You usually do not find out your LLC operating agreement is broken until a member threatens to sue you over a decision you thought was completely authorized. Maybe you signed a big contract, approved a distribution, or tried to remove a manager, and suddenly someone is quoting a sentence you barely remember reading. At that moment, you are not just arguing about business judgment; you are fighting about what the agreement really says and whether your actions were valid at all.
For many California business owners in Downtown Los Angeles and San Bernardino County, this problem starts with a “standard” operating agreement pulled from an online template, a filing service, or a friend’s old documents. Everyone signs, files the LLC with the Secretary of State, and gets back to work. The document sits in a folder until there is real money, control, or an exit on the line, and then lawyers begin dissecting every clause and every conflict inside it.
At The Blue Law Group, we review and litigate LLC operating agreements for businesses across Southern California, and we see the same patterns on a regular basis. Latent defects in the agreement, such as conflicting management clauses or mismatched voting rules, quietly sit in the background until a dispute gives someone a reason to use them as leverage. In this article, we walk through how those hidden defects arise, how they play out in real conflicts, and what you can do now to protect your company.
Facing an LLC dispute or unsure if your operating agreement protects you? Call (909) 766-9996 or contact The Blue Law Group online to review your agreement and understand your options.
How Latent Defects Hide Inside LLC Operating Agreements
When we talk about latent defects in an LLC operating agreement, we mean problems that are not obvious the first time you read the document. The agreement looks complete, it covers many topics, and the signature pages are in order. The defects only appear when different sections are compared against each other during a conflict. Two provisions that seemed harmless on their own can clash when both sides need them to support their position.
These problems often come from how the documents are created. Many LLCs in Los Angeles and San Bernardino County start with a template, then add custom language the members want. A new investor might insist on a special veto right. A bank might require certain covenants as a condition of financing. Someone may copy clauses from another agreement without harmonizing defined terms, management structure, or numbering. The end result is a patchwork of language that can include contradictions no one noticed at formation.
Courts in California do not throw out an entire operating agreement just because it has flaws. Judges try to interpret the contract as a whole, resolve conflicts between general and specific provisions, and fill in gaps with California default LLC rules when necessary. The problem for business owners is that ambiguity gives the other side room to argue. We regularly see disputes where the entire strategy turns on two sections that point in different directions, and the side that better uses those conflicts gains leverage in negotiations or in court.
Conflicting Management Clauses Can Undermine Your Authority
One of the most damaging types of latent defect involves management authority. LLCs are generally set up as member-managed or manager-managed. In a member-managed structure, all members participate in day-to-day management. In a manager-managed structure, members delegate authority to one or more managers, and members typically act more like shareholders in a corporation. Problems arise when an operating agreement mixes language from both models.
Imagine an agreement that states early on that the LLC is manager-managed, and that the manager has full and complete authority, power, and discretion to manage and control the business and affairs of the company. Later, another section might say that no action shall be taken by the company unless approved by members holding at least 70 percent of the percentage interests. If those sections are not clearly coordinated, an unhappy member can argue that major decisions required their vote, even though the manager believed they had full authority.
In disputes we handle, challenges to management legitimacy often start here. An opposing member may claim that a key contract, loan, merger, or lease was never properly authorized because the wrong person signed or the right approvals were not obtained. They will point to any clause that seems to limit the manager’s power, and they will argue that specific approval lists or higher thresholds override broad authority language. The manager, on the other hand, will rely on those broad authority clauses to defend every action they took.
Courts generally look at the agreement as a whole and try to reconcile these provisions, but ambiguity creates risk. A judge might decide that certain extraordinary actions were outside the manager’s authority unless member approval was clearly documented. That can open the door to unwinding transactions, re-voting on decisions, or awarding damages. These are the kinds of conflicts we focus on when we review operating agreements for managing members and investors who want to understand how secure their authority really is.
Voting Thresholds & Quorum Rules That Do Not Match Reality
Another common source of LLC agreement defects involves voting thresholds and quorum requirements. Most agreements specify what percentage of membership interests must vote to approve different types of decisions, and what percentage must be present or represented for any vote to be valid. Problems arise when these sections are inconsistent with each other or with the company’s current ownership structure.
For example, one section might say that a majority in interest of the members constitutes a quorum, while another requires the affirmative vote of at least two-thirds of the members for major actions. If it is not clear whether two-thirds refers to the number of people, percentage interests, or members present at a meeting, both sides can read the same language in very different ways. The confusion is compounded when membership interests shift over time through transfers, buy-ins, or buyouts, and the operating agreement is never updated.
