Will it matter if your LLC has an operating agreement?

Does it Really Matter if Your LLC Doesn’t have an Operating Agreement?

Yes! Having a limited liability company (LLC) with a properly written operating agreement (“OA”), customized to the members and managers of the LLC, matters a lot!

An LLC’s OA is its road map. It’s an agreement between the LLC members about how the LLC will decide issues as they arise. This article tells you why an OA matters and what happens when the LLC doesn’t have a written OA.

Often we see LLCs use “standard” online OAs or the LLC doesn’t have a written OA at all. Not having a written OA will require looking to Florida law to understand what may happen when, as an example, a member of the LLC dies or becomes incapacitated. Without a properly written OA, the LLC may be hindered or not allowed to complete a real estate transaction or a loan. The LLC members may not even know that due to the death of a member, Florida law may dissolve the LLC.

Let’s look at other examples of how Florida law applies when an LLC has no OA.

Multiple Managers of an LLC

Where a manager-managed LLC has more than one manager, absent an OA addressing one manager’s authority, Florida law provides that each manager has equal rights in management and requires either (1) an affirmative vote of the majority of managers at a meeting, or (2) unanimous consent of all managers. The members of the LLC may want to include in their OA specific provisions about the powers of individual managers. The members may want to take advantage of using recorded “Statements of Authority” that provide notice in the public records of a limitation or an expansion of an individual manager’s authority.

In Florida when a person is doing business with an LLC, Florida law allows the person without notice of a lack of authority to rely on the apparent authority of an LLC’s manager. Why does that matter? For example, a deed that transfers ownership of an LLC’s real estate, signed by one manager of a manager-managed LLC with more than one manager may bind the LLC even though the signing manager did not have the actual authority to sign and deliver the deed to the new owner. The new owner (the grantee in the deed) is presumed to be protected even though the delivery of the deed was against the wishes of the remaining managers and members of the LLC.

Loss of the LLC’s Members for 90 Days

In a catastrophe where all LLC’s members become deceased, or a single-member LLC loses its only member, Florida law says the LLC is dissolved after 90 days. Having an OA to state what happens in such an event can solve many headaches before they arise. Florida law is unclear whether the admission of a new member must occur within the 90-day period to avoid the dissolution of the LLC. Florida law does not provide for the reinstatement of an LLC dissolved for any reason other than administrative dissolution. When there is not at least one member of the LLC for 90 days, the result in Florida is dissolution and a mandatory winding-up of the LLC. The death of a member creates automatic dissociation as a member, so the death of a sole member results in the automatic dissolution of the LLC unless a new member is admitted before the expiration of the 90th day after the member’s death. In a member-managed LLC (but not in a manager-managed LLC), the bankruptcy or appointment of a guardian of a member also dissociates the member.

Florida allows an OA to provide rights to a person who is not a party to the OA. An OA providing for the transfer of a membership interest upon the death of a member of an LLC is enforceable. With such a provision, the membership interest passes outside of probate because the language in a contractual agreement specifically addressing the disposition of property upon death defeats a testamentary disposition of the property. Florida law supports an OA addressing membership rights at death. To avoid automatic dissolution, the LLC’s OA may provide for the automatic admission of a designated person or a legal entity as a member upon the death or incapacity of the last surviving member of the LLC.

Succession of Membership on the Death of a Member

Without an OA that states otherwise, the admission of new members after formation of an LLC requires the unanimous consent of all members. That result survives the death of a member. The “legal representative” of a deceased member has the authority under Florida law to wind up the estate of the deceased member. Therefore, the legal representative has the power to appoint new members only if the deceased member had the power to appoint new members. If a majority-in-interest member wants the power to add additional members without the consent of the other members, the power must be stated in the OA. An heir of a multi-member LLC cannot compel the LLC to recognize the heir as a member unless the deceased member had the power to do so under the OA.

Altering Fiduciary Duties

At its essence, a fiduciary holds a legal relationship of trust with another person(s). Florida law tells us there are specific fiduciary duties that cannot be waived. Under some circumstances, an LLC member’s fiduciary duties to other members may be modified by the OA. If not unreasonable, the LLC’s OA may alter or even eliminate the fiduciary duty of loyalty on profiting in winding up the company, use of company property, appropriation of a company opportunity, or competing with the LLC. The OA may identify activities that do not violate the duty of loyalty, alter the duty of care, or alter or eliminate any other fiduciary duty. The OA may allow a member to wind-up a dissolved LLC by purchasing the LLC’s assets without subjecting the purchasing member to a claim of breach of loyalty by the other members. As an example, a real estate developer involved in multiple LLCs with different members may want the OA to state that competing with the LLC’s business activities does not violate the person’s fiduciary duty to the other members.

Establishing the LLC’s Operating Agreement

Having an up-to-date, customized operating agreement will help you attain and maintain your LLC’s business objectives and maintain harmony among the members and managers of your LLC.

If we may help you in establishing your LLC’s operating agreement, please contact us at (813) 852-6500.