Multi-Member LLC Operating Agreement — California

Multi-Member LLC Operating Agreement (California)

Quick-Reference Summary

OPERATING AGREEMENT OF [LLC NAME], LLC

A California Multi-Member Limited Liability Company

This Operating Agreement (this "Agreement") is entered into and effective as of [__/__/____] (the "Effective Date") by and among the persons identified on the signature page hereof as the members (each a "Member" and collectively the "Members") of [LLC NAME], LLC, a California limited liability company (the "Company"), under the California Revised Uniform Limited Liability Company Act, Cal. Corp. Code § 17701.01 et seq. (the "Act").

Article I — Formation

1.1 Formation. The Company was organized on [__/__/____] by the filing of Articles of Organization (Form LLC-1) with the California Secretary of State under Cal. Corp. Code § 17702.01. The Secretary of State file number is [________________________________].

1.2 Name. The name of the Company is [LLC NAME], LLC, complying with Cal. Corp. Code § 17701.08.

1.3 Principal Office. The principal executive office is [________________________________], California [____].

1.4 Agent for Service of Process. The Company's California agent is [________________________________], whose address is [________________________________], California [____], filed under Cal. Corp. Code § 17701.13.

1.5 Term. The Company commenced upon Secretary of State acceptance of the Articles and shall continue until dissolved under Article XIV and Cal. Corp. Code § 17707.01 et seq.

1.6 No Publication. California imposes no publication requirement on a domestic LLC.

Article II — Purpose and Powers

2.1 Purpose. The Company is organized to engage in any lawful act or activity for which a California LLC may be organized, including without limitation: [________________________________].

2.2 Powers. The Company has all powers granted by Cal. Corp. Code § 17701.05.

2.3 Restricted Professional Services. If any business activity is regulated under California professional-licensing law, the Members shall confirm compliance with Cal. Corp. Code § 17701.04(b).

Article III — Members and Membership Interests

3.1 Initial Members and Interests. The Members, their initial capital contributions, and their initial Percentage Interests are:

3.2 Admission of Additional Members. Admission of any new member requires (a) the affirmative vote or written consent of Members holding [a Majority in Interest / Supermajority of __% / Unanimous] consent, and (b) execution of a written joinder, in accordance with Cal. Corp. Code § 17704.01.

3.3 No Liability for Company Obligations. No Member is personally liable for any debt, obligation, or liability of the Company solely by reason of being a Member, per Cal. Corp. Code § 17703.04.

Article IV — Capital Contributions and Capital Accounts

4.1 Initial Contributions. Each Member's initial contribution is set forth in Section 3.1 and Exhibit A.

4.2 Capital Accounts. A separate capital account shall be maintained for each Member in accordance with Treas. Reg. § 1.704-1(b)(2)(iv).

4.3 No Interest on Capital. No Member is entitled to interest on capital contributions.

4.4 Return of Capital. No Member has the right to demand return of capital except upon dissolution and only in accordance with Cal. Corp. Code § 17707.05.

Article V — Capital Calls

5.1 Mandatory Capital Calls. The Managers / Managing Member may make a written call for additional capital only if: (a) approved by Members holding [____]% of the Percentage Interests; and (b) needed to fund operations, debt service, or capital expenditures expressly approved under Section 7.4.

5.2 Optional Capital Calls. Any other capital contribution is optional and at the discretion of each Member.

5.3 Failure to Contribute; Dilution Remedy. If a Member fails to fund a mandatory call within [thirty (30)] days of written notice (the "Cure Period"), the non-defaulting Members may, at their option:

• (a) loan the defaulted amount to the Company at the then-applicable Wall Street Journal prime rate plus [____]%, secured by the defaulting Member's interest;
• (b) contribute the defaulted amount and dilute the defaulting Member's Percentage Interest by application of the formula in Exhibit B;
• (c) treat the defaulted amount as a capital contribution by the non-defaulting Members and reallocate Percentage Interests on a pro-rata basis; or
• (d) pursue any other remedy at law or in equity.

