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The Importance of the Operating Agreement in an LLC

Why an LLC?

Business Attorney Boynton Beach Limited liability companies, or LLC’s, are a unique form of business structure in that they provide the limited liability aspect of a corporation with the operational flexibility of a partnership. The owners of an LLC are known as “members,” and similar to the shareholders of a corporation, each member is considered to be a separate legal entity from the LLC. This means that each LLC member usually will be shielded from personal liability for any debts or legal obligations of the LLC itself. (In some instances, such as with illegal acts or where a member has signed a personal guarantee, this shield will not provide protection, which is why this business structure is referred to as a limited liability company.)

Another reason the LLC might be the preferred structure for a business is its operational flexibility. An LLC lacks centralized management, such that each member can freely participate in the management of the business. LLC’s tend to have fewer formalities than corporations, such as record-keeping requirements. Unlike a corporation, LLC’s are not required to have a board of director or officers. An LLC can also choose how profits will be distributed – in other business structures, such as the partnership or corporation, profit distributions are based on percentage of ownership or amount of capital contribution.

What is an Operating Agreement?

Most business structures will create a legal document that provides the terms of that business’s internal operations. In a corporation, the articles of incorporation serve as that document. LLC’s do not have articles of incorporation. Instead, the operating agreement is what structures the LLC’s financial and operational decisions. There is a key difference, however, between the articles of incorporation and an operating agreement – most states, including Florida, do not require an LLC to have an operating agreement. Articles of incorporation, on the other hand, are required by law in order for a corporation to exist. While this “relaxed” set of LLC rules might seem advantageous at first blush, those considering the creation of an LLC without an operating agreement should proceed with caution. In particular, if an LLC has more than one member, the failure to have an operating agreement might be considered, at the very least, unwise.

What Happens When an LLC Does Not Have an Operating Agreement?

The operating agreement usually includes provisions for how profits and losses will be allocated, percentages of ownership interests, authority and responsibilities of members, members’ voting rights, and procedures for transferring ownership interest. Without an operating agreement, the resolution of any disputes between members will be determined by the state statute. Similarly, where an existing operating agreement is silent on a particular issue, a state’s statute will provide default rules. In Florida, that statute is found in Chapter 605. Specifically, the relevant portion of 605.0105 states:

Except as otherwise provided in subsections (3) and (4), the operating agreement governs the following:

  • Relations among the members as members and between the members and the limited liability company;
  • The rights and duties under this chapter of a person in the capacity of manager;
  • The activities and affairs of the company and the conduct of those activities and affairs; and
  • The means and conditions for amending the operating agreement.

To the extent the operating agreement does not otherwise provide for a matter described in subsection (1), this chapter governs the matter.

In the event of a dispute between members of an LLC, the absence of an operating agreement may mean placing some weighty decisions in the hands of the state rather than the LLC itself.

Contact an Attorney with Experience

It is very important then, when establishing an LLC, to take the time to consult with a knowledgeable business attorney to complete an operating agreement. At the Law Firm of Peter M. Feaman, P.A., we provide top-notch services individualized to your particular business needs. Our attorneys are dedicated to ensuring our clients receive the best representation. To begin a free, personalized consultation, contact us in Boynton Beach at (561) 734-5552.