Florida recognizes the limited liability company (LLC) as a business entity that you can establish for benefits distinct from sole proprietorships and other corporate forms. The benefits of a florida llc operating agreement are twofold – LLCs avoid the double taxation of corporations while creating a liability shield and asset protection for the owners.
Naturally, the LLC is a popular business entity choice for privately held businesses that don’t anticipate many investors or a future IPO. An LLC and its member(s) can further benefit from a thoughtful operating agreement molded to fit the needs of the business (for example, if an LLC elects to include a Florida noncompete agreement). In this article, you’ll learn more about the different types of Florida LLCs and the issues that LLC operating agreements address.
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An operating agreement is a contract that defines how your LLC will function as a business entity. This type of agreement is unique to the LLC business entity form. You can compare an operating agreement to the bylaws of a corporation or the partnership agreement of a partnership. All members of the LLC sign the operating agreement – making it an enforceable contract between each member and the LLC.
Operating agreements are important in an LLC formation along with other legal documents like the articles of organization. Most operating agreements will cover who the members are, their ownership percentage of the company, management choices, and many other concepts for an efficient operation of the business. The contents of operating agreements are covered in greater detail further below.
Having an operating agreement (and following it) also serves the purpose of upholding the company’s limited liability status. Maintaining the corporate formalities of an LLC helps preserve its greatest benefit – protecting members from personal liability over the LLC (e.g., financial obligations, lawsuits, etc.).
Florida law offers two options for the management structure of your LLC (i.e., decision-making authority). One option is for the members of the LLC to appoint a manager within the operating agreement. The manager of an LLC is someone who leads the daily operations of the business and has some level of authority.
An LLC manager is a fiduciary position, which means a manager owes duties of care and loyalty to the LLC. In other words, the manager must exercise a minimum level of reason when acting on the LLC’s behalf and must avoid placing their interests (or the interest of others) above those of the LLC.
An operating agreement can state whether the manager will serve in perpetuity. In contrast, the operating agreement can give the manager a limited term and provide for an election or reappointment process. One approach is to have the manager serve on an annual basis with the LLC members reappointing the manager during its annual meeting.
Manager-managed LLCs are most common in situations where the business has multiple members. The benefit of a manager-managed LLC is the increased efficiency of streamlining some of the decision-making authority into one person. The manager of an LLC may be a managing-member who has more industry knowledge of the business compared to the remaining members. Sometimes, members will appoint a non-member to the position. Either way, selecting a manager is an important decision when starting an LLC, and the choice should not be made without careful consideration.
Equally important to selecting a manager is defining the range of their authority. Several issues occur in defining the scope of a manager’s authority depending on the nature of the business and the members. In a manager-managed system, members will generally reserve the right to make major business decisions (i.e., selling major business assets, acquiring debt, etc.). However, an operating agreement can expand or limit a manager’s authority in several other areas:
The other option for a Florida LLC is to have all the members participate in its management. In this management model, each member has the authority to act on behalf of the LLC and vote on important business decisions.
A member-managed model makes the most sense for LLCs with a limited number of members who all plan to be active in the daily operations of the company. The benefit of a member-managed LLC is the ability to obtain full agreement on business decisions before they happen. This can prevent future conflict and ensure all members have an equal say in the company’s operations. The downside to a member-managed LLC is the potential for inefficiency and an inability to move the business forward when disagreements arise amongst the members.
You can customize the scope of authority for members in a member-managed LLC through the operating agreement to balance the need for efficiency and giving members an equal voice. For example, you can give authority to all members to perform specific operations of the business without the need for other member approval. Alternatively, you can create a voting structure where certain decisions only require a majority of member approval while important decisions require each member’s approval.
You may wonder if it is possible to have an LLC with one member. The answer is yes. Single-member LLCs are common in a couple of scenarios.
The first is a sole proprietor whose business is starting to grow and would like liability protection beyond what standard business insurance provides. Single-member LLCs also exist with larger businesses that want to create a wall of separation between it and its other business ventures. In this context, the larger company (i.e., the parent) is the single member of another company known as a subsidiary.
A Florida single-member LLC operating agreement is especially important to maintain the separation between the member and the LLC. The separation is what prevents a piercing of the corporate veil – a situation where the member is indistinct from the LLC and, therefore, personally liable for the LLC’s liabilities.
An LLC that has more than one member will benefit from a Florida multi-member LLC operating agreement. Operating agreements are important in the context of LLCs with several members to establish ownership percentages, capital contributions, distributions standards, and other rights for income tax purposes.