5.4 No Third-Party Beneficiary. No creditor of the Company has any right to require or enforce a capital call.

Article VI — Allocations and Distributions

6.1 Allocations. Net Profits and Net Losses shall be allocated among the Members in proportion to their respective Percentage Interests, subject to (a) Treas. Reg. § 1.704-1(b)(2) substantial-economic-effect requirements, (b) the qualified-income-offset of Treas. Reg. § 1.704-1(b)(2)(ii)(d), and (c) the minimum-gain chargeback of Treas. Reg. § 1.704-2.

6.2 Distributions — Order of Priority (Waterfall). Available Cash, when distributed under Section 6.3, shall be paid in the following order:

1. First, to the Members in proportion to and to the extent of any Preferred Return of [____]% per annum on Unreturned Capital Contributions;
2. Second, to the Members in proportion to and until full return of Unreturned Capital Contributions;
3. Third, to the Members in proportion to their Percentage Interests (or, alternatively, in accordance with such other promote/carry arrangement set forth in Exhibit C).

6.3 Timing. Distributions shall be made at such times as the Managers / Managing Member determine, but no less frequently than annually if the Company has Available Cash.

6.4 Tax Distributions. Notwithstanding Section 6.2, the Company shall (to the extent of legally available funds and subject to Section 6.6) distribute to each Member, on or before the 15th day of the third month following each taxable year, an amount equal to that Member's allocable share of taxable income multiplied by the Assumed Tax Rate of [____]% (intended to approximate the highest combined federal and California marginal rates). Tax distributions are an advance against distributions otherwise due under Section 6.2.

6.5 Distributions in Kind. No Member may compel a distribution in kind.

6.6 Solvency Limitation. No distribution shall be made that violates Cal. Corp. Code § 17704.05 (insolvency or balance-sheet test).

Article VII — Management

7.1 Management Structure. The Company is [Member-managed / Manager-managed] as designated in the Articles of Organization.

7.2 Member-Managed Alternative. If member-managed: Each Member has equal rights in management of the activities and affairs of the Company under Cal. Corp. Code § 17704.07(b)(2). A matter relating to the activities of the Company is decided by the affirmative vote or consent of Members holding a Majority in Interest, except as otherwise required by Section 7.4 or the Act.

7.3 Manager-Managed Alternative. If manager-managed: The Company shall have [____] Manager(s), initially [________________________________]. Managers are elected by Members holding a Majority in Interest under Cal. Corp. Code § 17704.07(c).

7.4 Actions Requiring Supermajority or Unanimous Consent. Notwithstanding any other provision, the following actions require the unanimous written consent of all Members (or, where indicated, a Supermajority of [____]% of Percentage Interests):

• (a) amend this Agreement or the Articles of Organization (unanimous);
• (b) admit a new Member (Supermajority);
• (c) sell, exchange, lease (other than in the ordinary course), or pledge all or substantially all Company assets (Supermajority);
• (d) merge, convert, domesticate, or dissolve the Company (unanimous);
• (e) cause the Company to file a bankruptcy petition (unanimous);
• (f) make a check-the-box election under Treas. Reg. § 301.7701-3 or elect S-corporation classification (Supermajority);
• (g) incur indebtedness in excess of $[__________] (Supermajority);
• (h) approve a related-party transaction or a transaction in which a Member or Manager has a material interest (disinterested Majority); and
• (i) issue any new class of membership interest (unanimous).

7.5 Officers. The Managers / Managing Member may appoint officers (President, Chief Executive Officer, Secretary, Treasurer, Chief Financial Officer). Officers serve at the pleasure of the appointing body and have the authority delegated in writing.

7.6 Indemnification. To the fullest extent permitted by Cal. Corp. Code § 17704.08, the Company shall indemnify each Member, Manager, and officer against any loss, liability, damage, claim, or expense incurred in good faith on behalf of the Company.

