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Is an Operating Agreement Required for an LLC?

First page of OA for post that answers: Is an operating agreement required for an LLC?I have written many times about limited liability company operating agreements. This post answers the following question: Is an operating agreement required?

As is the case for many issues pertaining to limited liability companies, the answer varies from state to state. To answer this question, we need to examine the relevant statutes for each state.

Most States, Operating Agreement Not Required

Most states do not require that an LLC have an operating agreement. For example: (more…)

Under RULLCA Operating Agreements Have Limits

California State Flag, symbolizing this post about RULLCA operating agreementsAt the beginning of this year, the California Revised Uniform Limited Liability Company Act (RULLCA) took effect. (See RULLCA Brings New LLC Laws to California in 2014.) This post discusses how under RULLCA operating agreements for LLCs have a wide variety of limits.

RULLCA operating agreements‘ limits are addressed in Corporations Code Section 17701.10. Unfortunately, that section’s discussion of mandatory provisions is pretty difficult to understand for the following reasons. (more…)

LLCs: Why an Operating Agreement is Important

Logo for Quora, where Dana Shultz discussed why an operating agreement is importantThis post discusses why an operating agreement is important for every limited liability company (LLC). It expands upon an answer I provided on Quora several months ago. (See In simple terms, why are operating agreements important?)

An operating agreement is an agreement among the members of an LLC. It addresses relations among the members and how the LLC will conduct its affairs. (more…)

A Member can Withdraw from an LLC, Despite the Operating Agreement

Photo of an exit sign, symbolizing the right of a member to withdraw from an LLCFrom time to time, I am asked how a member of a limited liability company (LLC) can stop being a member. In legal terms, this is referred to as a member wishing to withdraw from an LLC.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Under this new law, the term “withdraw from a limited liability company” was changed to “dissociate as a member” or “withdraw as a member”.

A well-written Operating Agreement will address this question directly. It will specify the circumstances under which members may withdraw from an LLC, and the consequences of withdrawal.

(more…)

How to Form an LLC

Logo for Quora, where Dana Shultz answered a question about how to form an LLCI am writing this post about how to form an LLC (limited liability company) because of a question that I answered on Quora. Please see What are the basic requirements for forming of a LLC in US?

The following is an overview of the steps required to form an LLC properly in the U.S.: (more…)

Units are to LLCs as Shares are to Corporations

Logo for Quora, where Dana Shultz answered a question about LLC unitsI am writing this post about limited liability company (LLC) units because of a question that I answered on Quora. Please see Why would an operating agreement for an LLC have a Schedule A and also a quantity of Class A interests?

LLC Membership Interests: Percentages

We can specify LLC membership interests in either of two ways. (more…)

CA-RULLCA Receives Corrections Two Years Later

Photo of CA Corporations Code, which contains CA-RULLCA statutesIn RULLCA Brings New LLC Laws to California in 2014 , I explained how California’s version of the Revised Uniform Limited Liability Company Act (“RULLCA” or “CA-RULLCA” – Corporations Code Sections 17701.01 – 17713.13 ) was to take effect January 1, 2014. This post describes changes to CA-RULLCA that took effect on January 1, 2016.

Most of the changes were minor clean-up of the sort that one expects when major new legislation is adopted. However, some of the changes are noteworthy. (more…)

Yes, a Stranger Can Cancel Your LLC!

Logo for Quora, where Dana Shultz answered a question about how a stranger can cancel your LLC or corporationThis post discusses how (amazingly!) an unauthorized stranger can cancel your LLC (limited liability company) or corporation. It is based on a Quora question that I answered. See What prevents someone from filing a restated certificate of incorporation for a Delaware corporation in which they are not authorized to do so?

Unfortunately, the ease with which entity-formation documents can be filed in the U.S. – while facilitating business startups – does allow unauthorized filing of such documents. This means that, whether accidentally or intentionally, a stranger can cancel your LLC (or corporation). (more…)

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). (more…)

How to Dissolve a Delaware Corporation or LLC

Seal of the Delaware Division of Corporations, symbolizing this post by Dana Shultz about how to dissolve a Delaware corporation or LLCThis post discusses how to dissolve a Delaware corporation or LLC (limited liability company) – i.e., how to terminate the entity’s existence.

For information about dissolving California entities, see How to Kill Your Company when that’s the Only Choice. (more…)

How Do We Issue LLC Membership Interests?

