Over half of million LLC’s were formed in Florida in just the last two years.[1]  Many small business owners file a simple set of online Articles of Organization on Sunbiz.org with the Florida Secretary of State’s office to form an LLC.  The Articles have minimal information about the LLC.  The ease at which LLC’s may be formed in Florida, and other states, saves money for small business startups looking to bootstrap their startup companies. For many reasons, LLC’s is often the entity of choice for most small businesses. Most states, including Florida, do not require an LLC to have an operating agreement and many small businesses are simply too tempted to skip this step to save costs in the early formation of the business.   

The number of LLC’s with operating agreements skillfully drafted to account for the specific needs of their business is not readily available, but experience suggests it is likely to be dreadfully low.  Many small businesses either go without an operating agreement or use an operating agreement that is inadequate or generic without considering important issues related to the specific needs of the business and without taking advantage of the flexibility afforded to the LLC entity structure.  Not only do many small businesses miss out on all of the benefits of a skillfully drafted LLC operating agreement, but almost without fail, the lack of an operating agreement leads to later surprises and necessary complications down the road.  While no operating agreement can foresee all possible issues that may arise, much of what has been problematic in the past, can be identified and addressed. Too often, the parties to an LLC are forced into costly negotiations and sometimes even costly litigation to resolve issues that could have been addressed early on with an operating agreement.  Careful attention to the operating agreement in the formation stage benefits the members as the business grows and unexpected events and successes are realized. 

Beginning in January of 2014, the Florida Revised Limited Liability Company Act (the “Revised LLC Act”) became effective for all new LLC’s filed in Florida.  The Revised LLC Act is Chapter 605 of the Florida Statues, replacing the old Chapter 608, which was repealed.[2]  An LLC’s operating agreement guides the LLC in its operation and has many important roles. 

Absent an operating agreement in Florida, members of an LLC and its managers or managing member are subject to the provisions of the Revised LLC Act. While the statute is a default course of action that provides some guidance, allowing for the governance of your LLC by the standard default provisions of the statute may lead to unexpected and undesirable outcomes.  One of the key beneficial principles of an LLC is the enormous amount of flexibility provided by the statutory scheme for the formation and operation of an LLC.

Let’s take a look and highlight 15 important roles of the operating agreement for you as a small business owner, which will help you better understand your operating agreement or illustrate the importance of getting a well drafted operating agreement in place.  Here we go, an operating agreement will:

  1. Specify who will manage the LLC and how it will be managed.  An LLC may be manager-managed or member-managed.  In a member-managed LLC, each member has apparent authority to bind the company.  Care should be taken to determine how to best structure the management of the LLC and how to distributed control of the LLC. A manager in a manager-managed LLC may be a member but need not be a member. An LLC may have one or more managers.
  2. Specify the authority of the management, the scope of actions delegated to the management, and the voting requirements to take action among the management.
  3. Specify how much money or other valuable consideration each Member contributes (or did contribute) to the LLC at the startup and how much may be expected in the future.  This provision may also specify when and under what conditions, and with what approval of the members, whether majority, super majority, or unanimous, additional funding will be provided by each member. The operating agreement also addresses what happens if a member is unable to contribute future capital.
  4. Determine how important decisions will be made by the members and how the management and members will deal with deadlocks in voting.
  5. Provide for how the LLC will deal with the unfortunate circumstance of a member being unable to continue as a member through disability, insanity, incompetence, termination, or death.
  6. Provide the process for which a member may sell their interest in the LLC to a third party.
  7. Provides for a procedure for when a member wants to buy out the interest of another member
  8. Specify the tax classification and the tax matters partner, if applicable
  9. Specify the management of the member’s capital accounts, as applicable (partnership tax provisions in an LLC operating agreement are important).
  10. Provides for a process if the members of the LLC desire to separate, including the dissolution of the LLC.
  11. Determines whether the members are permitted to participate in or start businesses that compete with the LLC’s business
  12. Determines whether one member can force another member to sell their membership interest to a third party that offers to acquire the LLC
  13. Determines how profits will be allocated among the members and who decides how much will be distributed. Same with losses. An LLC taxed as a partnership allows for flexibility in this respect.
  14. Establishes a procedure for determining the value of each membership interest.
  15. Determines what happens in the case of a member filing for bankruptcy.

The Florida Revised LLC Act has 17 matters that may not be waived in an operating agreement.  Other than those 17 matters, a business and its owners may structure their LLC to optimize the management and structure of the LLC as well as plan for future events and how to handle them.

Hopefully this leaves you, the LLC manager or member, with a better understanding of operating agreement and why you should take time to consider the issues that can be customized within an operating agreement and take steps to ensure a customized framework to guide your LLC as your business grows.

[1] In 2017, 263,545 new limited liability companies (“LLC’s”) were formed in Florida.  In 2018, 295,966 new LLC’s were formed in the Florida. see https://dos.myflorida.com/sunbiz/about-us/yearly-statistics/

[2] Note to readers:  A major comprehensive revision to the Corporations Act under Chapter 607 of the Florida Statutes was signed into law in April 2019 and will go into effect January 1, 2020.

Dislaimer: A Deeper Dive with DLT and each blog post is not intended as legal advice, nor should you consider any part of this blog or website as such. Nothing herein acts to create any attorney client relationship with the lawyers at DLT Law Group. The blog is designed to provide general information and thoughts from the lawyers at DLT Law Group. You should not act upon any information contained in this website without first seeking professional advice from a lawyer licensed in your state or country.