Article VIII — Voting Rights and Member Meetings

8.1 Voting — Per Percentage Interest. Except as otherwise required by Section 7.4 or by the Act, all Member votes shall be by Percentage Interest.

8.2 Annual Meeting. An annual meeting of Members shall be held on [__/__/____] (or such other date as designated by the Managers) at the principal office or by remote communication.

8.3 Special Meetings. A special meeting may be called by (a) the Managers, (b) any Manager, or (c) Members holding at least [____]% of the Percentage Interests, on not less than [ten (10)] days' written notice.

8.4 Quorum. A quorum requires the presence (in person or by proxy) of Members holding a Majority in Interest.

8.5 Action by Written Consent. Any action that may be taken at a Member meeting may be taken without a meeting if Members holding the Percentage Interest required to authorize the action sign a written consent under Cal. Corp. Code § 17704.07(b)(3)(I).

8.6 Proxies. A Member may vote by proxy executed in writing.

Article IX — Fiduciary Duties and Standards of Conduct

9.1 General Standards. Each Member (in a member-managed LLC) and each Manager (in a manager-managed LLC) owes the Company and the other Members the duties of loyalty and care described in Cal. Corp. Code § 17704.09, and the contractual obligation of good faith and fair dealing.

9.2 Loyalty. The duty of loyalty under § 17704.09(b) includes (a) accounting to the Company for property, profit, or benefit derived from Company activity; (b) refraining from dealing with the Company as a person with an adverse interest; and (c) refraining from competing with the Company.

9.3 Care. The duty of care under § 17704.09(c) is to refrain from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

9.4 Modification of Duties (Permitted Scope). Pursuant to Cal. Corp. Code § 17701.10(c), and to the extent not prohibited thereby, the Members hereby agree that:

• (a) specific types or categories of activities that do not violate the duty of loyalty are identified in Schedule 9.4 (e.g., outside investments, family-business interests). The activities so identified shall not violate the duty of loyalty if not manifestly unreasonable;
• (b) the Members may authorize or ratify (after disclosure of all material facts) any specific transaction that would otherwise violate the duty of loyalty, by Majority in Interest of the disinterested Members;
• (c) standards for measuring performance of the good-faith obligation are set forth in Schedule 9.4, provided that such standards are not manifestly unreasonable.

9.5 Nonwaivable Provisions. Nothing in this Agreement (including this Article IX) may eliminate the duties identified as nonwaivable under Cal. Corp. Code § 17701.10(c), eliminate the contractual obligation of good faith and fair dealing, vary rights of third parties under the Act, or vary the court's power to decree dissolution under § 17707.03.

Article X — Transfer Restrictions, ROFR, Tag-Along, Drag-Along

10.1 General Transfer Restriction. No Member may sell, assign, pledge, hypothecate, encumber, or otherwise transfer all or any portion of the Member's interest in the Company (governance rights or transferable interest) except in compliance with this Article X, Cal. Corp. Code § 17705.02, and applicable securities laws.

10.2 Permitted Transfers. Transfers to a Permitted Transferee (defined in Exhibit D to include revocable trusts of the Member, immediate family members, and entities wholly owned by the Member) are permitted without consent, provided the transferee executes a written joinder.

10.3 Right of First Refusal (ROFR). Before any non-permitted transfer, the selling Member shall deliver a written notice ("Sale Notice") to the Company and the other Members describing the proposed transferee, price, and terms. The Company shall have [thirty (30)] days, and thereafter the non-selling Members shall have [thirty (30)] days, to elect to purchase the offered interest on the same terms.

10.4 Tag-Along Rights. If a Member (or group of Members) holding more than [____]% of Percentage Interests sells to a third party in a transaction not subject to ROFR, the remaining Members may elect to participate (tag along) on a pro-rata basis on the same terms.

10.5 Drag-Along Rights. If Members holding at least [____]% of Percentage Interests approve a sale of the Company to a bona fide third-party purchaser, the remaining Members shall be required to sell their interests on the same terms (subject to customary minority protections in Exhibit E).

