LLC Operating Agreement Explained
A Florida LLC operating agreement is a written agreement between owners, or members, of a Florida LLC that spells out how the LLC will be managed in terms of finances and decisions.
Unlike the Articles of Organization, an LLC operating agreement in Florida is not actually required. However, it is usually a good idea to formalize the agreement among the LLC members in an operating agreement. This is especially true when the members seek to avail themselves of the asset prtoection benefits of an LLC.
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 and legal relationships within the LLC.
LLC operating agreements are legal contracts with significant legal consequences for the LLC members. A properly drafted Florida LLC operating agreement includes:
- The names of the LLC members
- The members’ proportionate ownership interests in the LLC
- The members’ duties to contribute money or services to the LLC.
- Documentation of the member’s respective right to receive profit distributions and their relative share to tax losses and income.
- Various customized provisions that solidify the asset protection benefits provided by Florida’s LLC laws.
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 does not have the ability to search or to 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.
When to 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 that could arise in the course of 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 business in Florida that are within the above descriptions may do well with a simplified and inexpensive operating agreement.
When to Go Beyond Free LLC Operating Agreements
The majority of new LLCs need something more than a simple and 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 or money and expect to grow the LLC in to a substantially profitable business operation.
In-depth operating agreements are also strongly recommended when any LLC member faces creditor or judgment issues.
LLC members may wish to discuss the following list of questions, among others, as they start a new business so that their agreed answers to these questions can be drafted in to 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 types of legal and financial issues that people should consider when they start a new business. A properly drafted Florida LLC operating agreement should answer these types of questions.
It is easier for LLC members to resolve these issues before starting their LLC business than it is to fight over the issues as they come up on the course of 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 personal assets of individual members.
There are exceptions to this legal shield, however. One exception is when a member personal guarantees an LLC obligation. Another exception is when an LLC is established to defraud creditors.
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 the following features:
- Distributions of LLC cash flow should not be required at regular intervals. Instead, distributions should be at the discretion of manager or members under certain conditions.
- The LLC should be permitted to make unequal distributions among members under certain circumstances.
- 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, and the LLC operating agreement should include a savings clause detailing the rights and voting interests of the tenants by entireties members.
- Judgment creditors with charging lien 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 of membership interests (such as creditors);
- 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. Yet all of these features, and others, are important for effective asset protection of an investment through a Florida LLC.
What to Do Next
We can draft a customized LLC operating agreement for your LLC. We also help people go through their assets and income and determine what is at risk of collection from a judgment creditor. We then develop a plan to protect any exposed assets from collection. If you’re interested in protecting your assets from monetary judgment creditors, contact us or schedule an appointment online.