Operating Agreements: How Members Can Run an LLC on Their Terms
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Operating agreements can provide members of a limited liability company (“LLC”) with the power to create their own governing rules and resolve disputes before they arise. As LLCs become the predominant form of legal entity, members need to consider the importance of an operating agreement to ensure the LLC and members can operate under their own agreed upon terms.
- What is an Operating Agreement
Operating agreements are legal contracts between members of an LLC that govern the relationship between members and provide the terms of LLC management and operations. According to Section 605.0105, Florida Statutes, an operating agreement governs several important functions between members of an LLC, including the relationships between members as members, the relationships between members and the limited liability company, the rights and duties of a person in the capacity of a member or manager, and the activities and affairs of the company and the conduct of those activities and affairs. Consider the operating agreement as an instruction book for an LLC drafted by the members to meet the specific needs of a business. Signing an operating agreement will allow members and the LLC to operate under their own set of rules and procedures instead of relying on the default rules provided by the Florida Limited Liability Company Act.
- What can an LLC include in an Operating Agreement?
Members have significant flexibility and discretion when drafting operating agreements. Operating agreements can include the processes or procedures the members want in place when running the LLC or serving as a member. Operating agreements frequently address matters involving management rights, voting rights, profit distributions, manager powers, member powers, capital contributions, equity issuance, equity sales, buyouts, expulsion, and member voting. Members can also amend operating agreements to evolve with the company. To execute or amend an operating agreement, all members must consent.
- What can’t an LLC include in an Operating Agreement?
According to Section 605.0105, Florida Statutes, there are only a few things an LLC can’t include in an operating agreement:
- Prevent the LLC from suing or being sued;
- Vary the law applied to the Members or Company;
- Eliminate the duty of loyalty or the duty of care or obligation of good faith and fair dealing
- Relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law;
- Prevent members from inspecting records;
- Vary the grounds for dissolution, except to provide deadlock mechanism;
- Vary the requirement to wind up the company’s business, activities, and affairs after liquidation;
- Unreasonably restrict the right of a member to sue;
- Vary the right of a member to approve a merger, interest exchange, or conversion;
- Vary the required contents of plan of merger, a plan of interest exchange, a plan of conversion, or a plan of domestication;
- Restrict the rights under this chapter of a person other than a member or manager, with limited exceptions;
- Provide for indemnification for a member or manager for (1) conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law; (2) transaction from which the member or manager derived an improper personal benefit.; (3) A circumstance under which the liability provisions of s. 605.0406 are applicable; (4) A breach of duties or obligations under s. 605.04091, taking into account a restriction, an expansion, or an elimination of such duties and obligations provided for in the operating agreement to the extent allowed by subsection (4).
As long as the terms of the operating agreement do not attempt to undertake any of the actions listed above, the terms of the operating agreement will be enforceable and binding on all members.
- What happens if my LLC doesn’t have an Operating Agreement?
The Florida Revised Limited Liability Company Act provides the default rules for LLCs without an operating agreement. However, the Florida legislature drafted the Florida LLC Act to apply to all types of businesses by providing a standard set of rules that apply in the event members fail to create their own. The Florida LLC Act vests tremendous power to members in majority control and fails to address common issues such as buyouts, capital contributions, and informal deadlock resolutions. Relying upon the LLC act also increases the probability of litigation, as there are no other means for members to resolve their disputes without court action. Having an operating agreement in place ensures that members can operate LLCs without relying on the default rules provided by the Florida LLC Act.
The Operating Agreement is the most significant document for an LLC. Operating agreements can be complex or simple depending on the needs and concerns of the members. However, operating agreements must be carefully drafted and reviewed to minimize ambiguity or uncertainty, as members will remain bound by its terms for as long as they remain a member.