By Matthew P. Krupnick
The most expensive document in small business isn't the one you sign. It's the one you never wrote.
A few years back, two partners came to see me about an LLC they'd formed online in an afternoon. One owned 90%. The other owned 10%. They'd shaken hands, filed the Articles of Organization with the Secretary of State, and gotten to work. They never wrote an operating agreement. It seemed like paperwork they could do later.
"Later" arrived when the 90% partner wanted to sell a piece of equipment and reinvest the money, and the 10% partner said no — and then asked for half the profits anyway.
That's when I had to tell the majority owner something he found genuinely offensive: under California law, the two of them were equals.
California has an operating agreement for you. You just never read it.
California does not require an LLC to have a written operating agreement. You can form one, open a bank account, sign a lease, and run a business for years without one. Plenty of people do.
But the absence of an agreement doesn't mean the absence of rules. It means the rules come from Sacramento, not from you.
The Beverly-Killea Limited Liability Company Act — Corporations Code sections 17701.01 and following — is the operating agreement every California LLC has by default. It's a fine statute. It was not written with your business in mind.
Here is what it says about a member-managed LLC with no operating agreement:
Every member gets one vote, no matter how much they own. Your 90% interest gives you no more say than the 10% partner's. Voting is per capita, not proportional to ownership (see Corp. Code §§17704.04, 17704.07). The 10% partner may not know he's your equal. The Corporations Code does.
Profits are split equally unless you say otherwise. Distributions follow the same per-capita default. You put in $90,000, he put in $10,000, and the statute divides the pie evenly between the two of you.
Big moves require unanimous consent. Sell substantially all of the company's assets, merge, or take any act outside the ordinary course of business, and every member has to agree. One holdout can freeze the company.
There is no way to remove a member. The statute gives you no mechanism to expel a partner who stops showing up, starts competing, or simply becomes impossible to work with — unless your operating agreement creates one. I've watched companies limp along for years because nobody could fire a partner.
An LLC without an operating agreement isn't really a company. It's a lawsuit that already has a filing fee.
The deadlock ending, written by a judge
Eventually, one of the partners in a story like this stops talking to the other. And then somebody calls a lawyer — frequently me — and asks the question I hate answering: "Can we get rid of him?"
What I tell them is that California Corporations Code section 17707.03 lets any member ask a court to dissolve the LLC when "the management of the limited liability company is deadlocked or subject to internal dissension." A judge can wind the whole thing up. And in that proceeding, the statute lets the other members avoid dissolution by buying out the complaining member's interest at fair market value — which usually means dueling appraisers, months of motions, and a price neither side likes.
Judges write excellent operating agreements. They're just expensive — and they're never about what you intended.
The single-member LLC is not immune
If you're the only member, you might think none of this applies to you. The voting and distribution defaults don't matter when there's one vote. But the operating agreement serves a second purpose, and it's the one that protects the liability shield itself.
When a creditor comes after an LLC and finds no operating agreement, no minutes, no resolutions, and a bank account the owner treats like a personal wallet, the creditor has a word for what they're looking at: alter ego. California courts will disregard the LLC's separate existence when the owner fails to respect it. The paperwork doesn't create the separation — but its absence is Exhibit A that there wasn't any.
You don't need a 40-page document to run a one-person company. You need a signed agreement that says the company exists, how it's capitalized, who runs it, and that its money is its money. That, plus a separate bank account you actually keep separate, is what the shield is made of.
The fix costs less than an hour of the fight
I've been drafting operating agreements for over 20 years. The pattern never changes: the agreement always costs a fraction of the dispute it would have prevented. One afternoon of paperwork versus a dissolution proceeding that runs into six figures. It's not a close call.
That's why the operating agreement is the centerpiece of our Small Business & LLC System. It's a flat-fee package — $249, no meter running — built around the documents that actually matter: a California-specific operating agreement for single-member and multi-member LLCs, with buy-sell provisions, capital contribution terms, management and voting rules, transfer restrictions, and dissolution procedures, plus the guided checklist and worksheet that walk you through each decision before you sign.
Get the Small Business & LLC System →
Don't wait until a partner dispute turns your company into a case file. Write the rules now, while everyone still likes each other. That's the only time it works.
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