Most businesses in Florida are closely held limited liability companies (LLCs), thus the question often arises as to whether these entities actually need an operating agreement. This article is not meant to provide legal advice or to form an attorney-client relationship; it is meant only to provide general information about this important and deep impacting topic.
By way of background, an LLC is something of a hybrid between a partnership and a corporation and was specifically authorized under Florida law a little over twenty years ago. Previously, Chapter 608 of Florida’s Statutes controlled LLCs and provided a limited amount of guidance to business owners and Florida’s Courts. Unfortunately, the many default provisions found in Florida’s Corporate Code did not appear in the old LLC Chapter. This all changed with the enactment of the Revised LLC Act at Chapter 605, that took effect on January 1, 2014. After January 1, 2015, it applies to all Florida LLCs. Therefore, without specific provisions in an operating agreement to govern the operation and dissolution of an LLC, owners of LLCs will find themselves unintentionally in situations that they did not originally intend. A proper operating agreement can also embrace the benefits of the Revised LLC Act.
That said, the expense of an operating agreement prepared by an experienced business lawyer is not necessarily required in every instance. LLCs can be divided into two categories; single-member and multi-member. While a well-crafted operating agreement can never be a detriment to a LLC it may be one that a single-member LLC can save, depending on its circumstances.
An operating agreement can be thought of as the contract between the members of an LLC governing such topics as how members can depart the entity and what rules apply to the addition of new members, if any are allowed. Therefore, in the case of a single-member LLC, it may not be a necessity, but in the case of a multi-member LLC, it may be a very wise business decision. Without identifying responses to specific situations that can arise, such as the departure or death of a member, a dispute can evolve between the members that a Florida court can not readily or easily resolve. Even for specific events like valuation of membership interest, the members of a multi-member LLC may not wish to accept the statutory default and may be better served to apply their own method to address that situation.
A secondary consideration is whether to seek a pre-formatted, fill-in-the-blanks operating agreement or to hire a competent and seasoned business lawyer to prepare that document. Naturally, such a choice is a business or management decision, however, an operating agreement that is not tailored to the unique needs of a LLC by someone who understands the problems that arise and are normally the subject of lawsuits will not address those unique needs very well. The savings realized by purchasing a pre-formatted operating agreement may result in substantially increased expenses later if a dispute develops, which is likely not anticipated or adequately covered by the stock operating agreement.
Back in the summer of 2010, the Florida Supreme Court addressed the ownership of LLCs in its Olmstead decision. The Florida Supreme Court confirmed that an individual’s membership interest in a LLC is a property right that is subject to a judgment, even if such judgment had nothing to do with the LLC. In response, Florida’s Legislature amended the old LLC Statutes to clarify that a member’s interest in a multi-member LLC could not be seized with a judgment and only the member’s right to a distribution from the LLC could be attached. The Revised LLC Act expanded on that so particularly for a multi-member LLC, a failure to address the ownership interest in a well-crafted operating agreement can lead to unintended consequences for the business.
While it is not practically possible to provide broad advice to members of a LLC, it is always a wise and prudent business decision for the owners of any Florida LLC to take the time and incur the small cost to consult with a qualified and experienced business lawyer to determine whether an operating agreement is appropriate for the business. By so doing, they can have an agreement that matches their intent, can evaluate whether any existing agreement fully addresses their intent, can determine whether their existing agreement meets the requirements of the Revised Act or identify the provisions that can be included to ensure the smooth operation of the enterprise. A proper and solid operating agreement for a LLC can go a long way to limiting the costs of any future dispute where, for example, an owner wants to leave the LLC, dies, or is divorced.
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