The Need for an Operating Agreement in a Florida LLC

Limited liability companies (LLCs) have become the most popular entity in the State of Florida. Since 2015, there have been more than twice as many LLCs created in Florida than the second most popular entity, corporations. An LLC is a statutorily created hybrid entity that has characteristics of a corporation and a partnership. See Florida Statutes, Chapter 605, Florida’s Revised Limited liability Act. Their popularity continues to grow because LLCs offer the benefits of both types of business entities without most of the drawbacks.

Starting an LLC in Florida is a formal process. The owners of an LLC, called members, must file a document entitled Articles of Organization with the Florida Division of Corporations. While not required by law, it is advisable for any multiple member LLC to also execute an operating agreement during the organization process.

What is an Operating Agreement?

An operating agreement is a binding legal contract between the members of an LLC that sets forth the rights and obligations of each member. An operating agreement also outlines the fundamental functions of an LLC and how the entity will be managed.

Florida law allows for a great deal of flexibility regarding the form and substance of operating agreements. Members of an LLC can adopt an operating agreement at any time before or after an LLC is created. Operating agreements can be in writing, verbal or a combination of both. However, if an operating agreement contains both written and verbal provisions, any inconsistency will be resolved in favor of the written provisions.

To avoid any uncertainty between the members and hopefully reduce the likelihood of litigation, it is recommended that an operating agreement be in writing and address the following topics:

  • The ownership interest of each member;
  • A description of how the LLC will be managed (by its members or by a manager), including the voting rights of each member;
  • The timing and notice requirements of any member and/or director meeting;
  • The compensation of members and/or managers and how distributions of profits will be determined;
  • Any requirement regarding the contribution of additional capital;
  • The ability of the members to transfer their interest in the LLC; and
  • The dissolution of the LLC.

Depending upon the LLC, it may be advisable to also address more specific issues, such as how the accounting and financial management of the LLC will be accomplished.

To the extent an LLC has a written operating agreement, Florida Statute 605.0105 notes that the following information should be included in your operating agreement:

  • The relations among your members and between the members and the limited liability company;
  • The rights and duties of a person who serves as a manager of the LLC;
  • The activities and affairs of the company; and
  • How to amend the operating agreement.

Florida Statute 605.0105 also identifies provisions or terms that cannot be included in an operating agreement, such as provisions waiving or eliminating the LLC’s or its members’ duties of care or loyalty or restricting the members’ rights to certain information.

Why Do I Need an Operating Agreement?

The members of an LLC should adopt an operating agreement if they want to operate their LLC in a way different than what is provided in Florida Statute, Chapter 605. This chapter provides default provisions for how LLCs are operated and applies to all LLCs after January 1, 2015. An operating agreement is also advisable to avoid uncertainty or conflict between the members as to how the LLC should be operated. Creating a document that sets out everyone’s expectations and agreements can save a significant amount of time and money if a dispute arises in the future. An operating agreement also forces members to plan for the future and gives them a meaningful way to convey rights and obligations to prospective LLC members.

Is an Operating Agreement Needed in Single-Member LLCs?

Even though a single-member LLC does not have a risk of a dispute between members, an operating agreement should still be adopted. First, it will help the LLC avoid the default provisions of Chapter 605. Second, it can help with asset protection issues. The adoption of an operating agreement can be used as evidence that the LLC is truly a separate and distinct entity from its member, and not just an alter-ego. Third, an existing operating agreement can help with the growth of the LLC. An operating agreement can provide a structure for how new members or investors will be treated and re-paid.

What if There is No Operating Agreement?

If there is no operating agreement in place for an LLC, the default rules set forth in Florida Statute, Chapter 605 will apply.

Recommendations

Operating Agreements are complex and, sometimes, lengthy documents that have a direct impact on the rights of an LLC’s members. We strongly recommend that you seek the assistance of an experienced attorney when you are creating or reviewing an operating agreement.

If you want help drafting a Florida operating agreement, LegalStandard.comsm can help. LegalStandard.comsm can draft a stand-alone operating agreement or $800.00 or draft one as part of a package for $1,500.00. LegalStandard.comsm can also review an existing operating agreement for as low as $295.00, depending upon the length of the document.