Operating Agreements

How to Dissolve a California LLC

Question:  I am a member of a California LLC.  What are the legal requirements to dissolve the LLC?

Answer:  California’s Revised Uniform Limited Liability Company Act (RULLCA) provides four ways to dissolve or terminate a California limited liability company.  The four methods are:

  • The LLC’s Articles of Organization contains a provision that says the LLC must dissolve on the occurrence of one or more events set forth in the Articles of Organization.  Few California LLCs have Articles of Organization that contain this type of provision.
  • The members signed an Operating Agreement that contains a provision that says the LLC must dissolve on the occurrence of one or more events set forth in the Operating Agreement.  Many California LLCs have Operating Agreements that contain dissolution provisions.  For example, if the Operating Agreement says that the LLC will dissolve on the sale of its real property and the LLC sells its real property then the LLC must dissolve.  Cal. Corp. Code Section 17707.01(a).
  • If the LLC ceases to have a member the LLC for 90 consecutive days it must dissolve.  This happens frequently to California single member LLCs when the member is a person and that person dies.  Cal. Corp. Code Section 17707.01(c).  Automatic dissolution can create a nightmare for the heirs of the deceased.  For example, if a single member California LLC owns valuable real estate and the member dies and no member replaces the deceased member within 90 days of the death, the LLC ceases to exist and there is no owner of the real estate.  Solution: One of the reasons we recommend that people own their membership interests in California LLCs through a trust is to prevent the dissolution of the LLC if the single member dies.
  • The last method to terminate a California LLC occurs if a majority of the LLC’s members vote to dissolve the LLC.  Cal. Corp. Code Section 17707.01(b).  If the Operating Agreement requires more than a  majority vote of the members to approve a dissolution then that requirement must be met to dissolve the LLC.

How to Legally Dissolve the California Limited Liability Company

If the necessary number of members of a California LLC vote to dissolve the LLC the member(s) actually dissolve the company by doing the following:

  • The LLC must file a final current year tax return with the California Franchise Tax Board.  Check the applicable Final Return box on the first page of the return, and write “final” across the top.  The LLC must not conduct business in California after its final taxable year.  For more on this topic read the FTB Publication 1038, Guide to Dissolve, Surrender, or Cancel a Business Entity.
  • After filing the final tax return with the FTB, the members must file the California Secretary of State form called Certificate of Dissolution (Form LLC-3) to dissolve (i.e., elect to wind up) a California LLC.  To complete the cancellation process, the LLC members must also file a Certificate of Cancellation (Form LLC-4/7)Note: Form LLC-3 is not required when the vote to dissolve was made by all of the members and that fact is noted on a Certificate of Cancellation (Form LLC-4/7) filed by the members with the California Secretary of State.  Note: If the vote to dissolve was not made by all of the members, a Certificate of Dissolution (Form LLC-3) must be filed prior to or together with Form LLC-4/7.
By | 2016-12-13T21:20:06+00:00 June 30th, 2016|Categories: CA Law, FAQs, How Do I, Operating Agreements, Operating LLCs|0 Comments

New Member of a California LLC Bound by Operating Agreement

Question:  The initial members of my California LLC signed an Operating Agreement.  One of the initial members assigned ten percent of the membership interests to John Doe.  The initial members agreed to admit John as a member.  John refuses to sign the Operating Agreement.  What can we do?

Answer:  The good news for the initial members who signed the Operating Agreement is that Section 17701.11(b) states “A person that becomes a member of a limited liability company is deemed to assent to the operating agreement.”  John Doe is legally bound by the obligations contained in the Operating Agreement despite the fact he never signed it.

Warning to Prospective Members of an Existing California Limited Liability Company:  If you are thinking of becoming a member of an existing California LLC that has an Operating Agreement, do not become a member until you review the LLC’s Operating Agreement and approve all of its provisions.

By | 2016-12-13T21:20:06+00:00 May 10th, 2015|Categories: CA LLC Statutes, FAQs, Operating Agreements, Operating LLCs|0 Comments

California LLC Allocation of Profits

Question:  My friend and I started a California LLC.  We never signed an Operating Agreement.  I assumed that we would share the profits equally, but my friend says that he gets 60% of the profits and I get 40%.  This dispute has ruined our business relationship.  What should I do?

