Partner and LLC Member Non-Competes in California: Sections 16602 and 16602.5

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

Business and Professions Code sections 16602 and 16602.5 are the California exceptions that let partners and LLC members agree not to compete after they leave. An operating agreement can bar a departing member from carrying on a similar business within a specified area where the company has done business. It lasts only while another member or a successor carries on a like business there. Without such a clause, a former owner is generally free to compete. Kolmogorov Law, P.C., a business litigation firm in Irvine, represents co-owners in these disputes.

Call (909) 235-6116 or contact us online to discuss a co-owner's exit and a non-compete clause.

What sections 16602 and 16602.5 allow

California voids contracts that restrain anyone from engaging in a lawful business, except as the same chapter provides. (Bus. & Prof. Code, § 16600, subd. (a).) Two of the exceptions are written for co-owners. Our guide to California non-compete law covers the general rule.

For partnerships, any partner may agree not to carry on a similar business within a specified geographic area where the partnership business has been transacted. The agreement may be made upon, or in anticipation of, a dissolution of the partnership or the partner's dissociation. It lasts so long as another member of the partnership, or anyone deriving title to the business or its goodwill from one, carries on a like business there. (Bus. & Prof. Code, § 16602.)

For limited liability companies the wording is parallel. Any member may make the same agreement upon, or in anticipation of, a dissolution of the company or the termination of his or her interest in it. (Bus. & Prof. Code, § 16602.5.)

Because the agreement may be made in anticipation of the exit, the clause can sit in the partnership or operating agreement from the first day.

Without a clause, the duty not to compete ends at the exit

The default rules do not keep a former owner from competing.

While the partnership continues, a partner's duty of loyalty includes refraining from competing with it in the conduct of its business. (Corp. Code, § 16404, subd. (b)(3).) Upon dissociation that particular duty terminates. (Corp. Code, § 16603.) The duties to account for partnership property and opportunities continue only for matters that arose before the exit.

LLCs follow a similar pattern. In a member-managed company, a member must refrain from competing with the company in the conduct or winding up of its activities. (Corp. Code, § 17704.09, subd. (b)(3).) When a person is dissociated as a member, those fiduciary duties end for matters arising afterward. (Corp. Code, § 17706.03, subd. (a)(2).) In a manager-managed company the duty rests on the managers, not on members as such.

After the exit, then, the agreement is what restrains competition. A former owner still may not use the company's trade secrets, a subject covered on our trade secret page.

The limits courts apply

The California Supreme Court has upheld these clauses only as far as the statute reaches. In a case over an accounting partnership, the agreement barred a withdrawing partner from serving former clients and clients within a radius of the firm's offices. The court held the covenant was not void in its entirety. Because a restraint is void only "to that extent," the covenant could be upheld to the extent it fell within section 16602. It could not be read to bar serving clients wherever they were located. (Swenson v. File (1970) 3 Cal.3d 389, 395.)

Three points from that decision still guide these disputes.

• Territory is tied to where the business was transacted. A clause covering places the firm never served goes too far.
• Carrying on a business in an area is broader than keeping an office there. It includes soliciting or transacting substantial business in the area, directly or indirectly. Isolated, occasional transactions do not count.
• The statute in force when the agreement was signed governs it, unless the agreement shows the parties meant to adopt later changes.

The statute also calls for a specified geographic area. A clause that names no territory is exposed, and one Court of Appeal decision left open whether a court may supply one.

Some agreements do not forbid competition and instead put a price on it, such as forfeiting part of a buyout. The California Supreme Court allowed that approach for a law partnership and sent the case back for a decision on whether the amount was reasonable. An agreement imposing a reasonable cost on a departing partner who competes in a limited area is not void on its face. The amount must be reasonably calculated to compensate the firm for the loss, or it is an unenforceable penalty. (Howard v. Babcock (1993) 6 Cal.4th 409, 425.) Our page on liquidated damages explains that test.

Points specific to LLCs

Section 16602.5 speaks of the termination of a member's interest, where the partnership statute speaks of dissociation. A buyout of the whole interest fits those words.

A different exit needs a closer reading. Under the LLC act, a member who is dissociated keeps any transferable interest and holds it solely as a transferee. (Corp. Code, § 17706.03, subd. (a)(3).) Read the exit terms of the operating agreement against both statutes before relying on the restriction.

If the exit is a sale of the entire interest to the company or the other members, the sale-of-business exception may apply as well, as our page on seller non-competes explains. Our page on LLC member withdrawal covers the exit itself.

If you are staying with the business

Find the clause and check it against the statute: a named territory, a similar business, and an exit event the statute lists.

Collect evidence of where the firm actually did business before the exit. Client addresses, job sites, and marketing records define the area a court will protect.

If a buyout is on the table, raise the non-compete in the same discussion. Our page on partnership buyouts covers the buyout itself.

If you are the one leaving

Do not compete while you are still an owner. For a partner, or a member of a member-managed company, the duty of loyalty runs until the exit is effective, and a head start taken before then can be a separate claim.

A restriction inside the territory where the business operated can be enforced while the business continues there. A restriction reaching beyond it is void to that extent, though the valid part can survive.

Pay attention to how you leave. A withdrawal that breaches the agreement has its own consequences, covered on our page about partner dissociation.

What to bring to the first meeting

• The partnership or operating agreement and every amendment, with signature dates.
• Any buyout, redemption, or withdrawal agreement.
• Records showing where the business has served customers.
• Evidence of the competing activity and when it began.

Frequently asked questions

My business partner is leaving our LLC. Can our operating agreement stop him from competing?

Yes, if the clause fits the statute. California Business and Professions Code section 16602.5 lets a member agree, in anticipation of the end of his interest, not to carry on a similar business in a specified area where the company has done business. The restraint lasts while another member or a successor carries on a like business there.

I left a partnership and the agreement says I cannot serve any former client for three years. Do I have to follow it?

To the extent it fits California's partner exception, yes. The California Supreme Court upheld a similar clause only insofar as serving those clients amounted to carrying on a business in the area where the partnership had transacted business. Beyond that area the restraint is void.

Is a partner non-compete enforceable in California?

It can be. Section 16602 allows a partner to agree, upon or in anticipation of dissociation or dissolution, not to carry on a similar business in a specified geographic area where the partnership did business. California courts enforce the clause within those limits and treat the excess as void.

Does a departing LLC member owe a duty not to compete?

Usually not after the exit, unless an agreement says so. In a member-managed California LLC, the statutory duty to refrain from competing ends for matters arising after dissociation. Duties tied to events before the exit remain, and so do trade secret and contract obligations.

Can a partnership agreement make a departing partner pay for competing?

Possibly. The California Supreme Court has held that an agreement imposing a reasonable cost on a departing law partner who competes in a limited area is not void on its face. The amount has to be a reasonable estimate of the firm's loss when the agreement is made. A disproportionate charge is an unenforceable penalty.

Talk to a California partnership dispute attorney

If a co-owner's exit has raised a non-compete question, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located in Irvine, California. Related reading: our partnership dispute practice page and our page on partnership buyouts.

This page provides general information about California law and is not legal advice. Outcomes depend on the agreement, the facts of the exit, and the court.