This is the first in a series of business law articles that will discuss overlooked topics that many LLC operating agreements do not include or, if included, do not clearly explain the topic. These omissions can lead to disputes among members, confusion about what roles members will have in the functioning of the LLC, and give rise to unnecessary legal complications. Your LLC’s operating agreement is its most important document in establishing and operating your LLC. That is why knowing what your LLC’s operating agreement should say is so important.
Do You Need an LLC Operating Agreement?
An operating agreement is the key document regarding the LLC’s financial and functional decisions. The purpose of an operating agreement is to govern the internal operations of the LLC regarding its business and its owners, who are called “members”. When signed by the members of the LLC and its manager, the operating agreement is a contract that is binding on its members, the LLC, and the LLC’s manager.
Is an LLC Operating Agreement Required?
In Florida, an LLC operating agreement is not mandatory. An operating agreement is similar in function to a corporation’s by-laws; it is comparable to a partnership agreement. An operating agreement is a declaration of the structure that the members have selected for the LLC.
If your LLC does not have an operating agreement, in effect your operating agreement is Florida Statutes, Chapter 605. If you say that is good enough for you, you are invited to read Chapter 605. After reading, or even scanning it without reading it word for word, you will realize it is not a substitute for a thoughtful operating agreement that addresses your LLC’s specific members and what is important to them in the functioning of your LLC.
An operating agreement is recommended for multi-member LLCs and single member LLCs too. In upcoming articles, the reasons for all LLCs to have an operating agreement will become apparent. The series of articles that will be posted in the coming weeks will describe what must be in an operating agreement and what may be optional to include depending on the number of members that comprise the LLC, the members’ LLC objectives, the nature of the LLC’s operations, how long the LLC will operate, and how active the LLC’s members will be in the functioning of the LLC.
You might think your agreement covers all the bases, but does it address things like member exit strategies, what happens if a member dies or becomes mentally incapacitated, how member disputes are resolved without litigation, or what to do if there is a controversy over profit allocations? Does the operating agreement define what happens if a member fails to meet the member’s obligations? The foregoing are examples; they are not a complete list of topics to be addressed in an LLC operating agreement. By identifying needed provisions and addressing them in your operating agreement, you will be better prepared to resolve issues, strengthen protections, and outline solutions before problems arise.
In this series of articles, we will focus on specific subjects that are often missing or only briefly mentioned that provide practical suggestions for improvement.
Keep reading this series of articles so you can be sure your LLC’s operating agreement is as thorough and strong as it needs to be. The second article in this series to be posted next week will be about members’ and managers’ succession planning provisions in an LLC operating agreement.
If you are ready to set up your LLC Operating Agreement, please contact our Business Attorneys for a complimentary 30 minute phone consultation to discuss the next steps.
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