We live in a world of abundant “on line” forms and services. Quickie “do it yourself” LLCs, much like “self help DIY Florida estate plans“ are usually not a good idea. When it comes to your legal concerns, as in most things, you get what you pay for.
That said, because LLCs can be filed “on line” in most states or through legal forms websites, many people do not recognize the difference between a “boilerplate” LLC and one that is professionally prepared. One important distinguishing factor to consider is your LLC “Operating Agreement” in Florida. As a general rule, if you’re going to use one of these, you can gain some important advantages if a true professional prepares it for you. This article addresses the most common Operating Agreement benefits can be found in skillfully prepared Florida Operating Agreements.
Putting it in Writing [Key Advantages]
There’s a reason they say to put your agreements in writing. When the terms are spelled out in black and white, there’s less room for uncertainty and confusion. All the parties know what they’re getting and what to expect, and the risk of future conflict is reduced. If a dispute does arise, there’s a source of authority to turn to, so you’re not just arguing over who said what.
The advantages of a written contract are just as pronounced for an agreement between business partners as they are for a deal between businesses. In Florida, members of an LLC enter into an “operating agreement” to memorialize the business relationship between them. A good operating agreement eliminates ambiguity over how a business will be run. It defines the members’ respective interests, minimizes conflicts, and—when conflicts do arise—provides a means for resolving them.
Uses for Operating Agreements in Florida
An operating agreement is a Florida LLC’s primary governing document—a constitution for the company. It lays the groundwork for everything from what an LLC will do and how it will be managed to who the members are and what financial interests they hold in the company. A competent operating agreement clearly defines the rights and duties of the members in relation to each other and in relation to the entity.
At its core, an operating agreement is essentially a contract between the company’s members. But it’s more than an ordinary contract because it doesn’t just state members’ obligations, it also governs the functioning of the company itself. In that regard, an LLC’s operating agreement falls somewhere between the bylaws of a corporation and a simple partnership agreement.
Under Florida’s Limited Liability Company Act, an operating agreement governs the members’ relations with each other and the company, the manager’s rights and duties, the company’s activities and affairs, and the process for amending the operating agreement. Although Florida law technically does not require domestic LLCs to adopt operating agreements, neglecting to do so can lead to significant problems and prevent the members from realizing the full benefits of the LLC model.
Florida Operating Agreements for Member Decisions
An operating agreement allows the members of an LLC to make important decisions in advance about a wide range of issues affecting the company. Though operating agreements are sometimes described as contracts between an LLC’s members, even single-member LLCs benefit from having one in place. An operating agreement, for example, lets a sole member set a long-term financial framework, enjoy the full protections available from the LLC structure, and have a greater say in what happens to the business and its assets upon the owner’s incapacity or death.
Absent an operating agreement, many important organizational decisions will instead be made by the Florida legislature. Florida’s LLC statute provides a default template for numerous issues but leaves LLC members considerable flexibility to decide differently. While it’s good that the legislature enacted a backstop, individual business people obviously have a better understanding of what they are trying to accomplish and what will work best in their unique situations. All things considered, it’s preferable to decide for yourself (or decide with your fellow members) how your business will be run.
For entrepreneurs planning to team up on a venture, an operating agreement lets you set terms allowing for a smooth, constructive business relationship. By establishing clear parameters for the company’s operations and management early on, a well-drafted operating agreement minimizes the potential for future conflict between members and establishes clear rules for how members will relate to one another and to the company.
Key Areas Governed by a Florida LLC Operating Agreement
An operating agreement governs an LLC from cradle to grave—addressing how and why the company is formed, how it operates, and how it will eventually wind down. The precise topics to be addressed will depend on the company and the members, but there are a few subjects that should be included in the operating agreement of just about any company.
Financial issues are one of the most common areas for disputes between members. An operating agreement that leaves no ambiguity as to members’ present and future financial rights and obligations can do a lot to nip those disputes in the bud. At minimum, an agreement should detail the contributions made to the company by each member—whether in the form of capital or labor—and clearly define how profits and losses will be divided by members. Florida LLCs have the option of being taxed like a corporation or like a partnership—that decision should be included in an operating agreement.
An operating agreement should also set terms for when and how often distributions are made, how they are measured, and whether distributions come with any conditions. In all likelihood, a new company will at some point need additional capital. An operating agreement should state whether members can or must contribute additional cash and how membership interests are affected by subsequent contributions. If additional money is needed from outside the company, an operating agreement sets standards for borrowing and decides if and how membership interests can be issued to third-party investors.
The first management question a Florida LLC needs to address in its operating agreement is the management model the company will use. Florida law assumes LLCs are member-managed but allows companies to choose the manager-managed model as an alternative. In the former case, management decisions are made by the members themselves. With multi-member LLCs, this typically involves appointment of a management committee or board of managers. Members of a manager-managed LLC, on the other hand, choose a manager to empower with decision-making authority. The manager can be one of the members—but doesn’t necessarily have to be a member unless the operating agreement says otherwise.
Whether opting for management by members or an appointed manager, an operating agreement needs to establish management’s powers and obligations and set forth any limitations on management. The agreement should include a framework for how managers are chosen and how and why they can be removed. To avoid misunderstandings, an operating agreement should identify which members are authorized to act on behalf of the company and in which areas they are authorized to act.
Even with a manager or management team in place, there will be some decisions an LLC’s members want to make for themselves. With that in mind, an operating agreement needs to distinguish between areas in which management is empowered to act and decisions that require a vote by members. For questions decided by member vote, an operating agreement needs to specify which matters can be approved by simple majority and which require a super-majority or unanimous approval.
Depending on the nature of the company, the members might choose to have a single membership class, with voting rights based purely on members’ equity interests. Or, alternatively, the company can have more than one membership class, with some classes granted more or less voting power in general or with regard to specific topics.
