What Is a Business Operating Agreement (And Why You Need One in CA)

By Attorney Christopher Brainard – California Business and General Counsel Lawyer

If you're starting an LLC in California, there’s one essential legal document you should never overlook: the Operating Agreement. It’s not just paperwork—it’s your company’s internal constitution.

Even though California doesn’t always require it to be filed with the state, an Operating Agreement is critical to protecting your business, your rights, and your future. In this article, I’ll explain what a Business Operating Agreement is, why it matters, and how having a well-drafted version can prevent conflict, liability, and costly legal problems.

🧾 What Is a Business Operating Agreement?

A Business Operating Agreement is a written contract among the members (owners) of a Limited Liability Company (LLC) that governs:

  • How the business will operate

  • Each member’s roles and responsibilities

  • How profits and losses are distributed

  • What happens when there’s a dispute or someone leaves the business

Think of it as the rulebook for your business—customized to reflect how you want it to run.

🏛 Is It Required in California?

Yes and no.

California requires LLCs to have an Operating Agreement under Corporations Code § 17701.02(s)—but it does not require you to file it with the Secretary of State. Technically, it can even be oral or implied, though that’s never advisable.

📌 Bottom line:
Every California LLC should have a written Operating Agreement, even if you're a single-member LLC.

⚖️ Why You Absolutely Need One

1. Protects Your Limited Liability Status

Without a clear Operating Agreement, a court could treat your business like a sole proprietorship or general partnership. That means:

  • You could be personally liable for business debts or lawsuits

  • Creditors may "pierce the corporate veil"

A formal agreement helps prove that your LLC is a separate legal entity.

2. Prevents Internal Disputes

Partnerships and multi-member LLCs often fail because of:

  • Unclear roles

  • Disagreements over money

  • Lack of decision-making structure

  • No exit plan if someone wants out

An Operating Agreement sets clear rules for:

  • Voting rights and member duties

  • Profit splits

  • Buyouts and member exits

  • Resolving disagreements without litigation

📌 Pro tip: Even family-run businesses need clear, written rules—because things change.

3. Gives You More Control Than Default State Law

Without an Operating Agreement, your business is governed by California’s default LLC laws. That means:

  • Equal vote, even if ownership is unequal

  • Equal profit distribution, regardless of effort or capital invested

  • Limited customization for how your business really works

A customized Operating Agreement allows you to set the rules that fit your business goals.

4. Essential for Banks, Investors, and Legal Transactions

Most banks will require an Operating Agreement to open a business bank account.
Lenders, investors, and landlords will often ask for one, too.

You’ll also need it if you:

  • Sell or transfer membership interests

  • Take on new partners

  • Pursue funding

5. Clarifies What Happens When a Member Leaves or Passes Away

A good Operating Agreement includes succession planning:

  • What happens if an owner dies?

  • Can their shares be inherited or must they be bought out?

  • What’s the process for voluntary or forced exits?

Without clear answers, you're inviting legal battles.

✍️ What Should Be Included in an Operating Agreement?

Every Operating Agreement should be tailored, but core provisions typically include:

  • Member names and ownership percentages

  • Initial capital contributions

  • Voting rights and decision-making rules

  • Profit/loss allocation

  • Member duties and authority

  • Procedures for adding/removing members

  • Buy-sell agreements

  • Dispute resolution process

  • Dissolution process

At LawBrainard, I custom-draft these agreements to fit each business’s structure and long-term goals—not just fill-in-the-blanks.

🧠 What About Single-Member LLCs?

Even if you’re the only owner, you still need an Operating Agreement. It helps:

  • Prove you’re operating as a legitimate business

  • Maintain limited liability status

  • Clarify what happens if you bring on a partner or sell the business later

It’s a simple investment in your legal protection.

Let LawBrainard Help You Get It Right

Too many entrepreneurs use online templates or skip the Operating Agreement altogether. But that can lead to avoidable disputes, lawsuits, and tax consequences.

At LawBrainard, we help California businesses:

  • Draft strong, legally compliant Operating Agreements

  • Resolve ownership and management questions

  • Prevent problems before they start

📞 Call/Text (310) 266-4115
🌐 Visit: www.LawBrainard.com
🗓 Schedule a consultation to protect your business with the right legal documents.

Christopher Brainard is a California business attorney providing general counsel services to startups, LLCs, and small businesses. He helps clients form companies, draft contracts, and prevent costly legal disputes before they start.

*This article/blog is provided for informational and educational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship between you and Christopher Brainard, Esq. An attorney-client relationship can only be formed through a written and signed agreement with Christopher Brainard. If you need legal advice about your specific situation contact us for a consultation.  [Christopher Brainard, 651 N. Sepulveda Blvd., #2010, Bel Air, CA 90049. Tel: (310) 266 - 4115.  Email: christopherbrainard@gmail.com].

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