Answer:  Your dispute is too common.  Unfortunately the toothpaste is out of the tube, and it may be too late to solve the huge problem created by the members failure to sign an Operating Agreement that states how profits and losses will be allocated among the members.  The California Revised Uniform Limited Liability Act does not specify how profits and losses will be allocated among members of a multi-member California LLC.

Members of a California limited liability company must agree in an oral agreement or in a written and signed Operating Agreement as to how profits and losses will be allocated among the members.  The problem with an oral agreement is that it is a recipe for disaster because when people disagree they have no way to prove what they previously agreed to.

One of the main reasons all of the members of a multi-member California LLC need to sign an Operating Agreement is so they have proof in the document as to how the profits and losses are allocated among the members.

By | 2015-05-09T10:34:06+00:00 May 9th, 2015|Categories: FAQs, Member Disputes, Operating Agreements, Operating LLCs|0 Comments

Disassociation of a Member of a California LLC

Question:  Can a member of a California LLC disassociate (withdraw or terminate membership) from the LLC at any time even if disassociation is prohibited by an Operating Agreement?

Answer: Yes.  A good Operating Agreement will contain provisions that prevent a member from dissociating or that allow a member to disassociate only on the occurrence of one or more conditions.  See California Corporations Code Sections 17706.01(b)(1) and 17706.02(b).  However, even if a member is prohibited from disassociating the member may quit (disassociate) at any time by notifying the other members of the disassociation.

If the disassociation is prohibited by the LLC’s Operating Agreement, the disassociating member may be liable to the LLC for damages.  California Corporations Code Sections 17706.01(c). The disassociating member will not be entitled to any money or property unless the Operating Agreement provides otherwise.  California Corporations Code Section 17704.04(b).

By | 2016-12-13T21:20:06+00:00 May 2nd, 2015|Categories: FAQs, Operating Agreements, Operating LLCs|0 Comments

California LLC Member’s Liability for Capital Contribution

Question:  A California LLC owes me money, but claims it is broke.  One of the members of the California LLC signed an Operating Agreement in which he promised to contribute $50,000 to the LLC.  The member never paid the money to the LLC.  Can I collect my debt from the member, but you may have to sue the member and the LLC in the same lawsuit?

Answer:  Yes.  California law provides that a member who makes a promise in writing to make a capital contribution is liable to a creditor of the LLC if the member fails to contribute the money to the LLC.  California Corporations Code Section 17704.03(c) states:

“A creditor of a limited liability company that extends credit or otherwise acts in reliance on an obligation described in subdivision (a) may enforce the obligation.”

By | 2015-05-02T11:18:33+00:00 March 25th, 2015|Categories: FAQs, Lawsuits, Operating Agreements|0 Comments

Conditions to Amending an Operating Agreement

Question:  Can the Operating Agreement of a California limited liability contain one or more provisions that create a condition that must be satisfied before the Operating Agreement can be modified?

Answer:  Yes.  RULLCA Section 17701.12(a).  Here are some common conditions members of a California LLC could put into the LLC’s Operating Agreement that must be satisfied before the Operating Agreement can be modfied:

  • The amendment must be approved by a person or entity that is not a member of the LLC.  For example, Homer Simpson’s three children have a CA LLC with an Operating Agreement that says the Operating Agreement cannot be modified unless their father Homer Simpson approve the change.
  • The Operating Agreement cannot be amended unless until after a specified date.
  • The Operating Agreement cannot be modified unless at least two thirds of the members approve the change.
By | 2016-12-13T21:20:13+00:00 March 23rd, 2015|Categories: CA Law, FAQs, Operating Agreements, Operating LLCs|0 Comments

Can a California LLC Have an Oral Operating Agreement?

Question:  My California LLC has three members who never signed an Operating Agreement.  The members agree from time to time as to certain terms and conditions applicable to the LLC such as what actions the manager can take without the approval of all of the members.  If the members of a California limited liability company agree on an oral Operating Agreement is it legally enforceable?

Yes:  California RULLCA Section 17701.02(s) states:

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.”

Caution:  As LLC attorneys who have formed 4,400+ LLCs my father and I have seen too many disputes among members who never signed an Operating Agreement and who cannot agree on LLC issues.  LLC members who don’t have a signed Operating Agreement and rely instead on oral agreements are “cruisin” for a “bruisin.”  Oral agreements result in he said she said disputes among members.  If the members resort to litigation to settle a dispute it is a roll of the dice as to who the jury will believe.

