New Year, New Company: Forms & Contracts for Your California S-Corp or LLC

Starting a new Limited Liability Company (LLC) in California is an exciting venture. Our business attorneys understand the importance of laying a strong legal foundation to ensure your LLC operates smoothly and is protected against potential legal issues. 

Below are key business forms and contracts you should consider implementing after forming your LLC in California. A small corporation (S-corp.) with S-tax election under IRS regulations has similar but slightly different forms. An S-corp generally has more corporate formalities, while an LLC is a more informal California business type.

 1. Operating Agreement

An Operating Agreement is a critical document for any LLC, including those in California. Although not legally required in California (Cal. Corp. Code § 17701.02(s)), it is highly advisable as it outlines the management structure, financial arrangements among members, and other key operational details. 

Essentially, it serves as a roadmap for how the LLC will be run and can help prevent disputes among members. 

Key Provisions to Include:

  • Distribution of profits and losses (annual P&L statement)
  • Member capital contributions
  • Management structure and voting rights
  • Procedures for admitting new members
  • Buyout and buy-sell provisions

 2. Employment Agreement

If your LLC will have employees, it’s essential to have a well-drafted Employment Agreement. This contract sets forth the terms and conditions of employment, including job responsibilities, salary, benefits, confidentiality obligations, and termination procedures.

Key Provisions to Include:

  • Job description, scope of duties and expectations
  • Compensation and benefits (3-day PTO minimum required)
  • Confidentiality and non-disclosure clauses (NDA)
  • At-will employment statement (as California is an at-will employment state)
  • Dispute resolution methods (good-faith mediation, arbitration)

 3. Independent Contractor Agreement

When hiring independent contractors, a clear Independent Contractor Agreement is critical to outline the scope of work, payment terms, and the relationship between your LLC and the contractor. 

This helps avoid misclassification issues, which can lead to legal challenges (Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903). The standard test is as follows:

  1. Autonomy (Ability to control):The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. Business Distinction (Non-Similar Businesses):The worker performs work that is outside the usual course of the hiring entity’s business.
  3. Customary Engagement (Contractor is independent) :The worker is regularly engaged in an independently established trade, occupation, or business such as a sole proprietorship that they own an LLC or a small corporation (S-corp).

Key Provisions to Include:

  • Definition of the independent contractor status
  • Description of the services provided
  • Compensation and payment schedule
  • Intellectual property ownership
  • Confidentiality terms
  • Ensure compliance with the ABC test (per above)

 4. Non-Disclosure Agreement (NDA)

Protecting your LLC’s proprietary information is vital. A Non-Disclosure Agreement can help safeguard your trade secrets and business strategies when dealing with employees, contractors, and third parties (Cal. Civ. Code § 3426-3426.11).

Key Provisions to Include:

  • Definition of confidential information
  • Obligations of the receiving party
  • Exclusions from confidential information
  • Term of the agreement
  • Remedies for breach

 5. Member Buyout Agreement

The business should have an exit plan if it has more than a single member. A Member Buyout Agreement is important for setting the terms under which a member’s interest in the LLC can be valued and purchased by the LLC or other members. 

This agreement is crucial for planning for events such as retirement, death, or a member’s decision to leave the LLC.

Key Provisions to Include:

  • Conditions triggering a buyout
  • Buyout price determination
  • Payment terms
  • Right of first refusal
  • Valuation 
  • Dispute Resolution (3rd party CPA valuation, mediation, arbitration)

 6. Customer Contracts

Having well-drafted contracts with your customers can help ensure smooth transactions and limit liability. These agreements should be tailored to your LLC’s specific business operations and services.

Key Provisions to Include:

  • Description of product(s) sold or scope of services
  • Pricing and payment terms
  • Warranty and liability disclaimers
  • Dispute resolution clause (good-faith negotiation, mediation, arbitration)
  • Attorney fee and cost recovery (Cal. Civ. Code § 1717)

 Conclusion

As a new LLC in California, it is crucial to have the proper legal documents and contracts in place to protect your business and clarify relationships with members, employees, contractors, and customers. 

While this is not an exhaustive list, it covers the fundamental agreements most LLCs will need.

Starting an LLC in California involves a combination of state requirements and strategic business decisions. By following the legal steps outlined above, entrepreneurs can ensure that their new business venture is set up correctly and compliant with California law. 

Always keep abreast of the latest legal requirements and consider consulting with the lawyers at Gallagher Krich APC. Our experienced California business lawyers can help address any company-specific concerns. For more information, contact Gallagher Krich, APC at (858) 926-5797 or info@tomgallagherlaw.com

Attorney-Advertising: Tom Gallagher, Esq. is the attorney responsible for this advertising.

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