DO I NEED AN OPERATING AGREEMENT FOR MY LLC?

Most businesses in Florida are closely-held limited liability companies, 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 ten years ago.  Presently, Chapter 608 of Florida’s Statutes controls LLCs and provides a limited amount of guidance to business owners and Florida’s Courts.  Unfortunately, the many default provisions found in Florida’s Corporate Code do not appear in the LLC Chapter.  This is changing with the enactment of the Revised LLC Act at Chapter 605, but that does not take effect until January 1, 2104, and will not apply to all Florida LLCs until January 1, 2105.  Therefore, without specific provisions in an operating agreement now to govern the operation and dissolution of an LLC, owners of LLCs may find themselves unintentionally in situations that they did not originally intend, which presents unique challenges for Judges and juries.  A proper operating agreement can also prepare a LLC for the changes coming in the Revised Act.

That said, the expense of an operating agreement prepared by counsel 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 events, such as the departure of a member, a dispute can evolve between the members that a Florida court can not readily or easily resolve given the current lack of statutory guidance.  Even in specific triggering events that the current LLC Statutes address and that the Revised Act will address, the members of a multi-member LLC may not wish to accept the statutory default and would rather have 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 engage competent business counsel 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 will not be able to address those unique needs very well.  The savings realized by purchasing a pre-formatted operating agreement may likely result in substantially increased expenses later if a dispute develops, which is not covered or not adequately covered by the stock operating agreement.

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 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 even expands on this further.  Therefore, particularly for a multi-member LLC, failing to address this reality through a well-crafted operating agreement can lead to unintended results for the business.

While it is impossible and inappropriate to provide any general advice to members of a LLC, it is a wise business decision for members of any LLC, single and multi-member, to take the time and incur the limited expense to consult with qualified business counsel to determine whether an operating agreement is appropriate to the business, whether any existing operating agreement appropriately addresses the intent of the managers and members, whether it will meet the requirements of the Revised Act, or what provisions should be included in an operating  agreement to ensure the smooth operation of the enterprise and limit the costs that may be incurred in any future dispute or upon the occurrence of an event, such as the demise or incapacitation of a member or manager.

About the Author 

David Steinfeld, Esq. is one of just over 200 of the almost 100,000 attorneys in Florida that is a Board Certified Expert in Business Litigation Law by the Florida Bar.  He is the Owner of the Law Office of David Steinfeld, P.L. in Palm Beach Gardens and is rated AV-Preeminent by Martindale-Hubbell, which is the highest peer review rating an attorney can receive.  He is a Member of the Florida Bar’s Business Litigation Board Certification Committee that oversees certification in that area, the Florida Bar’s Subcommittees on Florida’s LLC and Corporate laws, and serves on the Palm Beach County Bar’s Professionalism and Business Litigation Education Committees.  He sits on the Advisory Board for the ESI Roundtable, is a Member of the Association of Certified E-Discovery Specialists, a Fellow in the invitation-only national trial lawyer honor society, the Litigation Counsel of America, and was named one of Florida Trend Magazine’s Legal Elite for 2012.  Informative videos and articles on business litigation, e-discovery, real estate, and business law, as well as social media links, can be accessed at http://www.davidsteinfeld.com.  To schedule an appointment, you can reach the Law Office of David Steinfeld at info@davidsteinfeld.com or (561) 316-7905.

 

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