LLC Operating Agreement Explained
A Florida LLC operating agreement is a contract between owners, or members, of a Florida LLC that regulates, among other things, members’ contributions of money to the LLC, distributions of LLC profits, and how decisions are made within the LLC.
Unlike the Articles of Organization, an LLC operating agreement in Florida is not required. However, it is usually a good idea to formalize the agreement among the LLC members in an operating agreement.
LLCs without operating agreements are governed by default rules and regulations of the Florida Revised Limited Liability Company Act. The default statutory rules may not be appropriate or welcome in LLCs involving unrelated members or LLCs with a particular legal goal such as asset protection.
A properly drafted LLC demonstrates the seriousness of the LLC business and avoids unanticipated consequences imposed by the statutory default LLC provisions. Members may customize their operating agreement as they wish to express their business relationship, provided, however, that Florida statutes do not permit operating agreements to waive some important member rights, obligations, or protections.
After the members form the LLC and file the Articles of Organization for a Florida LLC, the members should next prepare a written operating agreement expressing the provisions that govern the members’ business, the relationship within the LLC, and the LLC’s objectives.
A properly drafted Florida LLC operating agreement includes, at a minimum:
- The names of the LLC members.
- The members’ duties to contribute money or services to the LLC.
- The members’ economic interest in LLC property and profit.
- Distributions of LLC profit from time to time.
- Voting procedures and voting requirements for LLC decisions.
- Transferability of LLC interests to third parties.
- Responsibility and extent of authority of the LLC manager.
- Outline of how the LLC winds down its business.
- Various customized provisions that solidify the asset protection benefits provided by Florida’s LLC laws.
Oral Operating Agreements
An LLC operating does not have to be written in Florida. The Florida statutes expressly state that an operating agreement may be, in full or in part, an oral agreement or an agreement implied by conduct. Oral operating agreements save time and legal costs, but an oral agreement can lead to misunderstandings and conflicts between members because members have different recollections of prior oral promises.
Do Florida LLC Operating Agreements Have to be Filed?
An LLC operating agreement is a private contract among the LLC members. Florida law does not require an LLC to file with the State or to record in public records a copy of the LLC operating agreement. The general public cannot search or view each LLC’s operating agreement.
However, during litigation involving the LLC or its individual members, a court may compel discovery of the LLC operating agreement.
Free Operating Agreements
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 that could arise during business operations.
- 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. Examples include the sample LLC operating agreement form provided by eforms.com or the form provided by startbusiness.org.
When It is Worth Investing in a Professionally Drafted LLC Operating Agreement
Most serious businesses with significant capitalization need something more than a free or inexpensive 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.
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 the 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 he owes 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 priority return of capital or a priority share of profits until they receive the return of all or a percent 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 his 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?
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 fighting 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 claimant can recover judgments against the LLC only from LLC assets rather than from the personal assets of individual members. 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.
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 actually protects a member’s LLC interest from his 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.
- The LLC should be permitted to make unequal distributions among members.
- 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 be permitted to loan money to members.
- The LLC should be allowed to pay management fees and other compensation to members for services to the LLC.
- The LLC should deny voting rights to involuntary transferees.
- The LLC operating agreement should expressly provide that the holder of a charging lien is liable for member’s tax liability.
The above legal concepts are not included in a typical simple form LLC operating agreement in Florida. But all of these features, and others, are important for effective asset protection of an investment through a Florida LLC.
Last updated on October 25, 2021