The LLC model assumes limited liability—the idea that members do not have any personal liability for the debt of the company beyond the amount they have actually invested in the business. Even so, it’s a good idea to make that explicit in the operating agreement.
Florida law won’t allow an operating agreement to indemnify members from bad-faith or willful misconduct or knowing violations of law; however, an operating agreement can tweak members’ limited liability protections relating to company debts or debts owed to one another relating to the company.
Florida’s LLC statute is more protective of membership interests against creditor claims than in many other states. In some states, a personal creditor of a member can attach the member’s interest in the company and force a sale to satisfy the debt. In Florida, though, creditors can secure a lien on distributions to the member but cannot force a sale of the membership interest. An operating agreement can take advantage of this rule—and increase the protection of members’ interests—by including provisions for discretionary and asymmetrical distributions. Both can decrease the risk of the company’s distributions ending up with creditors instead of members.
Along the same lines, an operating agreement can discourage involuntary transfer of membership interests by denying voting rights to involuntary transferees. To discourage attachment, an LLC agreement might also require lienholders to contribute capital or share in tax liability. Will touch on this more talking about sophisticated strategies below.
Any company that does business for long eventually reaches a point where a founding member becomes a former member. Whether disassociation results from death or disability, retirement, sale or transfer, voluntary withdrawal, or some other reason, the company’s operating agreement should include provisions specifying how the situation will be handled.
To encourage management continuity, an agreement might require approval of other members for any transfer of membership interests to a non-member. Or, it might guaranty a right of first refusal to remaining members. To avoid probate in Florida, an operating agreement might incorporate Florida transfer-on-death provisions that automatically transfer membership interests to surviving members or heirs upon a member’s death.
In some scenarios, an LLC’s members might want to integrate a Florida buy/sell agreement within an operating agreement, perhaps working complementarily with a buy/sell agreement executed separately by the members. If, for instance, a member dies or retires, buy/sell terms could require a mandatory purchase of the disassociating member’s interest by remaining members. Buy/sell agreements avoid a situation in which an heir unfamiliar with the company acquires management rights and can also be used to ensure departing members receive a fair price for their interests.
A well-drafted operating agreement mitigates the potentially disastrous effects of member disputes through conflict-resolution provisions or mandatory buyouts when members are in irreconcilable disagreement over the direction of the company. Or, if a member is engaging in unethical or unlawful conduct, a Florida LLC operating agreement can allow for expulsion without going to court.
When it’s time to wind down operations, an operating agreement provides a roadmap for ending an LLC in a way that protects the rights and interests of members and third parties. Dissolution terms agreed in advance prevents a situation where members fight over a company’s remaining assets.
Florida’s Limited Liability Company Act provides default terms for many situations a new LLC might encounter. But rather than rely on the default, most business owners prefer to create an agreement precisely tailored to their specific business plan and relationships with other members. A seasoned Florida business planning attorney experienced with the Sunshine State’s LLC laws can help create an operating agreement individualized for your unique company.
Florida LLC Operating Agreements and Asset Protection
It is a fact that large companies and sophisticated real estate investors in Florida, and other states, seek to maximize their asset protection through using keenly analyzed legal documents containing the elements discussed above. In addition, common strategies used by experts in Florida include sophisticated “multi-tiered” Florida LLC planning and an extensive operating agreement that addresses all aspects of the company.
For sophisticated investors, a great deal of thought and preparation goes into setting up a proper legal strategy. For real estate and business holdings, the LLC is an essential tool for this purpose.
So, it shouldn’t be surprising to learn that 90% of the protection of your LLC actually comes from the Operating Agreement and NOT the fact that that the LLC was filed in the state of Florida. And, as touched on above, Florida’s asset protection laws are generally good AND thus within the Florida Operating Agreement, there are numerous options available when it comes to defending your business against creditor attacks and I will highlight a few of the most important options.
Remember, as discussed above, that membership interest is what the partners or shareholders in an LLC actually own and Managers are those with voting rights who control the decision making for the Company. Managers may be Managing Members or other individuals who are independently appointed by the Members.
This is not an exhaustive list and represents some key options that would not be considered in any boilerplate LLC. All of these provisions would become important if a creditor were trying to attach a lien or levy to your company or if a member filed bankruptcy and the trustee was attempting to attach to membership interest. These provisions would need to be expertly drafted by a competent professional such as yours truly so don’t try this at home…
1. You can require that a Manager or Managers may not be removed by a creditor.
2. You can require that no membership interest may be assigned to a creditor.
3. You can provide that the jurisdiction of the Company may be transferred upon vote of the members.
4. You can deny voting rights to creditors.
5. You can deny the partition or allocation of company assets to creditors or deny the Company from being forced into bankruptcy.
6. You can require mandatory capital contributions upon vote of the managers which could include a contribution by a creditor member.
It is only fair to point out that a creditor could challenge your LLC provisions and it would be up to the court to enforce them. That said, judges tend to seriously consider contractual provisions when they have been freely entered into by the LLC members. So, more often than not, the kinds of provisions that are designed to make a judgment creditor “less than comfortable” will be enforced unless they are a blatant violation of state laws.
DO YOU HAVE THE ABOVE TOOLS
IN YOUR TOOLBOX?
The above list is only the tip of the iceberg. Every Florida LLC should include an depth questionnaire to determine all aspects of how the entity will be governed. The goal for this article is to get you thinking beyond the boilerplate.
Also, in addition to creditor protection, there are numerous other considerations that may need to be included in your LLC Operating Agreement. Two of the most common other considerations are business succession planning in Florida which is a critical part of blending your business succession plan with your Florida estate plan.