LLC Operating Agreement in Florida

What Is an Operating Agreement?

In Florida, an LLC operating agreement is a foundational document that outlines the operational and financial decisions of a business, including rules, regulations, and provisions.

The agreement’s purpose is to govern the business’s internal operations in a way that suits the specific needs of its members.

An LLC operating agreement can substantially diminish a creditor’s ability to collect or seize assets or income of the debtor’s interest in the LLC.

What Should You Include in an Operating Agreement?

1. Membership Details: Specifies who the members are, their contributions, ownership percentages, rights, and responsibilities.
2. Management Structure: Outlines whether the LLC will be managed by members or a designated manager, detailing the manager’s role, powers, and how decisions are made.
3. Voting Rights and Responsibilities: Defines how votes are allocated among members and the voting process for making various business decisions.
4. Distributions: Describes how profits and losses are distributed to members. This includes the frequency of distributions and how amounts are calculated based on ownership interests.
5. Capital Contributions: Details initial and future contributions by members, whether additional contributions can be called, and the consequences for failing to meet these contributions.
6. Membership Changes: Explains the process for adding new members, what happens when a member wants to leave, or how interests are transferred, including any buyout procedures.
7. Dissolution: Lays out the conditions under which the LLC may be dissolved, the process for dissolution, and how assets are distributed after debts are settled.
8. Asset Protection Provisions: Various customized provisions that solidify the asset protection benefits provided by Florida’s LLC laws.

Do Florida LLC Operating Agreements Have to be Filed?

Florida law does not require LLC operating agreements to be filed. An LLC operating agreement is a private contract among the LLC members. The general public cannot search or view an LLC’s operating agreement.

However, during litigation involving the LLC or its individual members, a court may compel discovery of the LLC’s operating agreement.

Should You Use a Free Operating Agreement?

Many newly started Florida LLC businesses want to minimize organizational expenses such as legal and accountant fees. Such cost-sensitive start-ups may not want to spend legal fees for an attorney to draft a customized Florida LLC operating agreement. You should consider using a simple, low-cost, or free LLC operating agreement in Florida under the following circumstances:

• The LLC is a family business without creditor concerns and all family members work well together.
• The LLC members trust each other to amicably compromise business disagreements.
• All LLC members are contributing equal money and are sharing both losses and profits equally
• The amount of capital investment is relatively small, and members do not anticipate that the LLC will grow to a large or complicated business.
• The members are unconcerned about asset protection of their LLC membership interests from their individual creditors.

New LLC businesses in Florida that are within the above descriptions may do well with a simplified and inexpensive operating agreement, or they may rely on oral agreements.

Simple operating agreement forms are available without charge on the internet.

Benefits of an Attorney-Drafted LLC Operating Agreement

Most serious businesses with significant capitalization need something more than a free operating agreement to express the participating members’ business relationship. Customized operating agreements are appropriate whenever the members are unrelated partners or when the members are investing significant amounts of money and expect to grow the LLC into a substantially profitable business operation.

An LLC that will elect taxation as a subchapter-S entity requires special provisions in its operating agreement. An operating agreement that is inconsistent with the IRS rules for S-corps may forfeit the S election with adverse tax consequences for the LLC owners.

In-depth operating agreements are also strongly recommended when any LLC member faces creditor or judgment issues to take advantage of customized asset protection provisions.

LLC members—especially unrelated business partners—may wish to discuss the following list of questions, among others, as they start a new business. Their agreed answers to these questions should be included in their Florida LLC operating agreement.

• How much money is each member expected to contribute at the start of operations?
• Which members will contribute additional money if the LLC manager makes a call for additional capital, and what are the consequences for a member does not contribute what they owe to the LLC?
• Are any members required to contribute services in consideration for their right to LLC profits?
• Are any members agreeing to guarantee LLC debt, and if so, how are these members compensated for this risk?
• Who decides whether the LLC can afford to distribute cash flow to the members?
• Are any members entitled to a priority return of capital or a priority share of profits until they receive the return of all or a percentage of their initial investment?
• Do members agree to non-compete and confidentiality provisions?
• If one of the members wants to retire from the LLC business, is the LLC or are the remaining members required to pay the retiring member for their LLC interest? If so, what is the value of the retiring member’s interest?
• What happens if one of the members can no longer work in the LLC business or contribute additional money because of the member’s death or physical disability?
• What are the consequences of a particular member being involved in a divorce or other type of legal proceeding where a court may issue an order affecting that member’s rights and financial interest in the LLC?
• Will the LLC elect to be taxed as a S-corp?

The above list is only a sample representation of the legal and financial issues people should consider when they start a new business. It is easier for LLC members to resolve these issues before starting their LLC business than to fight over the issues as they come up in the course of an already busy and profitable business.

How to Use an LLC Operating Agreement for Asset Protection in Florida

An LLC can be an effective asset protection tool in Florida in two ways: (1) protection from claims against the LLC and (2) protection from claims against the LLC member.

Claims Against the LLC

First, the LLC shields its members from individual liability from claims made against the LLC. A person with a claim against the business can recover on a judgment against the LLC only from LLC assets rather than from the personal assets of individual members. This protection is referred to as a “corporate shield.” People with multiple investment assets should have each asset owned by a separate LLC to isolate each LLC’s exposure to only the affected LLC’s own assets.

There are exceptions to this legal shield. One exception is when a member personally guarantees an LLC obligation. The creditor may sue the owner individually based on the guaranty whether or not the creditor sues the LLC. Another exception is when an LLC is established to defraud creditors. The affected creditor may pursue an action to pierce the LLC liability shield and hold the LLC owners liable.

Claims Against the LLC Member

The primary asset protection purpose of an LLC is the protection of a member’s LLC interest from the member’s individual creditors.

While a judgment creditor can levy upon and force the sale of a debtor’s stock interest in a corporation, the same creditor is limited by Florida law to a charging lien against the debtor member’s interests in LLC distributions, if any are made.

The extent to which an LLC protects a member’s LLC interest from their individual creditors depends significantly upon the terms and conditions of the Florida LLC operating agreement.

To best protect the LLC membership interests from creditors, an LLC operating agreement in Florida should include at minimum the following features:

• Distributions of LLC cash flow should not be required at regular intervals.
• In kind distributions of property should be permitted.
• Members should not be entitled to a return of their capital contributions.
• Tenants by entireties ownership of membership interests should be expressly permitted.
• Judgment creditors with charging liens should be held liable for capital contributions.
• The LLC should deny voting rights to involuntary transferees.
• Appropriate provisions to comply with S-corp taxation rules where appropriate.

The above legal concepts are not included in a typical simple form LLC operating agreement in Florida. But all these features, and others, are important for effective asset protection of an investment through a Florida LLC.

How to Create an LLC Operating Agreement in Florida

An LLC operating agreement can be created by:

1. Using a free form.
2. Paying for an agreement generated online at low cost.
3. Hiring an attorney to draft a custom operating agreement.

In some circumstances, an operating agreement can be helpful even for single-member LLCs to provide evidence as to the owner of the LLC. An attorney-drafted operating agreement will be the most expensive option.

However, these operating agreements can be particularly helpful for business owners facing creditor issues or for ambitious businesses owned among non-family members (friends or business partners).