College friends Josie, Jackie, and Janice decided to start a pet grooming and training business together. They carefully researched their industry and prepared a business plan. After reviewing the different business entities available, they decided to form a limited liability company (LLC). The three friends decided not to bother drafting an LLC operating agreement, a decision they later regretted.
Why should they have drafted an LLC operating agreement? And should they have used a form on the internet or sought the advice of a Florida business lawyer?
LLC Fundamentals
A limited liability company (LLC) is a business structure that is similar to the corporate structure. LLC members have limited personal liability, just as the owners of a corporation. However, forming and operating an LLC is generally easier and less expensive.
In Florida, new LLCs file Articles of Organization with the Florida Division of Corporations. But state law does not require the owners of an LLC to prepare or file an operating agreement. Even though the LLC operating agreement is not required, it is still best practice to have one in place.
Here’s why.
The LLC Operating Agreement
The LLC operating agreement is key to business operations. It functions as a contract between the owners.
Provisions within the agreement state how the business will operate, as the name suggests. The owners of the LLC might have decided how to handle business decisions, but it’s best to put those agreements in writing.
For one thing, the owners can refer to their agreement when disputes arise. It’s almost inevitable that any business run by more than one person will eventually see serious disagreements arise between those owners.
But what happens when there’s no operating agreement or the owners pulled the agreement from a generic, online site?
The Perils and Pitfalls of a Bad – or Missing – LLC Operating Agreement
Members who disagree with each other can refer to the agreement. It should contain all the agreements made between the members. And, like most contracts, there will be dispute resolution provisions.
For example, Josie, Jackie, and Janice start their business and draft an LLC operating agreement. But later, they disagree about who is responsible for the accounting system and how much each member should contribute for working capital. Their agreement does not state who is responsible for business operation decisions like accounting. It also does not state how capital contributions will be handled. Finally, the LLC agreement does not provide any guidance for resolving their dispute.
Their disagreements could escalate to the point where they can no longer work together. Also, their business could suffer while they focus on resolving their differences.
In addition to memorializing agreements made amongst the LLC members, the LLC also firmly establishes the company’s LLC status. Without the LLC operating agreement, the IRS and other entities may feel the company is more of a partnership or sole proprietorship for single-member LLCs.
Why Choose a Florida Business Lawyer to Draft Your LLC Operating Agreement?
You can choose us because we have knowledge of Florida business law and experience dealing with the kinds of issues that arise when LLC operating agreements are poorly drafted. It’s best to get it right the first time.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.