In real disputes, we often see years of decisions challenged because of these drafting defects. A minority member who feels squeezed out may argue that past votes did not have a valid quorum or did not meet the correct threshold once the math is recalculated based on current ownership. They may claim that key resolutions, such as approving large expenditures or amending the agreement, were void from the outset. Management and the majority will respond that they followed the intent of the agreement and that everyone acted as if those decisions were valid for years.
California’s LLC statute provides default voting rules when agreements are silent, but when the document contains unclear or conflicting language, courts must interpret what the parties intended. Judges will look at the wording, the history of how the company operated, and any written consents or minutes. Ambiguity here does not just create legal risk; it creates bargaining chips. The party that can credibly threaten to invalidate past votes can push for better settlement terms. This is why we urge clients to review their voting and quorum language before conflicts arise, particularly after any significant change in ownership.
Capital Contribution & Capital Call Clauses That Clash
Capital contribution provisions control who is required to put money into the company and when. A well-drafted agreement clearly separates initial capital contributions from future capital calls and spells out whether additional contributions are voluntary or mandatory. Many defective agreements blur this line. The result is intense conflict when the company hits a cash crunch, and someone does not want to write another check.
We frequently see operating agreements that state, in one section, that no member shall be required to make any additional capital contributions. Later, another section may allow the manager or members to approve a capital call and impose consequences if a member does not participate, such as dilution, conversion of the unpaid amount into a loan at a high interest rate, or even forced transfer of the non-contributing member’s interest. If those provisions are not carefully harmonized, each side has a plausible reading that favors its position.
In a dispute, contributing members may argue that the capital call was clearly authorized and that everyone knew refusal would lead to dilution or loss of rights. The non-contributing member may point to the earlier no additional contributions required clause and insist that any capital call had to be voluntary. Because the language sends mixed signals, a court must weigh the specific wording, the sequence of sections, any defined terms, and the company’s past practice. The outcome can determine whether a member loses a significant portion of their interest or retains full rights without ever matching the capital others put in.
From a practical standpoint, these conflicts are avoidable with careful drafting and periodic review. In our work with LLCs across Southern California, we pay close attention to whether the capital clauses align with the company’s real financing plans. If the business model depends on future capital calls, the agreement needs to say so clearly, and the consequences of non-payment must be consistent throughout. If the members intend that no one will ever be forced to put in more money, the document should not include hidden penalties that suggest otherwise.
Buyout, Exit & Transfer Provisions That Fight Each Other
Exit events are another pressure point where latent agreement defects explode. Buyout, withdrawal, and transfer provisions govern what happens if a member wants to leave, dies, becomes disabled, divorces, or tries to bring in a new investor. When these sections are inconsistent, the problem surfaces at exactly the wrong time, when emotions are high and stakes are large.
A typical agreement might include a right of first refusal, which gives the company or remaining members the option to buy a departing member’s interest before it can be sold to a third party. It might also include permitted transfers to family trusts or affiliates. Problems arise when another section says members are free to transfer their interests subject to applicable law, or when the valuation formula in one section conflicts with a different formula in another. One part of the agreement appears to allow relatively free transfers, while another imposes heavy restrictions or very different pricing.
In disputes, heirs or departing members often argue that they can sell to whomever they wish at market price, pointing to the broad transfer language. Remaining members may insist that the right of first refusal and specific valuation formula control, and that any transfer not complying with those procedures is void. The confusion can lead to parallel lawsuits in probate and civil courts, challenges to the validity of transfers, and battles over whether the departing member’s interest should be valued on a discounted basis or at full fair market value.
Because The Blue Law Group handles not only business law but also related civil litigation and tax matters, we see how these defective exit provisions intersect with estate planning, creditor claims, and tax reporting. A poorly coordinated set of buyout clauses can contribute to unintended tax consequences, disputes among heirs, and allegations of self-dealing. That is why we emphasize to clients that exit and transfer language must be internally consistent and aligned with how they actually expect owners to enter and leave the business over time.
Dispute Resolution Clauses That Create More Disputes
Many LLC operating agreements attempt to control where and how disputes will be resolved, often through arbitration clauses, mediation requirements, or forum selection provisions. When these clauses are copied from different sources or added later without reviewing the entire document, they can conflict with each other and create a separate layer of litigation before anyone even reaches the merits of the business dispute.
We often see agreements that require binding arbitration of all disputes in one section, but in another section state that the parties consent to the exclusive jurisdiction of the state and federal courts located in Los Angeles County. Sometimes an earlier version of the agreement had one approach, and an amendment added another approach without deleting or reconciling the old language. Parties then disagree about whether they must arbitrate, can go straight to court in Downtown Los Angeles, or have a choice.
