Single Member LLC Operating Agreement for California
An operating agreement lays out the structure and rules governing an LLC. The the primary document of an LLC. A single member LLC is intended to be used when there will only be a single owner of the LLC.
LIABILITY COMPANY OPERATING AGREEMENT
OF [NAME OF COMPANY] LLC (A CALIFORNIA LIMITED LIABILITY COMPANY)
DATED AS OF [DATE]
THIS LIMITED LIABILITY COMPANY AGREEMENT (the "Agreement"), has been executed by the member (the "Member") set forth on Exhibit A annexed hereto, for the purposes of setting forth the rights and obligations of the Member in and to ____________ (the "Company") formed pursuant to the provisions of the California Revised Uniform Limited Liability Company Act (the "Act").
1. ARTICLE 1: THE COMPANY AND ITS BUSINESS
1.1. Formation of Company. The Company was formed pursuant to the provisions of the Act. The rights and liabilities of the Member, the management of the affairs of the Company and the conduct of its Business shall be as provided in the Act, except as otherwise expressly provided herein.
1.2. Name. The name of the Company shall be [Company Name], however, the Manager(s), subject to the terms of this Agreement, may change the name of the Company at any time and from time to time upon written notice to the Member.
1.3. Term of Company. The term of the Company commenced upon the filing of the appropriate formation documents in the Office of the Secretary of State of the State of California in accordance with the Act and shall continue until terminated in accordance with this Agreement or as provided by law.
1.4. Purposes of Company. The purpose of the Company is to (i) engage in any lawful act or activity for which limited liability companies may be organized under the Act; and (ii) do all things necessary, suitable or proper for the accomplishment of, or in the furtherance of the Company's Business.
1.5. Offices. The Company shall maintain its primary office and principal place of business at [Office Address], or at such other places of business as the Manager(s)deems advisable for the conduct of the Company's Business and may from time to time may change the Company's primary office after notifying the Member in writing of any such changes.
2. ARTICLE 2: CAPITALIZATION
2.1. Capital Contributions. The Member shall make such capital contributions, consisting of cash or real or personal property, to the Company as he, she, or it deems appropriate from time to time. The Member's initial capital contribution shall be provided on Exhibit A annexed hereto.
2.2. Liability of Member and Affiliates. Except as otherwise provided by applicable law, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company. Neither the Member, any person affiliated with the Member nor any officer of the Company shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being the Member, an affiliate of the Member or an officer of the Company.
3. ARTICLE 3: PROFITS AND LOSSES; DISTRIBUTIONS
3.1. Profit and Losses. All profits and losses of the Company will be allocated to the Member.
3.2. Distributions. All distributions of cash, property, profits or otherwise and the timing thereof will be made at the discretion of the Member.
4. ARTICLE 4: MANAGEMENT
4.1. Management by the Member. The business and affairs of the Company shall be managed by the Member. The Member shall have full power and authority to take any action and execute any documents on behalf of the Company. The Member is hereby designated as the sole manager of the Company. The Member is the agent of the Company for the purpose of the Company's business, and for the purpose of the execution in the name of the Company of any instrument for carrying on in the usual way the business of the Company. The Member's acts bind the Company, unless such act is in contravention of the Act or this Agreement.
4.2. Expenses. The Company shall pay all of its own operating, overhead and administrative expenses of every kind. The Member and the officers of the Company, shall be reimbursed for all reasonable costs and expenses they may have incurred or may hereafter incur on behalf of the Company.
4.3. Officers. The Member shall have the right to delegate any portion of his, her, or its duties as the Member may determine to officers or to other persons; provided, however, that no such delegation of authority shall relieve the Member of his, her, or its obligations hereunder. The Member may, from time to time, designate or appoint one or more officers of the Company, including, without limitation, one or more chairmen, a vice chairman, a chairman emeritus, a chief executive officer, a president, one or more vice presidents, a secretary, an assistant secretary, and/or a treasurer. Such officers may, but need not be, employees of the Company, or an affiliate of the Company. Each appointed officer shall hold office until: (i) his/her successor is appointed by the Member; (ii) such officer submits his/her resignation; or (iii) such officer is removed, with or without cause, by the Member. All officers shall have the authority to perform duties to conduct the day to day operations of the Company consistent with and in the ordinary course of its business, subject to the terms and provisions of this Agreement and to the direction and authorization of the Member. Each officer shall perform his/her duties as an officer in good faith and with such degree of care, which an ordinarily prudent person in a like position would use under similar circumstances.
