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What is an Operating Agreement?

The first page of an operating agreementI have used the term “operating agreement” in quite a few of this blog’s posts. However none of those posts explains in detail what a limited liability company (LLC) operating agreement must contain. This post provides that information.

The required contents of an operating agreement depend on the state in which the LLC is formed.

Operating Agreement – California

In California, where I practice, the definition of an operating agreement is set forth in Corporations Code Section 17701.02(s).

“Operating agreement” means the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company, including a sole member, concerning the matters described in subdivision (a) of Section 17701.10. The term “operating agreement” may include, without more, an agreement of all members to organize a limited liability company pursuant to this title.

Two points about this definition are noteworthy.

First, subdivision (a) of Section 17701.10 specifies the subject matter of an operating agreement.

(1) Relations among the members as members and between the members and the limited liability company.
(2) The rights and duties under this title of a person in the capacity of manager.
(3) The activities of the limited liability company and the conduct of those activities.
(4) The means and conditions for amending the operating agreement.

Second, a mere agreement among all members to form an LLC in accordance with applicable provisions of the Corporations Code constitutes an operating agreement. In effect, such an “operating agreement” would be an agreement that the LLC will be governed in all respects by the default provisions of California law.

Operating Agreement – Delaware

In Delaware, Limited Liability Company Act Section 18-101(7) provides the relevant definition.

“Limited liability company agreement” means any agreement (whether referred to as a limited liability company agreement, operating agreement or otherwise), written, oral or implied, of the member or members as to the affairs of a limited liability company and the conduct of its business.

Two points concerning this definition are noteworthy, as well.

First, the statute uses the term “limited liability company agreement”, while acknowledging that the relevant agreement may be called an “operating agreement” or something else.

Second, Delaware’s definition focuses on the members and conduct of the LLC’s business, whereas California’s definition also addresses the manager’s rights and duties and amending the operating agreement.

Operating Agreement is Optional

Finally, a point where California and Delaware laws are the same: An LLC is not obligated to have an operating agreement. Please see:

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
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