10.6 Admission of Transferee as Member. A transferee of a transferable interest is admitted as a Member only upon (a) Majority in Interest consent of the non-transferring Members (or such other threshold as required for admission under Section 3.2), and (b) execution of a written joinder.

10.7 Effect of Non-Compliant Transfer. A transfer in violation of this Article X is void as against the Company, and the transferee acquires no rights.

Article XI — Buy-Sell Provisions

11.1 Triggering Events. A Member's interest shall be subject to mandatory purchase under this Article XI upon the occurrence of any of the following events with respect to such Member (the "Departing Member"):

• (a) Death of an individual Member;
• (b) Disability (defined as the inability, due to physical or mental impairment, to perform the Member's duties to the Company for [180] consecutive days or [270] days in any 12-month period);
• (c) Divorce (to the extent a court awards a Member's interest, or any portion thereof, to a non-Member spouse);
• (d) Bankruptcy of a Member, including a voluntary or involuntary petition under title 11 of the United States Code;
• (e) Voluntary Withdrawal of a Member upon [ninety (90)] days' written notice;
• (f) For-Cause Expulsion under Cal. Corp. Code § 17706.02(5) by unanimous vote of the other Members for: (i) material breach of this Agreement uncured for [thirty (30)] days; (ii) conviction of a felony or any crime of moral turpitude; (iii) gross negligence or willful misconduct that materially harms the Company; or (iv) a determination by a court that the Member's conduct makes it not reasonably practicable to carry on the Company's activities with the Member.

11.2 Purchase Option / Obligation. Upon a Triggering Event:

• (a) The Company shall have a [sixty (60)] day option to purchase the Departing Member's interest at the Purchase Price determined under Section 11.3;
• (b) If the Company does not exercise in full, the remaining Members shall have a further [thirty (30)] day option to purchase pro-rata; and
• (c) For Death, Disability, and Bankruptcy, the purchase is mandatory to the extent of available life-insurance proceeds, disability-buyout proceeds, or funds in the buy-sell reserve, as applicable.

11.3 Valuation Methodology. The Purchase Price is the Fair Market Value of the Departing Member's Percentage Interest determined as follows:

• (a) by good-faith agreement of the parties within [thirty (30)] days; or, failing agreement,
• (b) by appraisal of a qualified independent business appraiser jointly selected, or (if the parties cannot agree) by an appraiser appointed by the American Arbitration Association under the AAA Commercial Arbitration Rules. The appraiser shall apply customary valuation methodologies (income, market, asset) without any minority-interest or marketability discount unless expressly specified in Exhibit F.

11.4 Payment Terms. Unless funded by insurance, the Purchase Price shall be paid (a) [twenty percent (20%)] in cash at closing and (b) the balance over [five (5)] years in equal annual installments, with interest at the applicable federal rate published by the IRS for mid-term loans, evidenced by a promissory note secured by the purchased interest.

11.5 Closing. Closing occurs not later than [sixty (60)] days after determination of the Purchase Price at the principal office.

Article XII — Charging Order

12.1 Charging Order — Exclusive Remedy. Under Cal. Corp. Code § 17705.03(f), entry of a charging order is the exclusive remedy by which a judgment creditor of a Member or transferee may satisfy a judgment from the Member's or transferee's transferable interest.

12.2 Mechanics. A charging order constitutes a lien on the judgment debtor's transferable interest and requires the Company to pay over to the order-holder any distribution that would otherwise be paid to the judgment debtor (§ 17705.03(a)).

12.3 Foreclosure (Multi-Member). Upon a showing that distributions will not satisfy the judgment within a reasonable time, the court may foreclose the lien and order sale. The purchaser at the foreclosure sale obtains only the transferable interest, does not become a Member, and is subject to § 17705.02 (§ 17705.03(b)(3)).

12.4 Redemption. The judgment debtor, the Company, or any non-debtor Member may extinguish the charging order at any time before foreclosure under § 17705.03(c)-(d).