4.4.1. Limitation of Liability. Neither the Member nor any officer of the Company shall be liable to the Company for any loss or damages resulting from errors in judgment or for any acts or omissions that do not constitute willful misconduct or gross negligence. In all transactions for or with the Company, the Member and the officers of the Company shall act in good faith and in a manner believed to be in the best interests of the Company.
4.4.2. Settlement of Claims. The Company, its receiver or its trustee, as the case may be (but not the Member personally), shall indemnify and defend the Member and the officers of the Company against and hold them harmless from any and all losses, judgments, costs, damages, liabilities, fines, claims and expenses (including, but not limited to, reasonable attorneys fees and court costs, which shall be paid by the Company as incurred) that may be made or imposed upon such persons and any amounts paid in settlement of any claims sustained by the Company by reason of any act or inaction which is determined by the Member or the officers of the Company, as the case may be, in good faith to have been in the best interests of the Company so long as such conduct shall not constitute willful misconduct or gross negligence.
4.4.3. Indemnified Matters. In the event of settlement of any action, suit or proceeding brought or threatened, such indemnification shall apply to all matters covered by the settlement except for matters as to which the Company is advised by counsel retained by the Company that the person seeking indemnification, in the opinion of counsel, did not act in good faith. The foregoing right of indemnification shall be in addition to any rights to which the Member or the officers of the Company may otherwise be entitled and shall inure to the benefit of the executors, administrators, personal representatives, successors or assigns of each such person.
4.4.4. Indemnification Limited To Company Assets. Any right of indemnity granted under this Section 4.4. may be satisfied only out of the assets of the Company, and neither the Member nor any officer of the Company shall be personally liable with respect to any such claim for indemnification.
4.4.5. Liability Insurance. The Member shall have the power to purchase and maintain insurance in reasonable amounts on behalf of itself and the officers, employees and agents of the Company against any liability incurred by them in their capacities as such, whether or not the Company has the power to indemnify them against such liability.
5. ARTICLE 5: BOOKS AND RECORDS
5.1. Books of Account. Complete books of account shall be kept by the Member at the principal office of the Company, or at such other office as the Member may designate.
5.2. Bank Accounts. The Member may maintain one or more bank accounts for such funds of the Company as he, she, or it shall choose to deposit therein, and withdrawals therefrom shall be made upon such signature or signatures as the Member shall determine.
5.3. Fiscal Year. The fiscal year of the Company shall end on [Date Fiscal Year Ends], except as otherwise required.
5.4. Tax Election. The Member shall have the authority to cause the Company to make any election required or permitted to be made for Income tax purposes if the Member determines, in his, her, or its sole judgment, that such election is in the best interests of the Company.
5.5. Tax Matters. The Member shall be the tax matter partner of the Company, and it or its authorized agent, shall be the only person authorized to prepare, execute and file tax returns and tax reports on behalf of the Company and to represent the Company before the Internal Revenue Service and any state or local taxing authority.
5.6. Title to Assets. Title to, and all right and interest in and to, the Company's assets, shall be acquired in the name of and held by the Company, or if acquired in any other name, held for the benefit of the Company.
5.7. Bankruptcy of the Member. The bankruptcy of the Member will not cause the Member to cease to be a Member of the Company, and upon the occurrence of such event, the Company shall continue without dissolution.
