California LLC operating agreements — beyond the template.

What Cal Corp Code §17701.10 actually requires — and what it doesn't#

California's RULLCA (Revised Uniform Limited Liability Company Act, codified at Cal Corp Code §§17701.01–17713.13) provides default rules for nearly every aspect of LLC governance — and explicitly allows an operating agreement to displace those defaults wherever the parties choose. Section 17701.10 makes the operating agreement mandatory for every California LLC: oral, written, implied, or some combination. The statute doesn't require any particular form — but in practice, anything other than a written, signed, comprehensive operating agreement leaves the LLC governed by statutory defaults that almost never match what the members actually intended.

What §17701.10 doesn't do is dictate content. It establishes a few non-waivable provisions (the duty of good faith and fair dealing, the right to access records, certain limits on indemnification, the right to bring derivative claims), but everything else — management, voting, distributions, transfers, dissolution — is negotiable. The flexibility is the feature. It's also the danger: a template operating agreement that doesn't actually engage with the negotiable provisions ends up applying the statutory defaults by silence.

The other framing fact: when a California LLC dispute is litigated, the operating agreement is the first document the court reads. Courts read it the way contract lawyers wrote it — strictly, by its terms. Ambiguities get resolved against the drafter (unless the agreement was negotiated, in which case ambiguities cut both ways). Provisions that seem clear in calm times become litigation magnets under stress. The drafting choices made when the LLC is formed decide every dispute that follows.

Management structure — the choice that decides who controls#

California offers two management structures: member-managed (the default) and manager-managed. The choice is declared on the Articles of Organization (Form LLC-1) and elaborated in the operating agreement.

Member-managed#

Default structure. Every member has actual and apparent authority to bind the LLC (Cal Corp Code §17703.01(a)), and decisions require member consent under either the operating agreement's defined thresholds or RULLCA defaults (majority for ordinary decisions, unanimity for major matters under §17704.07). Works for: single-member LLCs and small multi-member LLCs where every member is operationally involved.

Manager-managed#

One or more managers — who may or may not be members — handle day-to-day operations and bind the LLC. Members retain voting rights over major decisions but don't have apparent authority for ordinary business. Most multi-member LLCs ultimately want this structure because it lets operations happen without member meetings. The drafting question: which decisions are 'major' (requiring member approval) and which are operational (within manager discretion). RULLCA's default major-decision list under §17704.07(c) is a starting point; well-drafted operating agreements expand or contract it to match the business.

Vote thresholds within the management structure are equally important. Common patterns: simple majority for ordinary decisions, supermajority (typically 66 2/3% or 75%) for major decisions, unanimity for fundamental matters (admitting new members, amending the operating agreement itself, dissolving the LLC). The right thresholds depend on the membership configuration — a 60/40 LLC with supermajority requirements on major decisions gives the minority member effective veto power on those decisions; a 60/40 LLC with majority-only thresholds doesn't.

Capital, contributions, and distributions#

Initial capital contributions#

The operating agreement should explicitly state each member's initial capital contribution (cash, property, services, or a combination) and the resulting capital account balance. Service-only members ("sweat equity") create tax and valuation complications — California recognizes them under §17704.02(b), but the imputed value of services is taxable income to the contributing member and capital basis to the LLC. Most well-drafted operating agreements either (a) value the services explicitly and document the imputation, or (b) structure the service equity as a profits interest with vesting, which has cleaner tax treatment.

Additional capital — the call mechanism#

Capital calls are the single most-litigated capital provision. The operating agreement should address: (a) who can call additional capital (manager, member supermajority, automatically on defined events), (b) what happens to non-paying members (dilution, default penalty, forced buyout, loss of voting rights), (c) the procedure (notice, deadline, cure period), and (d) whether the LLC has a corresponding right to refuse additional capital from members. Silence on the call mechanism converts every additional-capital need into a member-dispute event.

Allocations and distributions#

Two related but distinct concepts. Allocations are the tax-side: how taxable income, losses, deductions, and credits are split among members for IRS purposes. Distributions are the cash-side: when the LLC actually pays members. RULLCA defaults to allocations and distributions in proportion to capital contributions (§17704.04, §17704.06), but operating agreements routinely override that — pro-rata by membership percentage, by units, by class (preferred/common), or by negotiated formula. The mismatch between allocations and distributions creates the classic "phantom income" problem: a member owes tax on their allocated share of taxable income but receives no cash distribution to pay the tax. Tax distributions (mandatory distributions sized to cover the tax bill) solve this; the operating agreement has to include the provision.

Voting, consent, and approval rights#

Whichever management structure the LLC uses, certain decisions belong to the members regardless. RULLCA §17704.07 enumerates default major decisions; the operating agreement can expand or contract the list. The decisions most commonly added to the major-decision list:

Admission of new members. Cal Corp Code §17704.04(b) requires unanimous member consent for admission absent operating-agreement override. Most operating agreements either keep unanimity (small LLCs) or set a supermajority threshold (larger LLCs). The drafting question is whether to allow waiver under specific circumstances — equity grants to employees, transfers to family members, etc.

Amendment of the operating agreement itself. Usually requires supermajority or unanimity. Operating agreements that allow amendment by simple majority of members give controlling members the power to rewrite the deal — a structural risk for minority members.

Major transactions. Sale of substantially all assets, merger, acquisition of another business, taking on material debt, issuing additional units, related-party transactions over a defined dollar threshold. Each gets a tailored vote threshold.

Dissolution and winding up. Voluntary dissolution requires unanimous member consent under §17707.01(b)(2) unless the operating agreement provides otherwise. Most operating agreements lower the threshold (supermajority) for practical reasons.

