disability, or irreconcilable deadlock — are particularly important in closely held LLCs where such events could otherwise result in unwanted co-owners or permanently deadlocked management.
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