12.5 Exemptions. This Agreement does not deprive any Member or transferee of the benefit of any applicable exemption laws (§ 17705.03(e)).

Article XIII — Deadlock and Dispute Resolution

13.1 Internal Resolution. Any Member may declare a Deadlock by written notice if the Members are unable to agree on a matter requiring their consent. The Members shall meet (in person or remotely) within [fifteen (15)] days to attempt resolution.

13.2 Mediation. If unresolved, the dispute shall be submitted to non-binding mediation under the JAMS Mediation Rules at [________________________________], California.

13.3 Arbitration. If mediation fails after [sixty (60)] days, the dispute shall be finally resolved by binding arbitration under the JAMS Comprehensive Arbitration Rules before a single arbitrator in [________________________________] County, California.

13.4 Buy-Sell Shotgun Option. If a Deadlock persists for [ninety (90)] days and the Members hold equal Percentage Interests (or are otherwise materially adverse on a Section 7.4 matter), either side ("Offeror") may serve a written shotgun notice on the other ("Offeree") specifying a price per 1% of Percentage Interest. The Offeree shall, within [thirty (30)] days, elect to (a) sell its entire interest to the Offeror at that price, or (b) buy the Offeror's entire interest at that price.

13.5 Judicial Dissolution. Nothing in this Article XIII limits any Member's right under Cal. Corp. Code § 17707.03 to apply for judicial dissolution on grounds including (a) economic purpose likely unreasonably frustrated; (b) member conduct making it not reasonably practicable to carry on; or (c) deadlock as to a matter material to the Company.

Article XIV — Dissolution and Winding Up

14.1 Events of Dissolution. The Company shall dissolve on the first to occur of, per Cal. Corp. Code § 17707.01:

• (a) an event or circumstance the Members agreed in this Agreement would cause dissolution;
• (b) the unanimous consent of the Members (or such other threshold under Section 7.4(d));
• (c) passage of 90 days after the dissociation of the last Member, unless a successor is admitted in accordance with § 17707.01(c);
• (d) entry of a decree of judicial dissolution under § 17707.03; or
• (e) administrative dissolution by the Secretary of State or the Franchise Tax Board.

14.2 Winding Up. On dissolution, the Company shall wind up its activities under § 17707.04. Assets shall be applied per § 17707.05:

1. to creditors (including Members as creditors) other than for distributions;
2. to Members for accrued but unpaid distributions; and
3. to Members in accordance with the distribution waterfall in Section 6.2.

14.3 Certificate of Cancellation. Upon completion of winding up, the Company shall file a Certificate of Dissolution (Form LLC-3) and Certificate of Cancellation (Form LLC-4/7) with the Secretary of State under § 17707.08.

14.4 Franchise Tax Clearance. All California franchise taxes, LLC fees, and Form 568 returns shall be filed and paid through the final taxable year.

Article XV — California-Specific Provisions

15.1 Statement of Information. The Company shall file its initial Statement of Information (Form LLC-12) within 90 days after Articles filing, and biennially thereafter; $20 fee.

15.2 $800 Minimum Franchise Tax. The Company shall pay the $800 minimum franchise tax (Cal. Rev. & Tax. Code § 17941) on or before the 15th day of the 4th month of each taxable year using Form FTB 3522.

15.3 LLC Fee. If California-source income equals or exceeds $250,000, the Company shall estimate and pay the LLC fee (Form FTB 3536) by the 15th day of the 6th month under Cal. Rev. & Tax. Code § 17942.

15.4 No Domestic Series LLC. California does not authorize a domestic Series LLC.

15.5 Nonwaivable RULLCA Provisions. This Agreement may not vary the matters identified in Cal. Corp. Code § 17701.10(c).

15.6 Federal Tax Classification. The Company shall be taxed as a partnership under Subchapter K unless and until a check-the-box election under Treas. Reg. § 301.7701-3 (or an S-election on Form 2553) is approved under Section 7.4(f).

15.7 Partnership Representative. The Company designates [________________________________] as Partnership Representative under I.R.C. § 6223 for purposes of the Bipartisan Budget Act of 2015 centralized partnership audit regime.

