An operating agreement or shareholder agreement is the private rulebook for a California business. It decides who makes decisions, how money comes in and goes out, what happens when an owner wants to leave, and how the owners break a deadlock. When the owners never sign one, or sign a generic template, California’s statutes fill the gaps with default rules that were written for no business in particular. As a California operating agreement attorney, Michael Holmes drafts and reviews LLC operating agreements, shareholder agreements and corporate governance documents so that the rules the owners live by are rules they actually chose.
Holmes Law is a remote practice with no physical office, and California clients work directly with Michael Holmes by phone, video and secure document exchange. This page goes deeper than the broader California business law page. Companion pages cover entity formation, buy-sell agreements and business contracts.
Why a California Operating Agreement Matters
The California Revised Uniform Limited Liability Company Act (Corp. Code § 17701.01 and following) is built around the operating agreement. Corp. Code § 17701.10 provides that the operating agreement governs relations among the members and managers, the activities of the company and the way the agreement itself is amended, with a limited list of things it cannot change. Almost everything else is a default. That flexibility cuts both ways: a well-drafted agreement can fit the business closely, but an LLC without one runs on statutory defaults that often produce results the owners never expected.
A California operating agreement attorney also watches for the gap between how owners actually run a company and what the documents say. Many LLCs formed online have a one-page template agreement that contradicts the articles of organization, ignores the real economics, and says nothing about what happens on death, divorce or departure.
Default Rules the Agreement Should Override
These California LLC defaults are the ones most often worth changing.
Management Structure
An LLC is member-managed unless the articles of organization state that it is manager-managed (Corp. Code § 17704.07). In a member-managed LLC, each member is an agent with authority over the company’s ordinary business, differences in the ordinary course are decided by a majority of the members, acts outside the ordinary course require the consent of all members, and the operating agreement can be amended only with the consent of all members. Majority “of the members” means per capita, not by percentage interest, unless the agreement says otherwise. A member holding 5 percent has the same vote as a member holding 95 percent under the default.
Most businesses with passive investors should be manager-managed, with voting tied to percentage interests, and the operating agreement should list the major decisions that require a higher vote.
Distributions and Capital
By default, distributions before dissolution are shared on the basis of the agreed value of contributions made by each member, and a member has no right to a distribution until the company decides to make one. The default rules say little about capital calls, preferred returns, tax distributions or what happens when one member funds more than their share. A good operating agreement sets out capital accounts, whether additional contributions are required, the consequences of failing to fund (dilution, a loan, or loss of rights), and a tax distribution provision so members can pay tax on allocated income.
Transfers and Transferees
A member can generally transfer their economic rights, but the transferee does not become a member or gain management rights without the consent the statute or agreement requires. The transferee receives only distributions. That default protects the other owners in part, but it leaves room for an unwelcome transferee to hold an economic interest indefinitely. Operating agreements typically add rights of first refusal, consent requirements, permitted transfers to trusts for estate planning, and a buy-sell mechanism that forces or allows a buyout on defined events.
Dissociation
A member has the power to dissociate at any time, although dissociation can be wrongful if it breaches the agreement. Under the default, a dissociated member generally becomes the equivalent of a transferee: they lose management rights but keep their economic interest, and the company has no obligation to buy them out. An owner who walks away can therefore keep receiving a share of distributions without working. The operating agreement should decide whether departing members are bought out, at what price, and on what payment terms.
Fiduciary Duties and the Limits on Modifying Them
Members of a member-managed LLC and managers of a manager-managed LLC owe duties of loyalty and care, plus the contractual obligation of good faith and fair dealing. California lets the operating agreement adjust these duties, but within firm limits set by Corp. Code § 17701.10:
- the agreement may not eliminate the duty of loyalty, but it may identify specific types or categories of activities that do not violate it, if not manifestly unreasonable, and it may specify how a conflicted transaction can be authorized or ratified after full disclosure;
- the agreement may not unreasonably reduce the duty of care;
- the agreement may not eliminate the obligation of good faith and fair dealing, but it may set standards for measuring performance if they are not manifestly unreasonable;
- limits on liability cannot cover breaches of the duty of loyalty, improper financial benefits, improper distributions, intentional infliction of harm or intentional criminal violations.
California adds a requirement that many templates miss. Modifications of fiduciary duties must appear in a written operating agreement with the informed consent of the members, and the statute provides that simply signing or assenting to the operating agreement is not informed consent. The drafting should therefore disclose the modification clearly and document each member’s informed consent to it. This matters most in real estate and investment companies where the manager has other ventures that could compete with the LLC.
California Shareholder Agreements for Corporations
Corporations are governed by bylaws and by the General Corporation Law, and the board of directors manages the business under Corp. Code § 300. In a closely held corporation, a shareholder agreement fills the gaps the bylaws leave. Typical provisions include:
- voting agreements to elect particular directors, which Corp. Code § 706 permits among shareholders of a close corporation and in voting trusts;
- restrictions on share transfers, which Corp. Code § 204(b) allows in the articles or bylaws and which must be noted on the certificate under Corp. Code § 418 to bind a transferee without actual knowledge;
- rights of first refusal, drag-along and tag-along rights;
- buy-sell obligations on death, disability, divorce and termination of employment;
- supermajority approval for major decisions such as issuing new shares, selling the business or taking on significant debt.
A statutory close corporation under Corp. Code § 158 may go further, allowing a shareholders’ agreement under Corp. Code § 300(b) to govern matters that would otherwise belong to the board. That structure requires the right statements in the articles and share certificates, and it is used less often than its flexibility suggests.