Logo for Quora where Dana Shultz answered a question about LLC membership interestsWhen one forms a limited liability company (LLC) without a lawyer, there is a high likelihood that LLC membership interests will not be issued properly. This post describes how to issue LLC membership interests. It is adapted from a Quora question about LLC membership vesting that I answered.

Properly-Issued LLC Membership Interests

If LLC membership interests are issued properly, one would expect to see several things. (more…)

RULLCA Brings New LLC Laws to California in 2014

Logo of the California Secretary of State, symbolizing RULLCA (the California Revised Uniform Limited Company Act)RULLCA is an abbreviation for the California Revised Uniform Limited Liability Company Act. That Act will bring new LLC laws to the state starting January 1, 2014.

RULLCA – Up to Date and in the Mainstream

RULLCA is intended to reflect changes in LLC law during the past 20 years. Also, it will make California’s LLC law more similar to LLC law in other states.

Perhaps most interesting, the new law applies automatically to all California LLCs in existence as of the effective date. It will apply to all out-of-state LLCs that are registered in California, as of that date, as well. No new documents need be filed with the Secretary of State. The new law has neither opt-in nor opt-out procedures.

(more…)

How Do We Add a New LLC Member?

Photo of signing a contract, symbolizing amending an operating agreement to add a new LLC memberRecently, I have seen several limited liability company (LLC) members ask, online, how they can add a new LLC member. This post provides the answer, which is pretty simple.

Short answer: One must amend the Operating Agreement to add a new LLC member.

Slightly longer answer: An Operating Agreement (OA) can be oral or written. A written OA is better because it clearly documents the members’ agreement concerning the LLC.

(more…)

Do LLC Officers Have a Fiduciary Duty?

Picture of a meerkat on duty, symbolizing whether LLC officers have fiduciary duties

Officers of a corporation have a fiduciary duty to both the corporation and its shareholders. (See California Officers Need to Be More Careful than Directors.) I recently had to consider, for a limited liability company in California, whether LLC officers have a similar duty.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

I was preparing the operating agreement for a client’s LLC. The client was to be the sole member (equity owner) and manager. (more…)

How Can I Have Reverse Vesting in an LLC?

Quora logo

I recently received, via Quora, a private question about setting up an LLC membership interest (rather than shares of a corporation) with reverse vesting (see Rewarding Key Personnel: Restricted Stock or Options?). That question, and my answer, are reproduced below with minor editing.

Q. I am starting a company and forming as an LLC. My co-founder will received a reverse-vested membership percentage. I’ve found plenty of sample restricted stock agreements, but nothing for LLCs and memberships. Do you have any suggestions where I can find a sample agreement? (more…)

LLC Accounting – Allocations vs. Distributions

Accountant's green and white ledger page, symbolixing LLC accounting practices

An entrepreneur who was trying to prepare a limited liability company (LLC) Operating Agreement on his own (apparently using someone else’s as a template) was puzzled by the concept of “sharing losses”. I could tell right away that he was not familiar with two fundamental concepts of LLC accounting: Allocations vs. distributions.

Before going further, I need to make two disclaimers:

  1. This post is not about taxes.
  2. The following discussion is extremely simple, addressing only the most basic considerations. One of the great things about LLCs is that the members can agree to make allocations and distributions in any way they desire to meet their business needs. As a result, LLC accounting can be far more complex than the following might suggest.

(more…)

Which Financial Information Must an LLC Provide to its Members?

Photo of a portion of a balance sheet, symbolizing financial information that an LLC must provide to its members

Several months ago, I wrote “Which Financial Information Must a Corporation Provide to its Shareholders? “ This post – prompted by a client’s question – discusses the financial information that a California limited liability company must provide to its members. It also explains that such information cannot be waived by any member.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014). (more…)

Who Can Sign a Contract for an LLC?

Photo of hand holding a pen, symbolizing who can sign a contract

Several months ago, I answered the question Who Can Sign Contracts for a Corporation? This post addresses who can sign a contract for a limited liability company (LLC).

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The LLC’s Articles of Organization may address who can sign a contract, but this rarely occurs. The subject is more likely to be addressed in the Operating Agreement.

