California LLC Operating Agreements in 2026: Wake-Up Calls for Formation Counsel

Three recent published opinions from the California Court of Appeal merit a closer look at LLC Operating Agreements in 2026. 

California entrepreneurs, and if we’re being honest, more than a few template-driven lawyers, still treat the LLC operating agreement like formation paperwork. You sign it, upload it to a portal, and never crack it open again until somebody sues somebody.

Three recent published opinions from the California Court of Appeal should change that thinking. Each one reads like a drafting memo wearing judicial robes, and each one maps to a problem I see over and over in small business deals: (1) “We waived dissolution,” (2) “We can kick them out and pay nothing,” and (3) “We’ll deal with records and member lists later.”

Operating Agreements are essential.

An Operating Agreement is essential to setting the rules for your business. When drafted with open dialogue and transparency, they can be useful tools to ensure the success of a fledgling business between two or more business partners. 

“We Waived Dissolution.” No, You Didn’t.

In Meads v. Driggers (2025) 114 Cal.App.5th 28, the members signed an operating agreement that purported to limit dissolution to member vote or bankruptcy/insolvency and to bar members from taking “any other voluntary action” to dissolve the LLC. When the dispute eventually turned into a dissolution lawsuit, the other side filed a cross-complaint trying to impose liability for bringing the dissolution claim in the first place. The Court of Appeal affirmed an anti-SLAPP strike, holding that the cross-complaint could not show minimal merit once the “waiver” provision was found unenforceable. (Code Civ. Proc., § 425.16, subd. (b)(1); Meads, supra, 114 Cal.App.5th at pp. 29, 35, 38-41.)

The case technically analyzed the pre-RULLCA Beverly-Killea Act (the agreement was executed in 2011), but the reasoning reads like a warning label for modern templates: where the statute says dissolution provisions may be varied “only to the extent expressly provided,” and the dissolution statute doesn’t authorize a waiver, members can’t bargain it away. (Meads, supra, 114 Cal.App.5th at pp. 40-41.)

The takeaway for 2026 formation counsel isn’t “stop trying to manage dissolution risk.” It’s this: don’t draft fake waivers that just invite motion practice and fee exposure down the road.

If your client’s real concern is “I don’t want a minority member using dissolution as leverage,” solve that with enforceable governance architecture, things like deadlock-breaking mechanisms, carefully drafted buy-sell triggers, and clear valuation and funding provisions, all while accepting that judicial dissolution remains available when the statutory conditions are met. (Corp. Code, § 17701.10, subd. (c)(7).)

Expulsion and “Zero Buyout” Clauses Are Not Theoretical

If you represent founder-managers, you know why expulsion and forced-buyout provisions end up in operating agreements: nobody wants to run a business with a co-owner who is sabotaging operations, breaching duties, or creating regulatory risk. The temptation is to draft the harshest possible remedy and call it a “terminating event.”

Tuli v. Specialty Surgical Center of Thousand Oaks LLC (2024) 105 Cal.App.5th 997 is the recent published reminder that courts will take the operating agreement seriously, and that litigation risk often turns less on whether you have an expulsion provision and more on how it’s structured, invoked, and defended. The opinion works through governance decisions under the business judgment rule and addresses arguments for equitable relief from forfeiture. (Tuli, supra, 105 Cal.App.5th at pp. 1011-1014, 1028-1030.)

From a drafting standpoint, the practical point is straightforward: if the business wants an expulsion-for-cause mechanism, don’t draft it as a single sentence with a draconian outcome and no process. A robust clause anticipates the litigation posture. That means clear standards of “cause,” notice and cure provisions, identification of the decision-maker and voting thresholds, a defensible valuation methodology, and a realistic funding mechanism. You’re not just drafting the remedy; you’re building the evidentiary record that will later support it.

Also worth noting: RULLCA’s flexibility around fiduciary duties comes with conditions and formalities. Fiduciary duties may be modified “only … in a written operating agreement with the informed consent of the members,” and simply agreeing to the operating agreement is not, by itself, informed consent. (Corp. Code, § 17701.10, subd. (e).)

Records Requests Are No Longer “Back Office.” They’re a Litigation Trigger.

The third topic that keeps coming up is books and records access, especially for investor-style LLCs with more than 35 members. A lot of small business clients treat recordkeeping and inspection rights as operational details they’ll figure out later. But in a dispute, records access is often the very first issue that gets litigated, because it controls who has information and who doesn’t.

