Forming an LLC in California – The Formation Documents

1. Articles of Organization

To form an LLC in California, the organizers must sign and deliver the articles of organization to the SOS for filing. An LLC is formed when the SOS has filed the articles. (Cal. Corp. Code § 17702.01(a), (d).) Although RULLCA requires only minimal information in the articles, the organizers should consider whether to include any additional provisions (Cal. Corp. Code § 17702.01(c)).

Articles of organization must be filed using Form LLC-1, available on the SOS website (Cal. Corp. Code § 17702.01(a) and see SOS: Articles of Organization (Form LLC-1)). The SOS will reject articles of organization filed using a self-drafted form.

Required Provisions

The articles of organization must include:

• The name of the LLC, which must comply with RULLCA’s requirements.
• A statement of the LLC’s purpose.  As a point of practice my firm usually designates the LLC purpose “is to engage in any lawful act or activity for which LLCs may be organized under RULLCA”.
• The following addresses:
  • the street address of the LLC’s initial designated office; and
  • if different, the mailing address of the LLC.
• The name and street address of the LLC’s initial agent for service of process (Cal. Corp. Code § 17701.13(c)). If a corporate agent is used, only the agent’s name is required.
• A statement that the LLC will be managed by:
  • a single manager; more than one manager; or all members. (Cal. Corp. Code § 17702.01(b).)

Optional Provisions

The articles of organization can include any other provisions consistent with law (Cal. Corp. Code § 17702.01(c)).

Whether to include any optional provisions depends on the LLC’s needs. Organizers should carefully consider including optional provisions because the articles are publicly filed. For this reason, an LLC’s articles of organization typically omit details regarding its internal affairs and business operations, such as membership, management (other than the information required by RULLCA), capital contributions, profit and loss allocations and distributions, and termination provisions. Instead, this information is included in the LLC’s operating agreement, which is not a public document. If the members desire to change these provisions in the future, it is easier to revise an internal governing document than to amend or restate the articles of organization, which requires a filing with the SOS and paying a filing fee (Cal. Corp. Code § 17702.02(b) and Cal. Gov’t Code § 12190(d)). 

Prohibited Provisions

The articles of organization may not contain any provision that would be ineffective if it were included in an operating agreement (Cal. Corp. Code §§ 17701.12(c) and 17702.01(c)). 

Effective Date and Time

An LLC is formed when the SOS files the articles of organization (Cal. Corp. Code § 17702.01(d)). The effective date of filing is the date the SOS receives the articles (Cal. Corp. Code § 17702.10). Original articles may not specify a future effective date (Cal. Corp. Code § 17702.05(c)).There may be situations where it is useful to delay the filing date. For example, the LLC may need time to prepare an operating agreement or to wait for member contributions of cash or other assets to be in place. For filings that are anticipated late in the year, there may also be administrative and tax advantages to delaying the effective date until the following year.

Filing the Articles of Organization

Organizers must use the standard form articles of organization prescribed by the SOS (Cal. Corp. Code § 17702.01(a)). The SOS only accepts submissions on Form LLC-1 and rejects custom-drafted articles of organization. Organizers may file the articles online, in person, or by mail.

The fee to file the articles of organization is usually $70. However, the fee is waived for articles submitted from July 1, 2022, to June 30, 2023. If filing in person, an additional $15 non-refundable special handling fee is required, which must be paid by separate check.

Unlike a DBA, there is no publication for filing the articles.  California does not require a published notice of the filing of articles of organization.

2. Statement of Information

An LLC must file a Form LLC-12 Statement of Information with the SOS within 90 days after the filing of its original articles of organization, and biennially thereafter (Cal. Corp. Code § 17702.09(a) and see SOS: Statement of Information (Form LLC-12)). If there has been no change in any of the information contained in the previously filed statement of information, an LLC may instead file a Form LLC-12NC Statement of No Change (Cal. Corp. Code § 17702.09(b) and see SOS: Statement of Information No Change (Form LLC-12NC)). LLCs may also fill out and file these statements of information forms by using the online service on the SOS website (see SOS: File a Statement of Information).

The fee to file the initial or a biennial statement of information or a biennial statement of no change by mail is $20. There is no fee to file (by mail) a statement of information submitted between required filing periods to report a change of information. (Cal. Corp. Code § 17702.09(c), Cal. Gov’t Code § 12190(k), (l), and see SOS: Statement of Information (Form LLC-12)). If filing in person, an additional $15 non-refundable service fee is required, which must be paid by separate check. 

3. Operating Agreement

The operating agreement (referred to as an LLC agreement in some jurisdictions) has many functions.  In general, an operating agreement is the “rules” by which the LLC operates.

The LLC’s management structure describes how to allocate and distribute the LLC’s profits, and sets out the agreements among the LLC’s members. The operating agreement functions in a similar fashion to the way the combination of a corporation’s bylaws and a typical shareholders’ agreement work for a corporation. 