(more…)

Forming an LLC: Figuring Out What’s Really Required

LinkedIn logo

Here (slightly edited) are a LinkedIn question and my answer (which no longer are available at LinkedIn because it Q&A feature was discontinued). Q. I need to get an operating agreement for my Nevada LLC startup. I plan on selling membership in the future. There are online services that do this for cheap, but I’m unsure about doing that. This is a bootstrapped startup, so I have very little/no cash to pay for an attorney at this point in time. Plus I haven’t been able to find a good referral to a NV business attorney.

A. I’m afraid that I can’t provide a useful direct answer to your question (I don’t know how to get something – especially something good – for nothing), but I can provide some warnings because I see several red flags popping up.

(more…)

Can I Assign My LLC Membership?

For Sale By Owner Sign

Recently I have received several questions about assigning LLC (limited liability company) memberships. Here is a brief summary of California law on this topic.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The applicable statutes are Corporations Code Sections 17705.01-17705.04. If assignment of membership interests (known as “transferable interests” under RULLCA) is not covered in the LLC’s Articles of Organization or Operating Agreement, the the following statutory provisions apply:

Can Personal Creditors Threaten My LLC?

I recently answered an Avvo question about whether personal financial problems would create trouble for the LLC that an individual was forming. The question and answer, substantially edited, are provided below.

Q. I am starting a new company. I wish to establish an LLC. I had a recent foreclosure and they are coming at me for 70k on a 3rd against the property. I also have a credit card judgment for 18k and 30k of other outstanding debt. Question is whether an LLC can protect me. I have investors placing 50-100k in this project and i cannot have any issues moving forward. [Emphasis added.] (more…)

Why does our Operating Agreement have a Spousal Consent?

I recently received questions about whether and why Spousal Consents are necessary with respect to certain business-ownership agreements. Here is a summary of the most important points that you need to know.

California is a community property state. If, during marriage, an individual acquires an interest in a business, the individual’s spouse has a community-property interest in that business.

(more…)

Funding Your LLC: Avoiding Mistakes

I recently answered an Avvo question about capital contributions and loans to an LLC. The question and answer are reproduced, in somewhat edited form, below.

Q: I am the sole member of an LLC. What is the best way to make capital contributions? Can I do this in the form of a loan? (more…)

Should We Issue LLC Membership Certificates?

Picture of LLC membership certificatesA friend recently asked whether his limited liability company, which was seeking investors, should issue LLC membership certificates.

The Section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Here are the points that I made in my response. (more…)

Can I compete with my own LLC?

I recently had a Q-and-A dialogue on Avvo with an LLC member-manager who had a falling out with the other (50%) member and wanted to know whether he could form a separate business that would compete with the existing LLC. An edited version of our exchange appears below.

Q. I have an LLC with a partner. We each own 50% of the business (its an e-commerce store) and we’re member-managers. I’d like to buy him out, but his price is higher than I’m willing to pay. I have been pondering starting another e-commerce store selling kind of the same thing. Question is a) Would an e-commerce business out there competing for new customers constitute a breach of fiduciary duty? b) Would it be possible to rescind title as manager in the LLC which would eliminate that non compete fiduciary duty of a manager?

(more…)

Can we kick one of the members out of our LLC?

I recently ran across a situation where several members of a limited liability company wanted to get rid of a fellow member whose disruptive behavior was harming the LLC, but they did not know whether or how they could kick him out.

The section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

California Corporations Code Sections 17706.02(b) and (c) say that an LLC operating agreement may provide for dissociation of a member. Upon dissociation, the member loses the right to participate in the LLC’s activities and holds any transferable interest in the LLC as a transferee. (more…)

Can I Form an LLC without a Lawyer?

Logo of the California Secretary of State, symbolizing filing Articles of Organization for an LLC without a lawyerRecently, several start-up entrepreneurs have asked me whether they can form a limited liability company – LLC – without a lawyer available to help. The following answer reflects practices in California.

Filing Articles of Organization for an LLC without a Lawyer is Easy

The first step, filing Articles of Organization with the Secretary of State, is easy – no lawyer is required. (Unless you want expedited turnaround, in which case a lawyer who has an existing relationship with a commercial filing service in Sacramento is invaluable.)

(more…)

What is Dissociation?

"Goodbye Friends" sign for post about dissociation from a partnership or LLC

This post explains what dissociation is. This is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology.

Definition of Dissociation

Dissociation is the process by which one:

  • Stops being a member of a limited liability company (LLC); or
  • Stops being a partner in a partnership.

Alternatively, this process sometimes is called withdrawal.

