An operating agreement is an agreement among members of the limited liability company (“LLC”) governing the LLC’s management and operations, including, but not limited to, each member’s financial and managerial rights and duties.
An operating agreement is similar in function to corporate bylaws, or analogous to a partnership agreement in multi-member LLCs. In single-member LLCs, an operating agreement is a declaration of the structure that the member has chosen for the company and is sometimes used to prove in court that the LLC structure is separate from that of the individual owner and thus necessary so that the owner has documentation to prove that he or she is indeed separate from the entity itself.
LLCs are very flexible in nature and the operating agreement defines each member or manager’s rights, powers and entitlements. This includes, without limitation, definition of capital accounts and how they are valued, restriction on transfer of membership interests, member’s capital contribution obligations, distributions of profit and allocated tax responsibility, as well as others. This internal document is an agreement set by the LLC’s members that contains provisions for critical items and rules that run the LLC.
Although the State of California does not require LLCs formed or operating within the state to have such an agreement, LLCs operating without one are governed by the state’s default rules contained in the California Revised Uniform Limited Liability Company Act (to be effective as of January 1, 2014).