In Perry v. Stuart (2025) 111 Cal.App.5th 472, the Court of Appeal addressed a records demand under Corporations Code section 17704.10 and the tension between statutory inspection rights and trade secret protection. The court affirmed the trial court’s trade secret finding as to the member list, while still enforcing the statutory requirement to provide specified financial statements accompanied by the accountant’s report (or, if no accountant report exists, the manager’s certificate that the statements were prepared without audit). (Perry, supra, 111 Cal.App.5th at pp. 474-475, 507-511; Corp. Code, § 17704.10, subd. (c)(3).)

Three drafting consequences flow from Perry

First, treat “purpose” and “scope” as operating agreement issues, not just statutory ones. Section 17704.10 is purpose-limited: the request must be “for purposes reasonably related to the interest” of the requesting member or transferee. (Corp. Code, § 17704.10, subd. (a).) That statutory standard will frame the case narrative. Draft your operating agreement to define what information exists, how it’s maintained, how it’s delivered, and how confidentiality is handled, while recognizing that you cannot waive the underlying statutory right. (Corp. Code, § 17704.10, subd. (h); id., § 17701.10, subd. (d)(2).)

Second, confidentiality clauses don’t automatically solve the trade secret problem. Perry rejected the argument that member confidentiality obligations defeat trade secret treatment of the member list. The trade secret inquiry turns on economic value derived from secrecy and reasonable efforts to maintain secrecy. (Civ. Code, § 3426.1, subd. (d)(1)-(2); Perry, supra, 111 Cal.App.5th at pp. 509-511.)

Third, for LLCs with more than 35 members, draft and administer the financial reporting mechanics with section 17704.10, subdivision (c) in mind, including the required accompaniment (accountant report or manager certificate). (Corp. Code, § 17704.10, subd. (c)(3).) Not glamorous, but it’s exactly the kind of compliance detail that becomes decisive when an unhappy investor starts building a record.

A Separate, Fast-Moving Issue: Non-competes Bleeding into LLC Paperwork

Even if your core formation work is entity-level, operating agreements frequently include member service obligations, restrictive covenants, or “non-solicit” style clauses. California’s already strict restraint-of-trade rules have been reinforced in ways that affect how those provisions are perceived and litigated.

As of January 1, 2024, Business and Professions Code section 16600 was amended to expressly read broadly in the employment context, and the statute now makes clear it is not limited to contracts where the restrained person is a party. (Bus. & Prof. Code, § 16600, subds. (a)-(c).)

Separate provisions now make it unlawful to include an employment noncompete that doesn’t fit a recognized exception, and address enforcement of void noncompetes. (Bus. & Prof. Code, §§ 16600.1, subd. (a), 16600.5, subds. (a)-(c).) The principal statutory sale-of-goodwill exception remains, but it’s not a free-form drafting license. (Bus. & Prof. Code, § 16601.)

If your operating agreement includes restrictive covenants, be clear about which hat the person is wearing (member, manager, employee, seller of goodwill) and draft with the relevant statutory exception in view. Don’t assume “member-owned business” automatically changes the analysis.

Assuming that because someone is an LLC member, a noncompete clause is automatically valid.

The Error: Including broad restrictive covenants without specifying the statutory exception (like “sale of goodwill”).

The Reality: Business and Professions Code section 16600 was broadened in 2024 to make most employment-related non-competes unlawful even if they are tucked inside an operating agreement. The only way for them to work is to fit the most common exception to enforce an LLC non-compete agreement: when a member is bought out a fair value with their consent.

The Common Thread

California LLC disputes are rarely won on abstract fiduciary-duty rhetoric. They’re won and lost on whether the operating agreement is aligned with the nonwaivable statutory core, and whether the agreement anticipates the first litigation motions: dissolution, expulsion and buyout enforcement, and records access.

If you’re still forming California LLCs with a generic operating agreement that purports to waive judicial dissolution, includes an expulsion clause with no process or valuation rigor, and treats records rights as a one-line confidentiality promise, the last 18 months of published appellate law suggests that template is already obsolete.

Informational only, not legal advice; consult counsel for application to specific facts.

Thomas F. Gallagher is a California licensed attorney and Founding Partner of Gallagher Krich APC in San Diego. He can be reached at (858) 926-5797 or info [at] tomgallagherlaw.com.