Article XVI — General Provisions

16.1 Amendment. This Agreement may be amended only by a writing signed by all Members, subject to Section 7.4(a) and Cal. Corp. Code § 17701.12.

16.2 Governing Law. California law governs, without regard to conflict-of-laws rules.

16.3 Venue. Subject to Article XIII, exclusive venue is the state and federal courts located in [________________________________] County, California.

16.4 Severability. If any provision is held invalid, the remainder remains in full force.

16.5 Integration. This Agreement and the Articles constitute the entire agreement of the Members with respect to the Company.

16.6 Counterparts; Electronic Signatures. Counterparts and electronic signatures are permitted under Cal. Civ. Code § 1633.1 et seq.

16.7 Records. The Company shall maintain records required by Cal. Corp. Code § 17701.13 at its principal office.

16.8 Notices. Notices shall be in writing and delivered personally, by overnight courier, by certified mail return receipt requested, or by email with confirmation, to the addresses set forth in Exhibit G.

Signature Block

IN WITNESS WHEREOF, the Members have executed this Operating Agreement as of the Effective Date.

The Company joins in this Agreement to evidence its acceptance:

[LLC NAME], LLC

By: [________________________________]
Name: [________________________________]
Title: [Manager / Managing Member]

Pre-Execution Checklist

☐ Articles of Organization (Form LLC-1) filed with California Secretary of State; $70 fee paid
☐ Secretary of State LLC file number recorded in Section 1.1
☐ Federal EIN obtained from IRS (Form SS-4)
☐ California agent for service of process designated
☐ Initial Statement of Information (Form LLC-12) filed within 90 days; $20 fee
☐ Initial capital contributions funded and recorded on books and Exhibit A
☐ Separate Company bank account opened
☐ Partnership tax classification confirmed (or Form 8832/2553 election made)
☐ Partnership Representative designated for centralized audit regime
☐ Annual $800 minimum franchise tax calendar set (Form FTB 3522)
☐ Form 568 and LLC fee (Form FTB 3536) calendar set if California-source income may reach $250,000
☐ All Exhibits (A, B, C, D, E, F, G) and Schedule 9.4 completed
☐ Buy-sell funding evaluated (life insurance, disability insurance, sinking fund)
☐ Spousal consents obtained where any Member resides in California (a community-property state)
☐ Securities-law compliance reviewed (federal Reg D / California Corp. Code § 25102(f))
☐ Operating Agreement executed by all Members and retained at principal office
☐ Beneficial Ownership Information report filed with FinCEN under the Corporate Transparency Act (or exemption documented)

Sources and References

• California Revised Uniform Limited Liability Company Act (RULLCA), Cal. Corp. Code § 17701.01 et seq. — https://leginfo.legislature.ca.gov/faces/codes_displayexpandedbranch.xhtml?tocCode=CORP&division=&title=2.6.&part=&chapter=&article=
• Cal. Corp. Code § 17704.07 (Management) — https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=17704.07&lawCode=CORP
• Cal. Corp. Code § 17704.09 (Standards of conduct) — https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=17704.09&lawCode=CORP
• Cal. Corp. Code § 17705.03 (Charging order) — https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=17705.03&lawCode=CORP
• Cal. Corp. Code § 17707.03 (Judicial dissolution) — https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=17707.03&lawCode=CORP
• California Secretary of State, Business Programs, LLC Forms — https://www.sos.ca.gov/business-programs/business-entities/forms
• California Franchise Tax Board — Limited Liability Company — https://www.ftb.ca.gov/file/business/types/limited-liability-company/index.html
• FTB Publication 3556, LLC Filing Information — https://www.ftb.ca.gov/forms/misc/3556.html
• IRS Partnership Representative / BBA centralized audit regime — https://www.irs.gov/businesses/partnerships/bba-centralized-partnership-audit-regime
• bizfile Online — https://bizfileonline.sos.ca.gov/