Deadlock, Dissolution and Buyouts
Deadlock is the most common reason closely held California businesses end up in court, especially 50-50 companies. The operating agreement or shareholder agreement should resolve deadlock before it happens with tools such as:
- a designated tiebreaker or independent manager for defined issues;
- mediation and then arbitration of governance disputes;
- a buy-sell or “shotgun” clause in which one owner names a price and the other must buy or sell at that price;
- a defined valuation and payout process that lets one owner exit without dissolving the company.
Without those tools, California’s statutes supply blunt remedies. Under Corp. Code § 17707.03, a court may dissolve an LLC when it is not reasonably practicable to carry on the business under the articles or operating agreement, when dissolution is reasonably necessary to protect the complaining members, when the business has been abandoned, when management is deadlocked or subject to internal dissension, or when those in control have engaged in or knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority. The other members can avoid dissolution by purchasing the moving members’ interests at fair market value, through the appraisal and payment procedure the statute provides.
Corporations have a parallel structure. Shareholders holding at least a third of the shares may petition for involuntary dissolution on grounds that include deadlock and persistent mismanagement (Corp. Code § 1800), and under Corp. Code § 2000 the corporation or holders of 50 percent or more of the voting power can avoid dissolution by buying the petitioning shareholders out at fair value. These statutory buyouts can be fair, but they are expensive, slow and unpredictable. A negotiated exit mechanism in the governing documents almost always works better.
Information Rights and Records
LLC members have statutory rights to information about the company’s business, finances and governing documents, and corporate shareholders have rights to inspect accounting records, minutes and the shareholder list for a purpose reasonably related to their interests. Operating and shareholder agreements should set out the financial reporting members will receive, how often, and who pays for outside accounting. Clear information rights reduce suspicion between owners, which is often what turns a disagreement into litigation.
Veil Piercing and the California Alter Ego Standard
A well-drafted governing document also helps protect the owners from personal liability. California courts apply the alter ego doctrine when two conditions are met: such a unity of interest and ownership that the separate personalities of the entity and its owners no longer exist, and an inequitable result if the acts are treated as those of the entity alone. Courts look at commingling of funds, treating company assets as personal property, undercapitalization, failure to maintain records and using the company as a mere shell. Leading California decisions include Associated Vendors, Inc. v. Oakland Meat Co. (1962) 210 Cal.App.2d 825 and Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523.
For LLCs, Corp. Code § 17703.04 applies the same alter ego rules that apply to corporate shareholders, but it provides that failure to hold meetings of members or managers, or to observe formalities for calling or conducting meetings, is not a factor tending to establish alter ego liability where the articles or operating agreement do not expressly require meetings. That is a reason not to add meeting requirements to an LLC operating agreement unless the owners will actually follow them. Corporations have no equivalent safe harbor, so corporate minutes and annual shareholder and board actions still matter.
Estate Planning and Family Issues in the Agreement
California is a community property state, and an ownership interest acquired during marriage is presumptively community property. A spouse who is not a member may therefore hold a community interest in the membership interest, and at death each spouse can dispose of half of the community property by will or trust. The operating agreement should address what happens when an interest passes to a spouse, former spouse or heirs, and should permit transfers to a revocable trust without triggering a buyout. Spousal consents are common in California, and the buy-sell agreements page explains why a consent does not by itself change the character of property.
Ownership succession should also be coordinated with the owners’ California trusts and wills. An operating agreement that lets a trustee step into a deceased member’s management role, or that forces a sale at a fair price, can keep a family business running while an estate is administered.
Reviewing an Existing Agreement
Many clients come to Holmes Law with an agreement already in place. A review focuses on whether the agreement matches the articles, whether management and voting reflect how the business really operates, whether capital and distribution provisions match the economics, whether the fiduciary duty modifications meet California’s informed consent requirement, and whether exit and deadlock provisions will work when needed. Amendments are often more practical than a full rewrite, but under the default rule every member must consent to an amendment, so timing matters.
Frequently Asked Questions
Is a California LLC required to have an operating agreement?
The statute contemplates an operating agreement, which may be oral, implied, written or a combination. Relying on an oral or implied agreement is risky, because disputes then turn on memory and the statutory defaults. A written agreement signed by all members is the practical standard.
Can a single-member LLC benefit from an operating agreement?
Yes. It documents that the LLC is a separate business, supports the liability shield, names who takes over management if the owner dies or becomes incapacitated, and makes it easier to add members later.
Can the operating agreement waive fiduciary duties entirely?
No. California allows the agreement to identify activities that do not violate the duty of loyalty and to adjust the duty of care within limits, but it cannot eliminate the duty of loyalty or the obligation of good faith and fair dealing, and modifications require the members’ informed consent in writing.
What happens in a 50-50 deadlock if our agreement says nothing?
Either owner may ask a court to dissolve the LLC on grounds such as deadlock or internal dissension, and the other members can avoid dissolution by buying out the moving members at fair market value. Resolving deadlock in the agreement ahead of time is almost always cheaper.
Do we need annual meetings for our LLC?
Not unless the articles or operating agreement require them. Corp. Code § 17703.04 provides that skipping meetings is not an alter ego factor when meetings are not required. Corporations are different and should keep minutes and hold annual actions.
Should a shareholder agreement include buyout terms?
In almost every closely held corporation, yes. Transfer restrictions and a buyout process on death, disability, divorce and departure prevent shares from ending up with people the other owners never chose.
Speak With a California Operating Agreement Attorney
Holmes Law drafts and reviews California operating agreements, shareholder agreements and governance documents for founders, family businesses and real estate investors. The practice is remote, so meetings happen by phone or video wherever you are in California. To discuss a new agreement or a review of an existing one, contact Holmes Law to schedule a consultation with Michael Holmes. Contacting Holmes Law does not create an attorney-client relationship, and this page is general information, not legal advice for your situation.