Simply stated, the law in Florida does not require an LLC to have an operating agreement. The Florida Revised Limited Liability Company Act contains rules that control how LLCs (and those who operate and own them) must operate when an operating agreement does not exist.
However, an operating agreement for an LLC is often better than relying on the rules set forth in Florida’s law for a couple of different reasons. The first is that you might not want to follow some of the LLC operating rules in Florida’s statute. The law allows you – through an operating agreement – to customize certain elements of an LLC’s operations (e.g., manager authority, distribution preferences, voting rights, etc.).
The second reason for an operating agreement is having an effective contract that clearly states who the members are and what percentage of the company they own. You wouldn’t make a purchase without obtaining some form of record showing ownership. The same is true for purchasing ownership in an LLC.
The contents of an LLC’s operating agreement will vary depending on the business, the number of members and their ownership interest, and other preferences. Some operating agreements only need to be a few pages while others might require more to capture relevant issues the LLC might encounter.
The contents of an operating agreement are up to the members to decide so long as the agreement does not violate the Florida statutes, the LLC’s articles of organization, or other state law concerning LLCs. Generally, most operating agreements will incorporate the following:
The operating agreement will state basic information about the LLC such as
Members of an LLC could be an individual, trust, or other business entity. The operating agreement should provide the names, contact information, and other important details about the members.
Establishing an LLC will require the member(s) exchange of property for an ownership interest in the company (similar to a shareholder agreement). The exchanged property could be cash, real estate, personal property, services, or other forms of capital. Having a clear picture of a member’s contribution to a company is important for income taxes and knowing each member’s ownership percentage. Operating agreements also provide terms for contributing additional capital if necessary.
An operating agreement should state what management structure the LLC will have – member or manager-managed. Furthermore, the operating agreement will state the scope of the manager’s authority and any other rights or obligations that might exist in managing the LLC.
The member(s) and manager(s) of an LLC will meet once or more throughout a year to discuss business issues and ratify decisions. Your operating agreement should detail the requirements for holding a meeting of the LLC or provide other methods for decision-making (i.e., written consent resolutions).
You can differentiate the voting rights of members to allow for founding or other important members to maintain control of the company. Operating agreements generally provide the rules for the different voting rights of members and the vote required to approve actions for the LLC.
One of the main objectives of an LLC is to earn a profit. When your LLC reaches a stage where members can take distributions, you will want an operating agreement that explains the when and how.
For example, you may prefer a situation where members take distributions equally, or you may have a scenario where certain members have priority over others. You can also specify how often distributions can happen (e.g., monthly, quarterly, annually, etc.). In the event of losses or need for further capital, the operating agreement can also provide terms for additional contributions to the company.
An operating agreement can explain how the LLC can add new members or remove current members. Adding or removing members is an important decision because it affects the company’s capital and the ownership interests of other members. You may want to consider terms such as a right of first refusal and repayment of capital to protect the business and remaining members.
Related to adding or removing members is a member’s ability to transfer the ownership interest. Restrictions around transfers of an ownership interest are common in operating agreements to protect the other members. Exceptions are sometimes made to allow for assignments of ownership interests to family members or trusts. However, exceptions for such transferees are often limited to profit interests in the LLC.
Disputes within LLCs are not uncommon and sometimes unavoidable. Litigating these conflicts (such as disputing a Florida NDA) can become costly and slow. To avoid costs and delays, LLCs can provide terms for resolving a conflict. This could include arbitration, hiring a predetermined mediator, or other methods that are faster and more cost-effective. Other important conflict resolution terms might include the choice of venue for a lawsuit and the handling of attorney’s fees and other costs of administering the conflict.
Operating agreements should also contemplate the potential end of the LLC. Termination terms will cover items like liquidating the company (appraising and selling assets), repaying creditors, performing a final accounting of the business, filing articles of dissolution, and issuing final distributions to members. For more information see our article on how to dissolve an LLC in Florida.
You can download our sample Florida LLC operating agreement to get a better sense of what a basic operating agreement looks like. This sample operating agreement PDF is a template meant for educational purposes only. You should not use it without first having an attorney review it in the context of your situation.
Cueto Law Group is a Miami-based, boutique law firm whose attorneys handle matters involving commercial transactions and litigation. The firm – founded by international business attorney, Santiago Cueto – regularly advises people and businesses on matters related to LLCs and other entities.
If you need help with drafting, negotiating, or amending an LLC’s operating agreement, please do not hesitate to contact our office. We can schedule a consultation to learn more about your legal needs and how Cueto Law Group may help.
Contact Cueto Law Group today to schedule a consultation for your Florida LLC’s operating agreement.