6. ARTICLE 6: DISSOLUTION AND TERMINATION
6.1. Dissolution. The Company shall be dissolved and terminated upon the earliest to occur of the following:
6.1.1. the entry of a decree of judicial dissolution of the Company; or
6.1.2. when the provisions of Section 6.3 below have been met; or
6.1.3. the retirement, resignation or dissolution of the Member or the occurrence of any other event that terminates the continued membership of the Member unless the business of the Company is continued in a manner permitted under the Act, or
6.1.4. when otherwise determined by the Member.
6.2. Distribution of Assets. In the event of dissolution, the Company shall conduct only such activities as are necessary to wind up its affairs (including the sale of the assets of the Company in an orderly manner), and the assets of the Company shall be applied in the manner, and in the order of priority, as set forth under the Act.
6.3. Termination. The Company shall terminate when all property owned by the Company shall have been disposed of and the assets, after payment of, or due provision has been taken for, liabilities to Company creditors, shall have been distributed. Upon such termination, the Member or the Company's officers shall execute and cause to be filed all documents necessary in connection with the termination of the Company.
7. ARTICLE 7: MISCELLANEOUS
7.1. Assignments. The Member may assign in whole or in part his, her, or its interest in the Company on such terms and conditions as the Member determines, in his, her, or its sole discretion.
7.2. Admission of Additional Member. One or more additional member may be admitted to the Company with the prior written consent of the Member.
7.3. Severability. If any of the provisions of this Agreement is held invalid or unenforceable, such invalidity or unenforceability shall not affect the other provisions hereof which can be given effect without the invalid provision, and to this end the provisions of this Agreement are intended to be and shall be deemed severable.
7.4. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of California without regard to the conflicts of law rules of said state.
7.5. Amendments. This Agreement may be amended or modified from time to time only upon the written consent of the Member (which consent may be evidenced by the execution of an amendment and restatement of this Agreement).
7.6. No Third Party Beneficiaries. None of the provisions of this Agreement shall be for the benefit of or enforceable by any of the creditors of the Company or any other person not a party to this Agreement.
IN WITNESS WHEREOF, the undersigned Member caused this counterpart signature page to this Limited Liability Company Agreement to be duly executed on the date set forth below, to be effective as of the date first above written.
_________________________ Sign Here
EXHIBIT A: Member Capital Contribution
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What Is a Single-Member LLC Operating Agreement?
A single-member limited liability company (LLC) operating agreement is a document prepared when a business is created that lays out how the business will be operated. This document should be created with the help of a lawyer.
The following definitions are important to understanding single-member LLC operating agreements:
- Single-member LLC: A business with one owner or a company owned by spouses. The single member might also be an entity such as a trust, partnership, corporation, or another LLC.
- Limited liability company: A form of business organization that protects the members or owners from liability. It combines aspects of a corporation and a partnership. An LLC might be managed by its owner or by managers who aren't owners.
- Operating agreement: A document that describes the business's operations and the agreement between the members of the business. An operating agreement isn't required for an LLC, but all LLCs should have one.
An operating agreement is similar to a corporation's by-laws, which guide the board of directors in decision making, or to a partnership agreement, which guides partnerships in making good decisions for their business.
By-laws are required for a corporation, but similar to an LLC's operating agreement, a partnership agreement isn't required. Because LLCs and partnerships function in similar ways, operating agreements and partnership agreements will be similar.
Reasons Your Single-Member LLC Needs an Operating Agreement
The importance of a multi-member LLC operating agreement may be more obvious, but that doesn't mean that a single-member LLC operating agreement is any less important.
Multi-member LLC operating agreements are designed to solve problems and resolve disputes that are between the owner or members of the multi-member LLC. Although you won't face the same issues with a single-member LLC, there are still several reasons to set up an operating agreement.
1. To Describe the Single-Member LLC
A single-member LLC operating agreement describes how the single-member LLC operates. It also explains the formation of the business and the procedures followed, as well as how LLC funds are distributed to the owner. This ensures that appropriate records are being kept.
2. To Separate the Owner From the Business
A single-member LLC operating agreement lays out the business's financial affairs and operation policies. This helps to separate the business's affairs from the affairs of the single owner, which is beneficial for tax purposes.