(more…)

You Can’t Just Stop Being a Shareholder

Logo for Quora, where Dana Shultz answered a question about how you can't just stop being a shareholderThis post explains why, in the U.S., one can’t just stop being a shareholder. I decided to write it after addressing this issue on Quora. Please see Corporate Law: What is the best method to abandon stock in a private company?

Ways to Stop Being a Shareholder

Corporate law does not permit a shareholder to unilaterally dispose of his or her shares. As a result: (more…)

How Should I Use a Fictitious Business Name?

Logo for Quora, the source for a question about fictitious business names

This post is adapted from my answer to a Quora question about use of a fictitious business name (FBN): Q. Must an LLC with a fictitious business name display the LLC name on its website?

A. In my opinion, an entity’s proper name and complete identification should be provided in every agreement. Agreements include website terms of service. Example showing how to include both the entity name and the FBN:

[Company Name], LLC, a California limited liability company doing business as [Fictitious Business Name], with a place of business at [address]

(more…)

How Much Does It Cost to Incorporate?

Picture of antique cash register - representative of the post's topic, the cost to incorporate a business

This post about the cost to incorporate in the U.S. is an Advertisement under Rule of Professional Conduct 1-400, Standard 5 (now subject to Chapter 7 of the Rules of Professional Conduct that took effect on November 1, 2018).

Recently I have seen a huge increase in the number of inquiries from prospective clients – especially foreign companies – interested in forming a corporation. One of their first questions usually is, “How much does it cost to incorporate?” This post answers that question.

First, though, I need to make a couple of points:

  • The following is merely illustrative. While the services described below suffice for many clients, we can know whether they are right for you only after we discuss your specific requirements in detail.
  • The only way we can agree that I will provide incorporation services is via an engagement letter signed by both of us. (The engagement process is discussed below).

(more…)

Legal Services

Statue of Justice representing legal services

Dana Shultz recently retired from the practice of law. As a lawyer, Dana dispensed as much business advice as legal advice. Accordingly, although he no longer is practicing law, Dana occasionally provides business consulting services to owners of small businesses.

If you need legal representation, Dana provides referrals to experienced business lawyers.

The remainder of this page is being retained online for archival purposes.


This description of Dana Shultz’s legal services is an Advertisement under Rule of Professional Conduct 1-400, Standard 5 (now subject to Chapter 7 of the Rules of Professional Conduct that took effect on November 1, 2018).

Brief summary:  I help clients to

  • form their businesses,
  • do their deals, and
  • keep out of trouble.

Dana Shultz provides the essential legal services that startup and early-stage companies in the San Francisco (California) Bay Area typically need. You may read many Client Testimonials about Dana’s services. (more…)

Assessing Personal Liability – Read Formation Documents Carefully!

A client, majority shareholder in a California corporation, asked whether there was any way to make a minority shareholder pay part of the corporation’s losses to date. In this particular case, the answer was “no” – but the question got me thinking about when a corporate shareholder or LLC member might be have personal liability beyond the amount payable for the ownership interest.

The LLC section reference and content below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

A century ago, corporations routinely issued assessable shares, i.e., shares that carried an obligation for the shareholder to pay additional amounts to the corporation under certain circumstances, such as to cover losses or to buy property. Today, however, almost all shares are non-assessable.

(more…)

How to Kill Your Company when That’s the Only Choice

Yesterday I wrote about ways that businesses with two equal owners can avoid management deadlocks (Resolving Small-business Disputes: The 50-50 Deadlock). Today I am writing about dissolution, i.e., termination of a California entity’s existence – the only reasonable outcome if a serious deadlock cannot be resolved.

LLC section references below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The essence of the dissolution process for a California corporation is as follows: (more…)

Resolving Small-business Disputes: The 50-50 Deadlock

On occasion when I help a client form a new corporation or limited liability company (LLC), the company will have two owners, each owning 50% of the company.

A major risk with 50-50 ownership is that disagreement on an important issue can deadlock the company. In an extreme situation, the dispute might even put the company out of business!

(more…)

Pre-formation Contracts: Avoiding Personal Liability

Logo for LinkedIn, where Dana Shultz answered a question about pre-formation contractsThis post is based on my answer to a LinkedIn question [before the LinkedIn Answers feature was terminated] – the answer would be similar for a contract entered into before a corporation, rather than LLC, is formed:

I signed a lease for office space one day before my LLC became active. Am I personally responsible for the lease? (more…)