Most businesses formed in Florida over the past decade or more are limited liability companies or LLCs. Thus, the question often arises as to whether these LLCs need an operating agreement.
The history of Florida LLCs
Before the LLC, the options for business owners were the partnership or the corporation. Partnerships offer little to no liability protection for the owners. Corporations offered liability protection, but only if certain corporate formalities were respected like documented shareholder meetings. Few small businesses complied with those corporate formalities simply because they had only one or maybe two shareholders. As a consequence, many corporations lost their liability protection of the corporation.
The LLC was created to fill the gap between the two and to provide business owners with liability protection without so many corporate formalities. An LLC is essentially a hybrid between a partnership and a corporation. LLCs were specifically authorized under Florida law in 1999 and those laws were updated in 2013. The effect of the Revised LLC Act of 2013 that applied to all LLCs in Florida after 2015 is that taken together those statutes act as an operating agreement but they also impose on business owners the default choices made by the legislature. To weigh which entity is best you might view my article titled Which is better the Inc. or the LLC.
How much does an LLC operating agreement cost?
An operating agreement is really the contract between the members or owners of an LLC. These kinds of documents are known as corporate governance documents. It regulates decisions like whether and how LLC members can leave the business, whether new members are allowed to join, and how to value a membership interest. But the expense of an operating agreement prepared by a business lawyer is not necessarily required for every LLC.
LLCs can be divided into two categories; single-member and multi-member. While a well-crafted operating agreement is never a detriment to an LLC, it may be one that a single-member LLC can save, depending on the circumstances. In order to reduce the costs involved, I use a questionnaire that I created to collect the information I need to create the first draft. This eliminates one interaction with the client and saves you money while still giving you a draft that we discuss and edit at the time. The result is a customized operating agreement in less time for less cost.
What are the considerations to weigh in deciding whether to have an operating agreement?
In the case of a single-member LLC, an operating agreement may not be necessary because there is just one person making the decisions anyway. In the single-member LLC, an operating agreement can act as a Will for the business although making it easier for a beneficiary to dispose of the assets. This is not necessarily a bad idea because the beneficiary can sometimes sell the business or its assets while they still have value as opposed to waiting for the probate process which can result in the business or its assets deteriorating with you as the owner at the helm.
In the case of a multi-member LLC, an operating agreement may be a very smart business decision. If the owners do not agree on what will happen in certain instances, like the death or departure of a member, a dispute can easily evolve between the members. Those disputes are commonly called corporate divorces. Without an operating agreement defining what was agreed to happen, a Florida court cannot easily resolve the corporate divorce.
Should I just get an operating agreement off the internet?
Another consideration is whether to buy a fill-in-the-blanks operating agreement online or hire a good business attorney to prepare the operating agreement. While that choice is purely a business decision, an operating agreement that is not made for the unique needs of your LLC will never address your unique needs very well.
One size fits all operating agreements rarely do the trick. They are simply too broad and generic and often leave important questions unanswered because there was simply no one there to ask them. From my many years of experience, I can say that the savings realized by purchasing a per-formatted operating agreement online always results in increased expenses later when a dispute develops.
How safe is my LLC membership interest
In 2010, the Florida Supreme Court said that the membership interest in an LLC was a property right subject to judgment enforcement, even if the judgment had nothing to do with the LLC. In other words, back then, you could lose your LLC membership interest if someone got a judgment against you from something like a car accident that was unrelated to the LLC.
The Florida Legislature then amended the LLC laws to say that only a member’s distribution from a multi-member LLC could be attached with a judgment. The Revised LLC Act expanded that to all LLCs so now only the distribution can be affected with a judgment. So, now your LLC membership interest is more protected than it used to be.
Smart business owners research decisions before they make them. The time and expense of speaking with a seasoned Board Certified business lawyer to help you decide if you need an operating agreement for your business is worth it. The cost of not doing so will be far greater later if a dispute arises among the LLC owners that could have easily been covered by a good operating agreement.
Read on to learn where to begin when spring cleaning your business.