Business & Contract Law ✦ Operating & Shareholder Agreements
The Agreement You Write While You Still Like Each Other.
An operating agreement or shareholder agreement is the contract among the owners: who decides, who gets what, and what happens when someone leaves, dies, divorces, or wants out. California fills every gap with default rules the owners would never have chosen. North Star Law Firm drafts agreements built for your ownership, with the buy-sell math tested against your real financials. Attorney-CPA. Flat fee. Statewide.
The Short Answer
If you have a co-owner, you need one, and you need it before the first disagreement.
California’s Revised Uniform Limited Liability Company Act (Corp. Code § 17701.01 et seq.) and the General Corporation Law supply default rules for every question an owners’ agreement leaves unanswered, and the defaults are rarely what the owners intended: equal management votes regardless of who invested more, distributions in proportion to contributions rather than the deal the owners struck, no obligation to buy out a departing owner and no formula for the price, and a dissolution vote that can be forced by a minority. A well-drafted agreement replaces all of that with the deal you actually made, and it is the document a court, a lender, a buyer, and the IRS will read to understand who owns what. The buy-sell provisions are where the CPA side of the practice matters most, because a valuation formula that looks fair on paper can produce an absurd number in practice.
- Operating agreements for single-member, multi-member, and manager-managed LLCs
- Bylaws and shareholder agreements for corporations, including close corporation elections under Corp. Code § 158
- Capital, profit, loss, and distribution provisions that match the tax allocations
- Management, voting, deadlock, and reserved-matter provisions
- Buy-sell terms: triggers, valuation, funding, and payment terms, tested against your financials
- Transfer restrictions, rights of first refusal, drag-along and tag-along rights, and non-solicitation
What Goes Wrong
The questions the agreement has to answer, and California’s default answer
Every one of these has ended a business or a friendship. The agreement answers them in advance.
| Question | California default if the agreement is silent | What a drafted agreement does |
|---|---|---|
| Who decides day-to-day and major matters? | LLC: all members vote, equally per member (Corp. Code § 17704.07) | Names managers, sets voting by percentage, lists major decisions that need supermajority or unanimity |
| How are profits and losses shared? | LLC: in proportion to contributions; corporation: by shares | Sets the economic deal, including preferred returns, sweat equity, and how the tax allocations under I.R.C. § 704 follow it |
| What if an owner dies, divorces, or goes bankrupt? | The interest passes to the heir, ex-spouse, or bankruptcy trustee, who becomes a transferee with economic rights | Buy-sell trigger with a valuation method, payment terms, and life insurance funding where appropriate |
| What if an owner wants out? | LLC: a member may dissociate but has no right to be bought out (§ 17706.01) | Put and call rights, notice periods, valuation, and a payment schedule the business can afford |
| What if the owners deadlock? | Petition the court for dissolution (§ 17707.03 or § 1800), with a buyout right for the others | Deadlock-breaking mechanisms: mediation, rotating tie-breaker, shotgun buy-sell |
| Can an owner sell to an outsider? | LLC: a transferee gets economic rights but not membership without consent | Rights of first refusal, tag-along and drag-along, and approved-transferee provisions |
| Can an owner compete or take employees? | Yes; California voids non-competes (Bus. & Prof. Code § 16600), with a narrow exception on sale of an ownership interest (§ 16601) | Confidentiality and non-solicitation drafted to what California enforces, and the sale-of-business exception used where it applies |
Why the buy-sell formula has to be tested, not just drafted
A buy-sell clause is a promise to buy an ownership interest at a price determined by a formula on a future date. Book value understates a profitable service business to nearly nothing; a multiple of revenue overstates a business with thin margins; an appraisal is accurate but slow and expensive; a fixed price the owners agree to update annually is excellent until they stop updating it. The right formula depends on the business, and the only way to know whether it produces a number the company can actually pay is to run it against the current financials and against a plausible future. We do that as part of drafting, and we structure the payment terms (down payment, note, term, security) so a death or a departure does not become an insolvency. Where life insurance can fund a death buyout, we size it and address who owns the policy.
The tax provisions most operating agreements get wrong
An LLC taxed as a partnership is governed by the allocation rules of I.R.C. § 704(b), and an operating agreement that promises members a distribution deal the allocations do not support will be reallocated by the IRS. Agreements copied from a form often include a “qualified income offset” and “minimum gain chargeback” without any explanation, and often include a target-allocation clause that conflicts with the distribution waterfall. For an LLC that has elected S corporation status the problem is the opposite: the agreement must maintain a single class of stock, so preferred returns, disproportionate distributions, and most waterfalls are prohibited, and an agreement that includes them can terminate the election. We draft the economic provisions to the tax classification, and we include the tax distribution clause that lets owners pay the tax on income they have not yet received.
The Attorney-CPA Difference
The agreement is a deal, a governance document, and a tax document. We draft all three at once.
- Economic terms drafted to match the tax classification, so the IRS enforces the deal you made
- Buy-sell formulas run against your financials before they go in the document
- Deadlock, exit, and transfer provisions that keep disputes out of court
- Non-solicitation and confidentiality drafted to what California actually enforces
- Flat fee, quoted in writing, for new agreements or amendments to existing ones
Questions & Answers
Operating and shareholder agreement questions we hear most
Do I need an operating agreement for a single-member LLC?
Yes, though a shorter one. Banks and title companies ask for it, it documents that the LLC is separate from you (which is the point of the liability shield), and it names a successor to manage the LLC if you die or become incapacitated.
We already signed a form operating agreement. Can it be replaced?
Yes. An amended and restated agreement replaces the old one in full, with the consent of the members the existing agreement requires. Most form agreements are replaced rather than amended because the problems run throughout.
Can we include a non-compete for an owner who leaves?
Generally not for an employee-owner, since California voids non-competes under Bus. & Prof. Code § 16600. When an owner sells their entire interest, § 16601 allows a reasonable non-compete tied to the sale, and the buy-sell can be drafted to use that exception. Non-solicitation of employees and confidentiality remain enforceable.
What is a close corporation election, and should we use it?
A California corporation with 35 or fewer shareholders can elect close corporation status under Corp. Code § 158, which lets the shareholders run the company by agreement without the formalities of a board. It suits family businesses and small partnerships that formed as corporations; an LLC often achieves the same flexibility.
Decide the hard questions now, while the answers are still easy.
A free consultation with an attorney-CPA, and a flat fee in writing before we draft.