The Importance of Being Written: The Operating Agreement

One thing I’ve drafted consistently throughout my years in practice has been Operating Agreements. I love them. They are so important to the health of an LLC and it feels good to be creating solid “bones” for a company. An Operating Agreement is a contract that almost every owner of an LLC needs to have in place. So what is it exactly? And when do you need to have one drafted?

An Operating Agreement is the governing contract for a limited liability company (“LLC”). It sets out the structure of ownership and how the company will be managed. It is THE document for an LLC. This one document controls a lot! Just so you can get an idea, here are some of the topics covered in an Operating Agreement:

Membership:
Who owns the company?
How much of the company does each member own?
What does each member have to contribute to the company to capitalize it?
When can a member receive profit distributions?
How are profits and losses allocated among the members?
When can a member sell his or her ownership interest in the company?
Who can own membership?
How can a new member be admitted?
Are there any rights of first refusal or options to purchase ownership interest in the company?
Can a member withdraw from the company?
What happens if a member dies or becomes disabled?
What happens if a member is involved in bankruptcy or gets a divorce?
How is the company to be taxed?

Management:
Who manages the company?
Is the company member-managed or manager-managed?
What types of decisions require a vote of the members?
When and how are meetings called?
What limitations are there on managerial authority?
How can management be changed?

It is important for every LLC to have an Operating Agreement, but it is critical for a multi-owner LLC to have one – in writing. Florida’s new Revised Limited Liability Company Act (“FRLLCA”) states that an Operating Agreement does not have to be in writing. This makes it even more important to have one in writing.

Without an “official” written Operating Agreement, one could be pieced together from emails, napkins and conversations. But what if those don’t accurately reflect the most recent agreement among the owners? Or what if they were only ideas that you eventually rejected for something else? You can see how this piecing-together approach can easily create disagreements and conflict among the owners. And it can create uncertainty that is not good for business.

One more thing – the FRLLCA provides for default rules – those situations that are not addressed in an Operating Agreement will be governed by the rules in the FRLLCA. If owners want to choose the rules that govern their company, they need to have a written Operating Agreement. Otherwise, they are stuck with the rules in the FRLLCA.

Bottom Line: It’s good business to have a written Operating Agreement in place. It’s especially critical for those LLC’s with more than one owner. Having a solid business structure in place creates stability for the company and a strong foundation for growth. For companies that do not currently have a written Operating Agreement, it’s not too late. Getting one in place before a question or conflict arises can help to avoid wasting time and money when a situation does arise. As business owners know, that time and money can be better spent growing their business.