What a California LLC Operating Agreement Actually Says (And Why It Matters)

Article

An operating agreement is the rulebook for how a California LLC operates internally — how decisions get made, how money flows, how members come and go. RULLCA fills the gaps with default rules when an operating agreement is silent, and the defaults are often not what owners would actually want. Here is what a real operating agreement covers and why it matters more than the formation filing.

ByTaylor Darcy, Esq.· California-licensed attorney · State Bar No. 317674

Founding attorney atThink Legal, P.C.· San Diego–based, statewide California practice focused on LLC formation and operating agreements.

Published April 27, 2026

In this article

• What an operating agreement is
• What an operating agreement actually covers
• Where the RULLCA defaults bite
• What a good operating agreement does that a template does not
• Common questions
• Related reading

For a California LLC, the most important document is not the Articles of Organization. The Articles bring the LLC into existence — they are a one-page filing that tells the Secretary of State the LLC’s name, address, agent for service of process, and management structure. They do not say anything about how the LLC actually operates.

The document that does that is theoperating agreement, and most California small business owners underestimate it. Filing services treat it as a checkbox. Some DIY founders skip it entirely. Even attorneys who do not focus on LLC work sometimes use a generic template that does not really fit the situation.

The operating agreement is what separates an LLC that operates the way you intended from one that operates the way California’s defaults assume you intended. (SeeWhat Is RULLCA?for the underlying statute that fills in those defaults.)

This article is plain-English orientation on what an operating agreement actually covers, why each section matters, and where the defaults bite when an agreement is silent or missing. It is not legal advice for your specific LLC — operating agreements are situation-specific by nature, and the right document for your LLC depends on facts only you know.

What an operating agreement is

An operating agreement is a contract among the members of an LLC (and, in some cases, between the members and the LLC itself) that sets out how the LLC will be governed, managed, and operated internally. It is not filed with the California Secretary of State. It is not a public document. It is an internal document the members keep among themselves, signed by everyone and updated as circumstances change.

California does not technically require LLCs to have a written operating agreement. RULLCA recognizes oral and implied operating agreements. But “no written operating agreement” effectively means “California’s default rules govern the LLC,” and the defaults are rarely the rules the members would actually want if they thought about it.

For single-member LLCs, the operating agreement is shorter and less negotiated, but still meaningful — it documents the member’s intent, supports the LLC’s status as a separate entity (which matters for liability protection), and addresses what happens to the LLC if the member dies or becomes incapacitated.

For multi-member LLCs, the operating agreement is the document. It is where most preventable partner disputes get prevented, and where they get invited when it is weak or missing.

What an operating agreement actually covers

A complete operating agreement addresses all of the following — though the depth and complexity of each section varies dramatically depending on the LLC’s situation. A single-member LLC can address most of these in a paragraph each. A multi-member LLC with complicated economics may need pages on a single section.

Formation and basic information

The opening sections identify the LLC by name, the date of formation, the principal office, the registered agent, the LLC’s business purpose, and the names of the initial members. This is mostly recitation of facts already in the Articles of Organization, but it puts everything in one place and sets up the references for later sections.

Membership: who owns the LLC

The membership section identifies the initial members, their capital contributions, and their ownership interests (often stated as percentages, sometimes as units or shares analogous to corporate stock). It also addresses:

• How new members can be admitted
• Whether existing members have the right to consent to (or veto) new member admissions
• What approval threshold is required (majority, supermajority, unanimous)
• Whether ownership interests are transferable, and to whom

The default rule under RULLCA is that admission of new members requires unanimous consent of existing members. That default works for a two-person LLC where both members trust each other completely. It does not work as well for a five-member LLC where one member might be holding up everyone else by refusing reasonable additions.

Capital contributions and capital accounts

The capital section addresses what each member contributes (cash, property, services), how those contributions are valued, and how each member’s “capital account” is tracked over time. Capital accounts matter because they affect how distributions and allocations of profit and loss flow through to members, and how a member’s interest is valued on exit.

The section also addresses:

• Whether members are required to make additional capital contributions later (capital calls)
• What happens if a member fails to make a required capital call
• Whether members can take loans from the LLC, and on what terms
• Whether the LLC can borrow from third parties (banks, etc.) and who has authority to sign

The default RULLCA rule on additional capital contributions is that members are not required to make them unless the operating agreement says otherwise. Most operating agreements explicitly address this — either by confirming the default (no required additional contributions) or by spelling out a capital-call mechanism with consequences for non-participating members.

Allocations and distributions: how money flows

This is one of the parts of an operating agreement where templates fail most often, because the right answer depends entirely on the deal the members made with each other.

