Do You Need An Operating Agreement for Your LLC?
By: Lauren Marsicano
Do You Need An Operating Agreement for Your LLC?
Florida, like many states, does not require a Limited Liability Company (“LLC”) to have an Operating Agreement; however, it is always recommended to create one for several important reasons discussed below.
As an initial step for anyone wishing to form a company in Florida, it is always recommended that you seek legal advice in Florida from a Florida business lawyer who will be able to provide guidance regarding which Florida business entity is right for your situation and to assist you in the proper formation of such corporate entity, including an LLC.
Once you decide to start an LLC, it is likely that the business attorney will recommend that you create an Operating Agreement to protect yourself and the LLC, even if you are a single-member LLC. An Operating Agreement is a corporate document in which the structure and rules of the LLC operations are defined. An Operating Agreement does not need to be filed with any Florida governmental entity, but it is an agreement or contract between the current and future owners (called members) of the LLC. All current and future members, if any, must abide by the terms of such Operating Agreement, and for this reason, it is important for even single-member LLCs to start laying out their rules and operations in such Agreement so that there are no problems or misunderstandings later if they decide to add additional members to the company. The Operating Agreement can regulate, for example, how decisions are made, what the rights and duties of its members and managers are, how accounting will be done, the process for the withdrawal of members, and penalties for breaches of specific events. Many people choose LLCs because they are extremely flexible entities in Florida, and this flexibility comes from the ability to define, for the most part, its own rules and procedures in the Operating Agreement.
When there is no Operating Agreement, the rules established by the Florida Statutes, or the default rules for LLCs in the state it was formed in, will apply. These are generic rules that are intended to encompass a wide variety of cases, and because of this, the default rules are not optimized for the unique needs of each specific company. For many, this can lead to unpleasant surprises if there was no Operating Agreement in place and members are added or attempt to leave. It could cost tens or thousands of dollars in legal fees to later sort out such messes caused by a lack of properly defined rules and procedures. This does not even include the potential loss of company profit to members that may not be participating anymore in the company but may still be entitled to distributions because roles were not properly defined in the formation documents. Also, when these rules are not specified in writing, the law provides that the Operating Agreement may be oral, implied, or recorded in any medium. This can lead to different interpretations, misunderstandings, and conflicts between members, which may be extremely difficult to resolve without resulting to time consuming and often expensive litigation.
The Revised Limited Liability Company Act codified in Chapter 605 of the Florida Statutes authorizes some provisions unconditionally while others are allowed only as long as they are “not manifestly unreasonable.” For instance, the Operating Agreement could prevent some events from triggering appraisal rights. In some transactions, such as mergers, sale of all assets of the company, or change to a different kind of entity, dissenting members have, by default, the option to sell to the LLC their membership interest at a fair value. An Operating Agreement can regulate several of these situations and prevent costly litigation later.
There are other provisions, however, that cannot be waived, such as judicial dissolution or unreasonably restricting the rights of members to initiate legal proceedings against the LLC or against other members or managers. One of the most important non-waivable provisions, some lawyers say, is the obligation and duty of good faith and fair dealing; however, the Operating Agreement can set standards for meeting these obligations, provided they are “not manifestly unreasonable.”
The Operating Agreement is also important to protect the limited liability status of the company and its members. The Operating Agreement may be used in court as evidence of the corporate structure and of corporate formalities being followed (or the failure to follow such formalities). Members must follow the corporate formalities to benefit from the protections of the limited liability shield in the event of lawsuits and judgments against the LLC. Such arguments and considerations would come out during an attempt to pierce the corporate veil and hold the members personally liable for judgments against the LLC.
Finally, it is important to have an Operating Agreement to signal the seriousness of a company to banks, potential members, and investors. A well thought out and drafted Operating Agreement not only protects the LLC and its members but it can also provide LLCs with better access to loans, angel capital, and investors. It may be required for other purposes such as immigration visas. For all these reasons, it is essential to have an LLC Operating Agreement tailored to the unique needs of the company and its members to avoid unpleasant (and costly) surprises later as well as ensure the best access to capital, resources, and potential members in the future.
*This article is being offered for educational purposes only and is not legal advice. No attorney-client relationship has been formed, and you should always consult an attorney to discuss your unique situation.