When forming an LLC (limited liability company), there are a variety of requirements you need to abide by to maintain your business license. These requirements vary depending on the state you are creating an LLC. If you are creating an LLC in Florida, one of the requirements is to draft an operating agreement.
The operating agreement allows you to structure your financial and working relationships. This helps you to decide on who receives what percentage of ownership in the LLC, their share of the profits, as well as rights and responsibilities, or what happens if one of you leaves.
Why Do You Need an Operating Agreement?
Florida LLC operating agreements are essential because they outline the financial and functional decisions of the business. It governs the internal operations of the business, to ensure that it fits the needs of the business owners.
Although Florida LLC operating agreements are required, they offer a few key benefits to members of the LLC.
Protects Limited Liability Status
The main reason to make an operating agreement is to ensure that your business will be respected in the eyes of the courts. Sometimes, if there is no operating agreement set up, the limited liability status of your business can be in jeopardy. Which means that your personal assets are at risk as well.
In certain situations, especially that of a single-member LLC, without an operating agreement, the LLC will look a lot like a sole proprietorship. Having a formal written operating agreement will give credibility to your LLC's separate existence, as well as protect your personal assets.
Clarifies Verbal Agreements
LLCs with multiple owners need to have a document that dictates all profit-sharing and decision-making protocols. This is essential because members need to have a written explanation for procedures, including those that revolve around the departure or addition of members.
Without an operating agreement, co-owners may have a difficult time when it comes to misunderstandings over finances and management. In addition, an LLC will be subject to the default operating rules created by your state law.
Protect Agreement in Eyes of the State
Each state has laws that set out basic operating rules for LLCs. Some of these may not be too favorable, so it is essential to have an operating agreement. For example, many states have a default rule that requires owners to divide up LLC profits and losses equally. If you did not invest equal amounts in the LLC, you most likely won’t want to have equal profit shares.
This is why you can outline this in your operating agreement. Overalls you can choose the rules that will govern your LLC, rather than go by the default rules of the state of Florida.
Information to Include in an Operating Agreement
When you create a Florida LLC operating agreement you are required to include the following.
The owners of an LLC typically make financial contributions of cash, property, or services to the business to get it started. In return, each member is given a percentage of ownership. This should be outlined in the operating agreement.
When you create an LLC you need to clearly define the roles of the members or managers of the company. Outlining the responsibilities of each member holds people accountable for their actions and responsibilities.
Specifying roles of members lets everyone know what they should be doing and how much authority that they have.
Procedures of Transferring Interest
Should someone die, become incapacitated, or simply want to leave the business, there needs to be a guideline to handle this. This is important because many new business owners neglect to think about what will happen if a member retires, dies, or sells interest in the company. This is why it will be outlined in the operating agreement.
Make sure to outline what happens specifically for each scenario of transferring interest. There are many different situations that should be accounted for like if a member leaves voluntarily, dies, is forced out, or files for bankruptcy or divorce.
LLC owners also receive shares of the LLC's profits and losses. These are known as "distributive shares." In addition to defining each owner's distributive share, your operating agreement should answer the following questions:
- How much of the profits should be distributed to the LLC members each year.
- How much should LLC members expect to pay in income taxes? When profits are plowed back into the business instead of being paid out, they are still treated as taxable income to the owners.
- Will distributions of profits be made regularly or are the owners able to draw whenever they need to, from the profits of the business.
Member Voting Powers
Most LLC management decisions are made informally, but sometimes a formal vote is necessary. There are 2 main ways that voting power is split among members of an LLC:
- Corresponding to the percentage interest in the business
- Per capita voting (each member gets one vote)
Other Areas of the Operating Agreement
Other aspects of the operating agreement include general management of business, as well as rules for holding meetings and taking votes.
Does Florida Require an Operating Agreement?
Florida does not require that you have an operating agreement in place for your LLC, but we highly recommend that you have one. It is best to get the legal advice of an experienced business attorney to draft your operating agreement right when you create your limited liability company.
As we have talked about throughout this article, operating agreements are there for the members. They clearly define roles, responsibilities, and authority. To help settle feuds or decisions that members might have.
If you do not have a Florida LLC operating agreement in place then your LLC will be bound by the Florida LLC rules the state has put in place. Don’t leave the decisions on your company up to the government, retain control of your business by creating a Florida LLC operating agreement.
How to Create an LLC Operating Agreement
Writing an operating agreement is a somewhat time-consuming process. Hiring a lawyer can help you to ensure you do not leave any part out of the agreement. Typically though, it includes the following basic types of provisions: identifying information, a statement of intent, business purpose, and term of the LLC. You may also want to include the tax treatment and what happens with the admission of new members.
Creating an LLC operating agreement on your own can be a lot of extra work. An experienced law attorney knows every step of the LLC formation process and will make sure that everything is done by the book.
Let our experts do what we do best so you can focus on running your company. Speak with a business law attorney today to help draft your Florida LLC operating agreement.