Drafting an Effective Operating Agreement
Although Florida does not require limited liability companies (LLCs) to have an Operating Agreement, the absence of one means your LLC will be defaulting to states rules and regulations, which may not be in the best interests of your business.
What is an Operating Agreement?An Operating Agreement is made between the owners (e.g., members) of an LLC and serves as a framework for how the company is to be run. Among other matters, it provides a guideline for the members' ownership interests, financial and managerial rights, and responsibilities to the company. In essence, it is the LLC equivalent to corporate by-laws and partnership agreements.
The two primary reasons why an Operating Agreement is so crucial to an LLC are:
1. It protects you and the other members from personal liability.
2. It sets forth the rules, duties, and protocols needed to both run the business and to resolve or address any disputes among its owners.
You might wonder why you would need an Operating Agreement to help provide liability protection if an LLC seem to serve that purpose by definition. As it turns out, liability protection is not absolute. If your business is hit with a lawsuit and the opposing party requests the court to hold you personally liable, they can cite the lack of an Operating Agreement as proof that your business was not being run as an independent entity. Ignoring the formalities of the LLC -- the rules, functions, and member responsibilities that give a company its distinct legal personality -- can leave you vulnerable in litigation.
With this in mind, here are the essential elements of an effective and comprehensive LLC Operating Agreement.
It Should be in WritingNo matter how much you trust or know the other members, you should never rely solely on informal, oral agreements to govern your LLC. Setting aside the impracticality of remembering the finer details that go into running a business, it will be far more difficult to settle disputes or make major business decisions by memory. An Operating Agreement offers a clear and inarguable set of guidelines that can be referenced and agreed upon by all members. Our attorneys have drafted numerous Operating Agreements and know how to make it unambiguous and comprehensive.
Every Member Must SignAs the primary document governing all aspects of the LLC, it should go without saying that every member must sign the Operating Agreement so as to be legally bound to its terms. This may seem like an obvious point, but there have been plenty cases where one member forgets to sign, leading to major problems down the road once a dispute arises. Make sure every member signs and dates the Operating Agreement. It is advisable to have everyone meet together at the same time for this purpose. In addition to writing the Operating Agreement, we are very thorough when it comes to ensuring it is properly executed.
The Management Structure Must Be ClearThere are two main ways that an LLC can be managed: member-managed or manager-managed. Each has its strengths and weaknesses depending on how many members the LLC has and how it is intended to function.
Under a member-managed structure, each member has the authority to manage the LLC and act on its behalf (not unlike partners in a partnership). This choice is most popular when there is only one or two members of the LLC, since it can be unwieldy to have multiple members exercising managerial rights, especially if their decisions were to conflict.
With a manager-managed LLC, only certain members or non-members are appointed to manage the company and act on its behalf. As your business grows and more members join, this approach may prove more palatable.
An effective Operating Agreement clearly lays out which managerial structure will govern the LLC, thereby preventing any future issues. Jurado & Farshchian business attorneys can help you determine the best structure for your LLC.
Member Interests, Contributions, and Responsibilities Need to be Well DefinedIt is all too common for friends, relatives, or colleagues to come together and create a business without formalizing each of their respective duties and interests. There must be a clear understanding among all members of their functions within the company and their share of the interest in the LLC. Not only will this make everyone's job easier to do, but it will avoid any potential misunderstandings or conflicts down the road. Our attorneys will work with you to hammer out a clear delineation of everyone's individual duties and interests.