Some important considerations in choosing the terms of the operating agreement include:

• The members’ rights. The operating agreement should spell out a member’s aggregate rights in the LLC, including the right to:
  • share in the LLC’s profits and losses;
  • receive distributions from the LLC; and
  • vote and participate in the LLC’s management. (Cal. Corp. Code §§ 17701.02(r), (aa) and 17701.10(a)(1).)
  • Whether the LLC will have multiple classes of membership interests. With the flexible capital structure of an LLC, classes of membership interests can be created which include:
    • non-voting interests;
    • non-economic interests;
    • convertible interests;
    • profit interests; or
    • income interests. (Cal. Corp. Code § 17712.01.)
• The LLC’s management. An LLC is member-managed unless the articles of organization contain a statement that the LLC is manager-managed (Cal. Corp. Code §§ 17702.01(b)(5) and 17704.07(a)). An LLC can be either:
  • member-managed, which is the management structure of most small business LLCs. Each member typically has the inherent authority to act on the LLC’s behalf and execute contracts; or
  • manager-managed, which is generally more appropriate where there are passive investors in the LLC who are not actively involved in the direct management or day-to-day activities of the LLC. The managers govern the LLC in a manner like a corporation’s board of directors.
• In either case, the operating agreement should specify rules and procedures for members and managers to follow when managing the LLC.
• For further information on management considerations, see Operating Agreement Checklist (CA): Management.
• Initial capital contributions. The operating agreement should state how the initial capital contributions will be made. Contributions may consist of cash, tangible or intangible property, services performed, promissory notes, other agreements to contribute money or property, and contracts to perform services (Cal. Corp. Code § 17704.02). The operating agreement may also address a member’s liability for failure to make a contribution (Cal. Corp. Code §§ 17701.10(d) and 17704.03).
• Allocating profits, losses, and distributions. The operating agreement should specify how to allocate profits, losses, and distributions among the members. Unless otherwise provided by the operating agreement, profits, losses, and distributions are made on the basis of the value of contributions made by each member (Cal. Corp. Code §§ 17701.10(d) and 17704.04(a), (e)).
• Admitting new members and transferring membership interests. The operating agreement should specify the terms and conditions of admitting new members and any transfer restrictions on the membership interests (Cal. Corp. Code §§ 17701.02(aa), 17704.01(c)(1), and 17705.02(f)).
• The dissolution and winding up of the LLC. A written operating agreement may specify a specific time of dissolution or events that would trigger dissolution, as well as procedures for the distribution of assets in winding up the LLC (Cal. Corp. Code §§ 17707.01(a) and 17707.05(a)). The operating agreement may not vary other statutory requirements for dissolution and winding up the LLC’s business except as provided by RULLCA (Cal. Corp. Code § 17701.10(c)(8)).

For a more in-depth consideration of the above topics, see Operating Agreement Checklist (CA).

A California LLC, regardless of the number of members, is not required to have a written operating agreement (Cal. Corp. Code §§ 17701.02(s) and 17701.11(c)). An operating agreement can contain any provision not inconsistent with the law or the articles of organization relating to:

• Relations among the members and between the members and the LLC.
• The rights and duties of the managers.
• The LLC’s activities and the conduct of its activities.
• Amendments to the operating agreement.
  (Cal. Corp. Code § 17701.10(a).)

The operating agreement may be entered into at any time. If the LLC is not yet formed, the parties who will be the initial members can enter into an agreement that will become the operating agreement when the LLC is formed (Cal. Corp. Code § 17701.11(c)).

If a provision in the operating agreement covers the subject matter of a RULLCA default provision, it generally supersedes that provision (Cal. Corp. Code § 17701.10(b)). However, there are a number of provisions that may not be modified by the operating agreement (Cal. Corp. Code § 17701.10(c), (d), (g), and see Standard Document, Operating Agreement (Single Member) (CA): Drafting Note: RULLCA Default and Non-Modifiable Provisions).

For examples of operating agreements for California LLCs, see Standard Documents:

4. Membership Interests

Transfer Restrictions and Buy-Sell Rights

LLCs should consider whether to include any of the following concepts to restrict transfer interests of persons holding membership interests.

• Right of first refusal. 
• Right of first offer. 
• Drag-along provision. 
• Tag-along (or co-sale) provision. 
• Preemptive rights

Certificated Interests

The LLC must determine whether transferable interests will be evidenced by certificates (similar to share certificates) or be uncertificated. RULLCA does not require a certificate of interest to evidence any ownership interest in the LLC (Cal. Corp. Code § 17705.02(d)). LLCs often do not issue certificates for membership interests. If a member pledges its interests as security for a loan, however, the lender may look to the operating agreement to verify whether the interests are certificated. The operating agreement usually addresses whether an LLC’s membership interests are certificated.

Membership interest certificates should reference any operating agreement transfer restrictions, buy-sell rights, or requirements for transfer of membership interests to provide notice to future transferees. A transfer of a transferable interest that violates a transfer restriction in an operating agreement is ineffective if the transferee knew of the restriction at the time of the transfer (Cal. Corp. Code § 17705.02(f)). A securities law legend is also commonly placed on membership interest certificates.

Initial Acts of the Members or Managers

Though not required by RULLCA, some LLCs choose to adopt initial resolutions of the members or managers of the LLC (similar to the organizational acts of a corporation’s board of directors). If the LLC chooses to do this, consider authorizing organizational acts such as:

• Adopting the operating agreement.
• Issuing membership interests to the initial members.
• Applying for foreign qualification in other states.
• Adopting the fiscal year (LLCs usually operate on calendar year).
• Opening bank accounts and authorizing signatories.
• Electing officers (LLCs can have officers similar to corporations) (Cal. Corp. Code § 17704.07(v)).• Approving budgets, especially if the LLC will have third-party investors.