When these conflicts exist, the first fight in a case is often over venue and process. One side may file a lawsuit in San Bernardino County, only to face a motion to compel arbitration based on language buried in another part of the agreement. That motion can itself lead to extensive briefing and hearings, which cost time and money while the underlying business problem continues to harm the company. Judges must interpret which clause controls, whether the arbitration agreement is enforceable, and how to handle conflicting forum language.
As litigators, we know that these preliminary fights can be just as expensive as the main case. A clear, consistent dispute resolution section gives everyone a predictable path when conflict arises. A defective one becomes a tool for delay and procedural maneuvering. When we review an LLC operating agreement, we always map out every clause that touches on disputes, including attorney’s fees provisions and carve-outs, to help ensure they work together instead of pulling in different directions.
Why California’s Default LLC Rules May Control When Your Agreement Fails
Many business owners assume that once they have an operating agreement, whatever it says will control. In California, though, the LLC statute supplies a set of default rules that apply when an operating agreement is silent, ambiguous, or unenforceable on a given point. This means that if your agreement is defective or incomplete, the law may override your expectations and impose rules you never discussed with your partners.
For example, if an agreement fails to specify clear voting procedures for certain actions, or if conflicting provisions make it difficult to tell what approval is required, courts may look to statutory defaults about how members act and what level of consent is necessary. If distribution provisions are unclear, default rules about sharing profits and losses could step in. The same is true for the removal of managers, indemnification, and other governance topics that are not clearly addressed.
In practice, judges in Downtown Los Angeles and San Bernardino County courts consider both the operating agreement and California’s LLC statute together. They assess whether the agreement validly modifies a default rule, whether any modification is unconscionable or contrary to public policy, and what to do when provisions cannot be reconciled. For a business owner who believed the operating agreement was fully customized, it can be jarring to learn that statutory defaults still have significant power.
Our experience with business disputes in Southern California has taught us that understanding this interaction between contract and statute is critical. During an operating agreement review, we do not just check for internal consistency. We also consider where California default rules are likely to fill in gaps or override flawed language, and how that might affect control, distributions, and dispute resolution if a conflict lands in court.
How To Audit Your LLC Operating Agreement For Hidden Defects
Most business owners are not going to rewrite their operating agreement from scratch the moment they read about these risks. A more realistic first step is to perform a basic self-audit, then decide whether a deeper legal review is necessary. While this will not replace a formal legal analysis, it can help you spot obvious red flags and prioritize your next steps.
Start by gathering every version of your operating agreement, including amendments, member admission agreements, and any side letters that affect ownership or governance. Many LLCs in Los Angeles and San Bernardino County have multiple documents that function together as the agreement, and latent defects often hide where new language was added without fully integrating it. Also, collect your cap table or ownership schedule, meeting minutes or written consents, and any key financing documents that require changes to governance.
As you read through the agreement, look for patterns that suggest internal conflict. For example, do you see references to both member-managed and manager-managed structures? Does one section say no additional capital is ever required, while another describes mandatory capital calls with penalties? Are there multiple sections describing how disputes must be resolved, with different forums or procedures? Do voting and quorum provisions clearly match your current ownership percentages, or do they seem to assume a different ownership structure entirely?
When clients bring us their documents at The Blue Law Group, we perform a much more detailed version of this audit. We read the agreement as litigators, asking how an unhappy member or creditor might attack it. We look for conflicts between general and specific clauses, undefined or inconsistently used terms, and provisions that no longer fit the company’s reality. Because our practice includes business law, civil litigation, tax, and employment, we can also spot where governance defects might spill over into other legal problems, such as tax reporting or employee ownership disputes.
If you identify any of the red flags described in this article, or if you are already in a disagreement with a fellow member or manager, it is time to have a California business law attorney review your operating agreement in detail. Our firm offers same-day, free initial consultations and bilingual services in English and Spanish, so you can get clear, plain language feedback on what your agreement really says and how that might play out if a dispute escalates. That insight can guide whether you amend the agreement now, negotiate changes with your partners, or prepare for litigation.
Protect Your Business From Hidden LLC Agreement Defects
Your operating agreement is more than a formation document. It is the rulebook that controls what happens when people disagree, when money is tight, or when someone wants out. Latent defects and conflicting clauses may not matter in good times, but they can decide who keeps control of the company, which decisions stand, and how much leverage each side has when internal conflict hits.
You do not have to wait for a lawsuit to find out whether your agreement will hold up. A focused review can help uncover hidden risks, clarify how California’s default rules interact with your document, and suggest concrete changes to align the agreement with how your business actually operates.
If you recognize any of the issues described here in your own LLC operating agreement, or if a dispute is already brewing, contact The Blue Law Group online or call (909) 766-9996 to discuss a targeted operating agreement review and your options going forward.