Making the LLC a clearly defined independent entity helps protect the owner's personal assets. This separation is crucial if there is ever a liability issue.
3. To Clarify Succession
What happens if the owner dies or can't run the business? A single-member LLC operating agreement lays out what happens in the event that a succession is needed.
Without a plan for succession, it might be difficult for your family or business members to continue the business or to dissolve the business without a lengthy legal battle.
The operating agreement should also lay out who will manage and run the business if the owner isn't able to do so anymore.
4. To Prevent "Default Rules"
Without an operating agreement, a single-member LLC is subject to a state's "default rules." The state is the one in which an LLC is organized. Most business owners don't want the state to tell them how to run their business and spend the assets, and a single-member LLC operating agreement lets the business make the decision.
The operating agreement doesn't have to be filed with the state, but it should be kept easily accessible at your business's official location.
5. To Inform Lenders
A single-member LLC operating agreement is also beneficial for your LLC as it details information about how your business will run that can be given to potential lenders or funders.
Someone who is potentially going to give your business money wants to see how that money will be used and know that your business is organized before investing. A single-member LLC operating agreement will be one of the things potential lenders will look at.
The Elements of a Single-Member LLC Operating Agreement
Just as each business is unique, each operating agreement is unique. The owner of the single-member LLC can write the operating agreement in any way they want. However, there are a few elements that should be included in every single-member LLC operating agreement. The basic elements should cover how you're organizing and running your business. Those elements are as follows:
Organization and ownership: Since you are the only owner of your business, this is the easy part. Make clear that as the sole owner, you have all of the voting rights. Additionally, this section should be clear that you as the owner have limited liabilities for the debts of the LLC.
Management: This section is particularly important for a single-member LLC that is managed by someone other than the owner. Clearly lay out the powers, rights, and responsibilities of the manager and state how the manager will be chosen or promoted. You can also state who the interim manager will be if the manager becomes unavailable.
This section should include a statement limiting liability for the managers. The statement should explain that the manager will not be held personally responsible for or be expected to pay off the business's debts, obligations, or other liabilities.
Taxes and financial matters: Even if they choose to be treated as a pass-through entity, LLCs are required to file an annual tax return. In contrast, a single-member LLC may be treated as disregarded entities. This makes a single-member LLC exempt from filing a federal tax return. This saves the single-member LLC time and money. It might also allow the single-member LLC to take tax benefits that aren't generally available to LLCs. Some states require single-member LLCs to file state tax returns, even if they're exempt from filing federal tax returns.
Contribution and distribution of capital: The single-member LLC operating agreement should make clear the capital contributions that the single member makes. If the single member contributes something other than cash, the value of that contribution should be made clear.
This section should also describe how the single-member LLC will distribute losses and profits to the single member. These profits and losses must be reported on the single member's tax return.
Transferring shares: This element of a single-member LLC operating agreement is where the owner can state how business shares can be shared in whole or part. If this isn't expressly stated, the default will be whatever state laws dictate.
Dissolution: This is the clause that puts a contingency plan in place in case you as the owner are unable to continue the business. This will lay out how the LLC should be dissolved, if that's ever necessary. Although this is likely the furthest thing in your mind when beginning your LLC, it's good to have a provision in place for every possibility.
Trigger events: No one wants to think of their own death or bankruptcy, but when creating a single-member LLC operating agreement, it's necessary. This provision puts into place what should happen to the single-member LLC in the case of the death or bankruptcy of the owner. Without this provision, the single-member LLC might be forced to dissolve when the owner dies, even if there is someone willing to step up as manager or owner.
General or miscellaneous provisions: The single-member LLC operating agreement should set the basic rules for the management and operation of the LLC. This might include rules on holding meetings and taking votes. Though you as the owner and single member might be the only one at the meetings, it's a good idea to have guidelines.
Signatures: Any agreement needs a signature. Even if you're the sole member, be sure to sign the document, make copies, and create a digital copy or scan. Keep the copies in a few different places so that you're guaranteed to have one when you need it.
