Does an LLC Need an Operating Agreement in Florida?
Only a handful of states statutorily require that new LLC’s create an operating agreement. Even if there is no legal requirement to do so in Florida, however, an LLC should have one. When things are going well within an LLC, members often don’t see the necessity for an operating agreement, but when disagreements arise, having one can make all the difference. Here are several of the main reasons why an operating agreement is important:
An Operating Agreement Determines Management Type for the LLC
The operating agreement will spell out whether the LLC is member-managed or manager-managed. With member-managed LLCs, members/co-owners are involved in the daily management duties and actively make decisions. With manager-managed LLCs, the authority is delegated to a specific person or persons. If an LLC does not specify how the LLC is to be managed, it will default to a member-managed LLC, which may not be what the members intend.
An Operating Agreement Determines How and By Whom Decisions Will be Made
Thinking ahead of time and outlining how decisions should be made can help with disputes down the line. An LLC can detail everything from basic daily operational decisions to major business decisions. Does everyone have equal voting rights? Is a unanimous agreement required? And, what happens if there is a tie?
An Operating Agreement Determines the Procedures for When a Member Wants to Sell
If a member of the LLC wants to sell and you don’t have an operating agreement in place, the member might find himself or herself with a new co-member that no one else knows or likes. Spell out procedures for what happens when a member wants to sell his or her interest in the company in the operating agreement. Options may be to either restrict a member’s right to sell without majority approval, or a clause that requires the member to first offer his or her interest to other LLC members before offering the same deal to an outside party.
An Operating Agreement Determines the Procedure if a Member Needs or Wants Out
This can be an entirely different scenario than a member who just wants to sell his or her interest. Unfortunately, life events can alter someone’s situation – such as a death in the family, divorce, health problems, or financial issues. Having rules spelled out ahead of time when you are preparing an operating agreement can help solve these issues without involving a lot of emotions during a particularly rough time for the member.
An Operating Agreement Determines How Profits are Split
Operating agreements can define how profits are split between members. Because LLCs offer more flexibility on many business aspects, including profits, it’s important to have this outlined. For example, a member could share ownership 50%/50% between the member and another member, but choose to split profits 75% / 25%, which varies from the traditional corporation business structure that dictates profits are split based on ownership amounts.
Updating the LLC’s Operating Agreement
One of the easiest mistakes to make is not updating an LLC’s operating agreement. Did a member leave? Did the LLC gain a new partner? Did the LLC decide to handle business decisions differently? Without updates, a member can find himself or herself in the middle of a big member dispute.
If you have an LLC and are experiencing issues with a member dispute, contact our team at Rabin Kammerer Johnson to schedule a consultation. Our dedicated West Palm Beach attorneys are eager to assist you throughout each step of your case.