Limited Liability Companies (LLCs) are an excellent business formation option for many people. They are simple enough to ensure they don’t get in the way of actually doing business, yet provide enough protection that you can operate safely without fear of personal liability for business risks and debts. If you have already started an LLC or you are thinking about starting an LLC in the near future, you will want to also understand the importance of having a written operating agreement in place.
As of January 1st, 2014, operating agreements are required for all California LLCs. Unfortunately, far too many people still believe they can go without or utilize an oral operating agreement. The reality is, whether they are legally required or not, written operating agreements should be a key document for every LLC. Read the following five reasons why it is so important that your LLC has a written one in California.
Prove No Oral Agreement Exists
Technically, California law accepts any oral, written or implied agreement that exists between all of the legal members of an LLC. However, a written agreement will take precedence over an oral or implied agreement for obvious reasons. If you don’t have a written agreement in place, any member of the LLC can claim that there was an oral agreement that said whatever they wanted and take it to court. Even if they lose, it can cost the members of the LLC thousands just to get through the process.
Allocating Profits & Losses
One of the biggest benefits of an LLC in California is that it allows you to divide up profits and losses in any way you choose. Most other business types require profits and losses to be split up based on percentage of ownership. If you want to have your LLC’s profits and losses split up in a way other than percentage of ownership, you can write this out in the written operating agreement that all members sign.
Avoiding Probate Courts
In the event that one of the members of the LLC passes away, their ownership portion may need to go through probate. If you use a written operating agreement, however, you can identify exactly what happens to their portion of the business. This will typically allow the other members of the LLC to skip the probate process, which can save a lot of time and money for everyone involved.
Proof of Ownership
When setting up new contracts with vendors or customers, it is not uncommon for them to want proof of ownership before beginning. Having a written operating agreement is a very simple way to clearly identify the owners. This legal document will not only prove ownership, but will also show which members have the legal authority to sign specific types of contracts.
Options for Expelling a Member
If a member of the LLC defaults on obligations to the business, it can be very difficult to either force them to fulfill the obligations or punish them with removal from the LLC unless these steps are clearly identified in the written operating agreement. You can write into the agreement the exact process that will be followed should a default occur so that everyone is well aware of the consequences.
Creating a Legal Written Operating Agreement
While it is technically enforceable to have a very simple operating agreement that is written without an attorney, it is certainly not advisable. There are many topics that need to be addressed, and provisions that need to be covered in order to ensure your operating agreement covers all of the potential situations that you may face and the unique circumstances of your business. Here at Integrated General Counsel we have helped numerous California businesses create effective written operating agreements, and we would be honored to help you too. Please contact us with any questions or to get the process started right away.
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