Each company that creates a single-member LLC operating agreement will structure it slightly differently and include different information. The same principle applies to different lawyers whom you might ask to draw up a single-member LLC operating agreement. There's no one-size-fits-all draft when it comes to this type of document.
The process of creating an operating agreement will help you as the owner to see the document and the business plan through someone else's eyes. Creating this document might also make clear issues that you have with your business plan. This is an opportunity to fix those problems before they become any bigger.
Setting Up a Single-Member LLC
It's imperative that when setting up a single-member LLC, an operating agreement is drafted, checked by a lawyer, and signed by the single-member of the LLC.
Keep in mind that the laws governing LLCs differ from state to state. Some states - such as California, Georgia, Florida, Utah, New York, Oregon, Colorado, and Kansas - offer minimal protection to single-member LLCs, while others offer a lot of protection. When setting up your single-member LLC, carefully consider in which state you want to form your business. Your decision will affect the way your single-member LLC is treated.
You should also review case law to determine the potential pitfalls of a single-member LLC. For instance, the courts in two states that are typically favorable to single-member LLCs, Nevada and Wyoming, have recently ruled against single-member LLCs in specific situations. In the September 2014 case of In re Cleveland, the U.S. District Court in Nevada decided that a bankruptcy trustee could manage the LLC in place of the single owner. Two months later in the Greenhunter case, the Wyoming Supreme Court held a Texas company that was the single member of a Wyoming LLC liable for the LLC's debts.
Benefits of a Single-Member LLC Operating Agreement
A single-member LLC operating agreement is your protection as the owner against lawsuits and potential liability. Here are a few ways that the single-member LLC operating agreement benefits the single-member LLC.
1. You Can Set Your Own Rules
Without a single-member LLC operating agreement, your company will be bound by the default rules of your state if any litigation or liability is brought against your company.
Many states do not have laws that support or benefit a single-member LLC in the event of litigation. By creating an operating agreement, you protect your business from the default rules of your state.
2. You Can Protect Your Personal Assets
An operating agreement creates separation between your single-member LLC as a business entity and yourself as a private individual. That way if a lawsuit is ever brought against the business, your personal assets - such as your investments, home, and car - will not be affected.
3. You Can Facilitate Future Growth
A successful business is one that has the potential to grow and reaches that potential. A single-member LLC operating agreement puts down the rules for how investors will be treated, how investments will be repaid, and whether the investors will have voting rights as the business grows. This gives the owner the ability to lay out exactly how the business will be run in the future and as it grows.
4. You Can Control Day-to-Day Operations
A single-member LLC operating agreement can also help the owner to lay out how the business will be run day-to-day, explaining the responsibilities and powers that a manager can have.
5. You Can Limit the Powers of a Successor-Manager
A single-member LLC operating agreement can also limit the powers that are given to the chosen successor manager. The single-member LLC operating agreement can fully lay out any plan that the single-member deems necessary in the event that management of the company must change hands.
- Why should I set my business up as a single-member LLC versus a sole proprietorship or S corporation?
It might seem easier as a business owner to choose a sole proprietorship or an S corporation, but there are some benefits of an LLC that aren't available to those types of businesses.
For example, only an LLC provides the level of flexibility that an owner might need, including the ability to name a successor. In a corporation, the successor is named by the Board of Directors. In the case of a sole proprietorship, there may be no one left to make the decision as the sole proprietor is often the sole director, sole officer, and sole shareholder.
- Is a single-member LLC operating agreement really necessary?
Yes! Just because you're the only member of a single-member LLC doesn't mean that rules and plans don't need to be written down.
A single-member LLC operating agreement is important so that you can share the business plan with potential investors and plan for any problems, such as the death of the owner or bankruptcy. It is also necessary to protect your personal assets in the event of any liability lawsuits.
A single-member LLC operating agreement can be as specific or as general as you need for your business. Contact one of the highly-trained lawyers at UpCounsel for consultation on what your single-member LLC operating agreement should look like.
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