What is an Operating Agreement?
The LLC’s most important yet overlooked document is the operating agreement. An operating agreement is a formal document that describes how a Limited Liability Company (“LLC”) will operate. It typically describes how the LLC adds new members, the voting powers of the individual members, tax treatment, or how the members manage the LLC. Florida law does not require LLCs to have an operating agreement. As a result, many people create LLCs and operate them without an operating agreement. What many people do not realize is that according to Florida law, any matters not covered in an operating agreement is governed by Florida Statutes 605.0105(2). This means if you do not have an operating agreement, whether you know it or not, Florida has created rules for your LLC. Are you following them? Here are three of many reasons why you need an operating agreement for your LLC.
Operating Agreements Help Secure Limited Liability
One of the most significant reasons to form a LLC is the limited liability protections. In general, members of a LLC are not personally liable for the debts and obligations of the LLC. This gives LLC members the freedom to conduct business without worrying about risking their personal assets when running the LLC. However, you can lose this protection if a court finds that the LLC is not a legitimate business. An operating agreement goes a long way in proving you have a legitimate business regardless of the purpose of the LLC. If you do not have an operating agreement and you get sued, you leave yourself vulnerable to having the court disregard your LLC as an entity which may result in you losing personal assets if you lose the case.
Easily Solves Partnership Disputes
Imagine a relationship where you can solve every disagreement before it begins. That is what an operating agreement does for a LLC with multiple members. If the LLC is drafted by an experienced business attorney, the most significant issues that partners have are already resolved when the partners first form the LLC. Once the partners agree to the terms of the operating agreement, they do not have to worry about stalemates. This is especially important in LLCs with two members. Partnership disputes are costly, but you can avoid these issues with a properly written operating agreement.
Savings in Legal Fees
This benefit is not obvious, but it is important. At some point, your business will need legal assistance. Whether you need an attorney to sell your business, solicit investors or dissolve the business, an operating agreement will help your cause. If you have an operating agreement, your lawyer will use it to follow the process you established. Without an operating agreement, your attorney will have to follow the default rules of the Florida Statutes (see above) and then create a procedure for you. This all takes time, and you will pay for it. Once the attorney establishes and follows the procedures, the actual legal issue you came for the attorney gets solved. If you do not have an operating agreement, you could end up paying twice as much for any legal service. This reason alone makes the operating agreement a worthwhile investment.
Whether you are just starting a LLC or already own one, you need an operating agreement. Our experienced Fort Lauderdale business formation attorney has formed and negotiated operating agreements for every industry in Florida. If you do not have an operating agreement and want the advice of a Fort Lauderdale business lawyer, give us a call at (954) 282-9331 or request a consultation so we can protect your business!
Bryant Taylor Law
333 Las Olas Way
Fort Lauderdale, FL 33301