Allocationsare the assignment of the LLC’s profits and losses to members for tax purposes. The default rule is that allocations follow ownership percentages — a 60% member gets 60% of the profits and losses. But operating agreements can allocate differently — for example, a “preferred return” structure where one member gets the first dollars of profit before the others share, or a “waterfall” where different tiers of distribution apply at different return thresholds.

Distributionsare the actual cash that flows out of the LLC to members. The default rule is that distributions also follow ownership percentages and are made when the LLC’s manager (or members, in a member-managed LLC) decides. Operating agreements typically address:

• When distributions will be made (regularly, ad hoc, by tax-distribution formula)
• Whether distributions must be made to cover members’ tax obligations on allocated income (the “tax distribution” provision — important for any LLC where members are taxed on income they have not actually received)
• How distributions are split when ownership is not equal or when there are preferred returns
• What happens to undistributed profits

For multi-member LLCs with anything other than equal ownership and equal contributions, this section is where the deal lives. Templates that just say “distributions in proportion to ownership” miss most of what real partnerships actually need.

Management: who runs the LLC

The management section addresses whether the LLC ismember-managed(all members participate in management directly) ormanager-managed(one or more managers, who may or may not be members, run the day-to-day). The choice has real implications:

• Member-managed LLCs treat all members as having authority to bind the LLC in ordinary business
• Manager-managed LLCs limit that authority to the designated managers — non-manager members are more like passive investors

The section also addresses:

• Who has authority to make what decisions
• Which decisions require member consent (and at what threshold)
• How meetings are called and conducted
• Whether managers can be removed and how
• Compensation for managers (if any)

The default rule under RULLCA for ordinary business decisions in a member-managed LLC is majority of the members by vote. Major decisions (mergers, dissolution, amendments to the operating agreement, sale of substantially all assets) require unanimous consent under RULLCA’s defaults — which can become a real problem in larger multi-member LLCs where one holdout can paralyze the company.

Member exit: what happens when someone leaves

This is the section that most prevents (or invites) disputes. It addresses:

• Voluntary withdrawal.Can a member withdraw on their own? With notice? Forever, or after some lock-up period?
• Involuntary removal.Under what circumstances can a member be removed? (Misconduct, breach of agreement, criminal conviction, etc.)
• Death of a member.Does the deceased member’s interest pass to their estate? Does it get bought out automatically? On what terms?
• Disability of a member.What happens if a member becomes unable to participate? Forced buyout? Continued participation through a representative?
• Divorce of a member.How is a member’s interest treated when the member’s marriage ends? (SeeSpouses and California LLCsfor the community-property dimension that interacts here.)
• Bankruptcy of a member.What happens if a member files for personal bankruptcy?

For each of these triggers, the operating agreement should specify what happens — typically through a buy-sell mechanism that values the departing member’s interest, sets payment terms, and identifies who has the right (or obligation) to buy. Without a clear mechanism, exits become negotiations under pressure, and pressured negotiations are how partner relationships end up in court.

Buy-sell provisions

The buy-sell section is often a separate document referenced in the operating agreement, sometimes integrated directly into the operating agreement itself. Either way, it is the contract that governs what happens at the major exit triggers — death, disability, divorce, dispute. (SeeBuy-Sell Agreementsfor a deeper treatment.)

The core elements of a workable buy-sell:

• Trigger events.What specifically activates the buy-sell — death, disability, voluntary exit, deadlock, etc.
• Valuation method.How the departing member’s interest is valued — book value, formula, appraisal, last agreed price. The valuation method matters enormously and is the single most-litigated part of buy-sell agreements when they fail.
• Payment terms.Lump sum or over time? Interest rate? Security?
• Right or obligation.Does the LLC (or remaining members) have the right to buy, or the obligation to buy? Different answers for different triggers usually make sense.

Amendments

The amendments section addresses how the operating agreement itself can be changed. Default rule under RULLCA is unanimous consent, which works for small LLCs but can be limiting. Many multi-member operating agreements adopt a supermajority requirement (say, 75%) for amendments, with certain “fundamental” amendments requiring unanimous consent.

Dissolution

The dissolution section addresses how the LLC ends. (SeeHow to Dissolve a California LLCfor the mechanics of dissolution itself.) Within the operating agreement, the section addresses:

• What events trigger dissolution
• Whether members can vote to dissolve, and at what threshold
• The order of distributions on dissolution (creditors, preferred returns, capital, residual)
• Who has authority to wind up the LLC’s affairs

The default rule under RULLCA is that dissolution by member vote requires consent of members holding a majority of distribution rights, but operating agreements commonly require a higher threshold to make dissolution intentional rather than reactive.

