California LLC Allocation of Profits

Question:  My friend and I started a California LLC.  We never signed an Operating Agreement.  I assumed that we would share the profits equally, but my friend says that he gets 60% of the profits and I get 40%.  This dispute has ruined our business relationship.  What should I do?

Answer:  Your dispute is too common.  Unfortunately the toothpaste is out of the tube, and it may be too late to solve the huge problem created by the members failure to sign an Operating Agreement that states how profits and losses will be allocated among the members.  The California Revised Uniform Limited Liability Act does not specify how profits and losses will be allocated among members of a multi-member California LLC.

Members of a California limited liability company must agree in an oral agreement or in a written and signed Operating Agreement as to how profits and losses will be allocated among the members.  The problem with an oral agreement is that it is a recipe for disaster because when people disagree they have no way to prove what they previously agreed to.

One of the main reasons all of the members of a multi-member California LLC need to sign an Operating Agreement is so they have proof in the document as to how the profits and losses are allocated among the members.