Member transfers, admission, and the buy-sell core#

California's default rule is that economic interest is freely transferable but management rights are not (§17705.01). A member can assign their right to distributions to a third party without consent; the third party becomes a transferee with economic rights but not a member. This default is almost never what the parties actually want. The operating agreement should either restrict transfers entirely (consent required, with limited exceptions) or define the conditions under which a transferee becomes a full member.

The buy-sell provisions sit at the heart of this section. Triggering events, valuation methods, payment terms, transfer restrictions (ROFR, ROFO, tag-along, drag-along) — all of these belong in the operating agreement (or in a separate but coordinated buy-sell agreement). See the California Buy-Sell Agreements pillar guide for the full drafting framework. The integration point with the operating agreement: every transfer-related provision in the OA has to align with the buy-sell mechanics, regardless of which document each provision lives in.

Tax provisions that don't get enough attention#

Operating agreements consistently underweight tax provisions. The defaults in §17704.04 and §17704.06 produce pro-rata allocations and distributions, which is usually wrong — and the IRS partnership rules have specific drafting requirements that need to be reflected if the LLC wants the desired tax treatment.

Tax election. Multi-member LLCs default to partnership taxation. Single-member LLCs default to disregarded entity treatment. Either can elect corporate (Subchapter C) or S-corp taxation via IRS Form 8832 and/or Form 2553. The operating agreement should specify which election the LLC has made or intends to make — and align distribution mechanics with the elected treatment (S-corp election requires distributions in strict proportion to ownership, which conflicts with many flexible-distribution operating agreements).

Tax distributions. Mandatory distributions sized to cover the members' tax liability on their allocated shares of taxable income. Standard formula: gross taxable income allocated × the highest combined federal/California marginal rate (typically calculated at the top bracket to be conservative), distributed proportionally to allocations. Without this provision, members face the phantom-income problem on every profitable year.

Section 754 election. When a member transfers their interest, the LLC can elect under IRC §754 to step up the basis of the LLC's assets in proportion to the price paid. This benefits the incoming member by reducing future taxable gain on asset sales. Most operating agreements should either mandate the §754 election or give the LLC the option to make it on member request.

Special allocations. If the operating agreement allocates income or losses disproportionately to ownership percentages — common in waterfall structures, preferred-return arrangements, or carve-outs — IRC §704(b) requires the allocations to have substantial economic effect. The technical requirements (qualified income offset, deficit restoration obligations or limited deficit makeup, capital-account maintenance per Regulations §1.704-1) need explicit drafting. Templates that include "special allocation" language without the technical apparatus fail under audit.

Dispute resolution, indemnification, and limitation of liability#

Indemnification#

California allows LLCs to indemnify members and managers against liability arising from the LLC's business, subject to limitations (no indemnification for breach of fiduciary duty under §17704.09, no indemnification for intentional misconduct or knowing violations of law). The operating agreement should explicitly state the indemnification scope — mandatory vs. permissive, advancement of fees vs. reimbursement, conditions for clawback if indemnification was wrongly paid.

Limitation of fiduciary duties#

California's fiduciary-duty rules under §17704.09 (loyalty, care, good faith) can be modified by operating agreement, with limits. The duty of good faith and fair dealing is non-waivable; the duties of loyalty and care can be limited but not eliminated. Sophisticated operating agreements modify the loyalty duty to allow specific kinds of self-dealing (e.g., transactions between affiliated entities) with appropriate disclosure and approval procedures.

Dispute resolution#

Mandatory mediation as a precondition to litigation is common and usually beneficial — it forces parties into structured conversation before legal positions harden. Mandatory arbitration is more controversial in the LLC member context: it removes the dispute from California's well-developed business courts and into a forum that can be less predictable. The right choice depends on the membership configuration and the kinds of disputes most likely to arise.

Why template operating agreements consistently fail#

Three failure modes account for most of the cases where a template OA is the central document in litigation.

First: silence on negotiated provisions. Templates ship with generic defaults that match no one's actual deal. The capital-call mechanism is generic. The transfer restrictions are boilerplate. The major-decision list is the RULLCA default. When the dispute arises, the operating agreement turns out not to have addressed the specific question — and the answer comes from RULLCA, which the members may not have read.

Second: misalignment between operating agreement, articles, and side agreements. Templates don't know about the LLC's Articles of Organization, its buy-sell agreement, its employment agreements with member-employees, its loan agreements. Each of these documents has provisions that touch on the operating agreement's territory, and inconsistencies between them create dispute opportunities.

Third: tax provisions that don't engage with the actual elected treatment. The template's distribution waterfall assumes partnership taxation; the LLC made an S-corp election; the waterfall is now broken. Or vice versa. Or the special-allocation language doesn't include the §704(b) apparatus required for substantial economic effect. The tax outcome is whatever the IRS says, regardless of what the operating agreement says — but the operating agreement is what the LLC has to live with.

Why same-firm representation matters here#

Operating agreements are the canonical case for transactional-and-litigation continuity. The drafting is forward-looking: anticipate every dispute that might arise, address it explicitly, leave nothing material to default rules. The litigation is backward-looking: read the agreement strictly, exploit every ambiguity, leverage every drafting gap. A firm that does both knows what gets fought over. Provisions that look fine on paper at the drafting stage turn out to be the ones that don't survive cross-examination. Provisions that seem over-engineered at drafting turn out to be the ones that resolve disputes cleanly when invoked.

Same firm drafts the operating agreement. Same firm litigates when it's tested. That's not a marketing line — it's the structural argument for taking operating-agreement drafting seriously. The cost of a real operating agreement, drafted with future litigation in mind, is a small fraction of the cost of even one of the disputes a careful operating agreement prevents.