Where the RULLCA defaults bite

Several specific defaults are worth knowing because they apply automatically when an operating agreement is silent and they often surprise members:

Equal voting on most matters.RULLCA’s default voting rule is one vote per member, regardless of ownership percentage. A 90% member and a 10% member each get one vote. This is rarely what owners actually want and is one of the most-overridden defaults.

Unanimous consent for major decisions.As noted above, certain fundamental decisions require unanimous member consent under RULLCA. In a two-member LLC, this is fine. In a five-member LLC, it can paralyze the company.

Pro-rata distributions.Distributions follow ownership percentages by default. Any departure from that — preferred returns, tiered distributions, special allocations — has to be in the operating agreement.

Free transferability of distribution rights, but not membership.A member can transfer their economic interest (the right to distributions) freely under RULLCA’s defaults, but the recipient does not become a member without consent of the existing members. This bifurcation is rarely what owners actually want and is almost always overridden.

No required additional capital contributions.Members are not obligated to put more money in unless the operating agreement says they are. This default usually fits, but operating agreements with capital-call mechanisms have to spell them out clearly.

What a good operating agreement does that a template does not

The difference between a real operating agreement and a template is not the number of pages. It is whether the document was written for the specific deal among specific members.

A good operating agreement reflects:

• The actual ownership economics — what each member contributes, in what form, valued how, with what return expectations
• The actual decision-making roles — who decides what, with what input from whom
• The exit scenarios the members actually need to address — death, disability, divorce, dispute, voluntary exit, all on terms that fit this partnership
• The buy-sell mechanism that fits the LLC’s likely valuation and payment capacity
• Tax considerations specific to this LLC (S-corp eligibility if relevant, special allocations if needed, etc.)
• Any unusual provisions specific to the business (industry-specific compliance, professional licensing, real estate-specific terms, etc.)

A template fills in the blanks for the most common case and trusts the user to know which provisions to modify. When the template’s most common case does not fit, the LLC inherits an operating agreement that fights the deal rather than reflects it.

For single-member LLCs, templates are often acceptable because the customization needed is minimal. For multi-member LLCs, templates fail more often than they succeed.

Common questions

Is my operating agreement still valid if I never updated it?Probably yes for what it says, but circumstances change. Operating agreements written at formation should be revisited when major changes happen — new members, big shifts in the business, marriages, divorces, new tax situations. An operating agreement that does not reflect current reality is a document waiting to be ignored or fought over.

Can I write my own operating agreement?Legally, yes. For single-member LLCs, many owners do. For multi-member LLCs, the operating agreement is the legal mechanism by which the partners’ deal gets memorialized — and the cost of getting it wrong is much larger than the cost of getting it right. Most multi-member founders are better served working with an attorney, even if just for the first version.

What if I have a partner and we never made an operating agreement?California’s default rules apply. That means equal voting, pro-rata distributions, unanimous consent for major decisions, and no clear mechanism for exit. If the partnership is going well, this is fine. When it stops going well, the absence of an operating agreement is where the real cost shows up.

Can the operating agreement be oral?RULLCA recognizes oral operating agreements, but proving the terms of an oral agreement when partners disagree is exactly the kind of dispute the document is supposed to prevent. “Get it in writing” is the standard answer, and it is the right answer.

Does my operating agreement need to be signed by everyone?Yes. An unsigned operating agreement is harder to enforce. All members should sign and keep a copy, and any amendments should be signed by everyone whose consent was required under the amendment provision.

Where should I keep my operating agreement?With the LLC’s other formation records — Articles of Organization, EIN confirmation, bank account documentation, member resolutions. Wherever the LLC’s records live should include the operating agreement and any amendments. Members should each keep a copy.

What if my operating agreement conflicts with RULLCA?RULLCA has some mandatory rules that an operating agreement cannot override (the “non-waivable” provisions in California Corporations Code §17701.10). For most provisions, the operating agreement controls and RULLCA fills gaps. For a small set of mandatory rules, RULLCA controls regardless of what the operating agreement says.

Related reading

• What Is RULLCA?— the California statute that fills in defaults when the operating agreement is silent
• Multi-Member LLCs— why multi-member operating agreements are the work
• Buy-Sell Agreements— the exit-triggers part of the operating agreement that prevents most preventable disputes
• California LLC Formation— flat-fee attorney-assisted formation that includes a real operating agreement, not a template
• Spouses and California LLCs— the marital-property issues that interact with operating agreement provisions for married members
• California LLC vs. S-Corp Election— operating agreement provisions that determine S-corp eligibility