If your California LLC does not have an Operating Agreement signed by all of the members then do yourself and the other members a big favor and arrange for all the members to sign a good, custom Operating Agreement drafted to comply with California’s new Revised Uniform Limited Liability Company Act that took effect on January 1, 2014.

By | 2015-02-25T20:03:50+00:00 February 9th, 2015|Categories: FAQs, Formation Issues, Operating Agreements|0 Comments

Can People Agree on the Contents of an Operating Agreement before Forming an LLC?

Question:  I understand that California LLC law does not require my multi-member California LLC to have an Operating Agreement signed by all of the members.  However, I know that it is prudent that every California LLC have its members sign an Operating Agreement.  Several of us want to form a California LLC, but I am concerned that after we form the LLC we may not agree on the terms and conditions of the Operating Agreement.  Can the prospective members of a to-be-formed California LLC agree on the contents of an Operating Agreement before they actually file the Articles of Organization and form the LLC?

Answer:  Yes.  California RULLCA Section 17701.11(c) states:

“Two or more persons intending to become the initial members of a limited liability company may make an agreement providing that upon the formation of the limited liability company the agreement will become the operating agreement. “

I recommend that if you are considering forming a California LLC with multi-members that would involve a lot of money, services or members’ time, all of the prospective members should definitely sign a contract in which they agree that on forming the LLC each of them will sign the Operating Agreement that is attached as an exhibit to the contract.  The agreement to sign an Operating Agreement must be created as part of a legally binding contract.

Call me, California LLC attorney Richard C. Keyt, J.D., M.S. (accounting), at 844-552-6468 ext. 3 if you need a contract among prospective members to sign an Operating Agreement.

By | 2016-12-13T21:20:14+00:00 February 8th, 2015|Categories: FAQs, Formation Issues, Operating Agreements|0 Comments

Operating Agreement Filed with California Secretary of State

Question:  Do California LLCs have to file their Operating Agreement with the California Secretary of State?

Answer:  No.  California LLC law does not require a California LLC to have an Operating Agreement.  Nor does the law require California LLCs that have an Operating Agreement to file the Operating Agreement with the California Secretary of State.  If a California LLC attempted to file its Operating Agreement with the California Secretary of State it would be rejected.

By | 2015-02-25T20:02:23+00:00 June 19th, 2014|Categories: California Secretary of State, FAQs, Operating Agreements|0 Comments

Standards To Measure Good Faith And Fair Dealing Under NJ-RULLCA

In this article Gianfranco Pietrafesa states “The full title to this article should be ‘prescribing standards to measure performance of the contractual obligation of good faith and fair dealing under the New Jersey Revised Uniform Limited Liability Company Act.’ . . . The New Jersey Revised Uniform Limited Liability Company Act (NJ-RULLCA) includes a contractual obligation of good faith and fair dealing . . . . An LLC operating agreement may not eliminate the contractual obligation of good faith and fair dealing.”

The new California Revised Limited Liability Company Act contains a similar provision.  People who are drafting Operating Agreements for California LLCs should read this article.

By | 2016-12-13T21:20:15+00:00 May 30th, 2014|Categories: Fiduciary Duties, Operating Agreements|0 Comments

How Do I Open a Bank Account for an LLC?

Question: I just formed by new California limited liability company. I now need to open a bank account in the name of the LLC. How do I open the account?

Answer: Tell the bank you want to open a bank account in the name of the LLC. Give the following to the bank officer:

  • A copy of the LLC’s Articles of Organization with either the California Secretary of State’s filed stamp.
  • A few banks also require a copy of the LLC’s Operating Agreement.  If you do not have an Operating Agreement for your California LLC you may hire us to prepare a custom Operating Agreement that complies with California’s new Revised Limited Liability Company Law effective January 1, 2014.

Most banks will allow you to open a bank account in the name of the LLC if you give the bank your social security number, but I recommend that you get an EIN for your LLC instead.  In this age of identity theft, it is better to get an EIN for the LLC so you do not have to give out your SSAN to banks or others from time to time.

By | 2014-06-04T21:51:52+00:00 January 1st, 2014|Categories: CA LLC Formation, Operating Agreements|0 Comments