Are you thinking about forming a limited liability company (“LLC”) in the State of Florida?   If so, you should give strong consideration to having a written operating agreement in place to govern that LLC.  That agreement will serve as the play book for your company and reduce potential conflicts amongst owners/members. 

Under the Florida Revised Limited Liability Company “Act”, the parties to an operating agreement have wide latitude in drafting that agreement.  Therefore, subject to some exceptions, the provisions of your operating agreement are contractual and binding on the signatories.  If the owners of your LLC fail to address certain provisions in the operating agreement, those provisions will be governed by the default provisions set forth in the Act. See chapter 605 of the Florida Statutes. 

Indeed, the Act provides:

To the extent that, at law or in equity, a member, manager, or other person has duties, including fiduciary duties, to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by an operating agreement, the duties of the member, manager, or other person may be restricted, expanded, or eliminated, including in the determination of applicable duties and obligations under this chapter, by the operating agreement, to the extent allowed by s. 605.0105.”

This post will focus on six important provisions that should be in every operating agreement.  Of course, every operating agreement should be carefully drafted to ensure it fits the needs of the particular business and its owners. 

What is an Operating Agreement

The operating agreement, also known as an LLC agreement, is:

an agreement, whether referred to as an operating agreement or not, which may be oral, implied, in a record, or in any combination thereof, of the members of a limited liability company, including a sole member, concerning the matters described in s. 605.0105(1). The term includes the operating agreement as amended or restated.

See section 605.0102, Fla. Stat.

Thus, your operating agreement can be as comprehensive or minimalistic as the owners desire.  That operating agreement governs the following:

(a) relations among the members as members and between the members and the limited liability company;

(b) rights and duties of a person in the capacity of manager of the LLC;

(c) activities and affairs of the LLC, and the conduct of those activities and affairs; and

(d) the means and conditions for amending the operating agreement.

See section 605.0105, Fla. Stat.

Though this post cannot detail all the essential provisions for your LLC operating agreement, it provides six key provisions (in no particular order of importance) that should be included in every operating agreement. 

Key Provision No. 1:  Identifying the LLC Owners and Admission of New Members After LLC Formation

The operating agreement should specify who the owners/members are and, if appropriate, who the managing member will be.  Your operating agreement should provide addresses, including email addresses, for each member.  In addition, if the owners of the LLC want to add new members, that process should be outlined in the operating agreement.  For example, will new LLC members only be admitted by approval of the LLC’s manager (assuming the LLC is manager managed), by unanimous consent of all members or by something less than unanimous consent.  If any of the LLC owners/members are individuals, will those persons be employees of the LLC?  If so, the operating agreement may include certain restrictive covenants for those employees, like a non-compete agreement.  If the LLC will be “manager managed,” the operating agreement should address the management duties for the managing member of the LLC.

Key Provision No. 2:  Owners’ Ability to Transfer or Sell Their LLC Interests

Absent contrary language in the operating agreement, members may freely assign or transfer their respective LLC interests.   See 605.0502, Fla. Stat.  Therefore, your operating agreement should articulate how ownership interests are transferred, the approval method required for such transfer, and, upon transfer, whether the transferee can become a member of the LLC.  

For example, the operating agreement could require unanimous consent for such a transfer or might just require the manager’s approval (assuming it’s a manager managed LLC).  In addition, the operating agreement might include a group of permitted transferees, like immediate family members, family trusts or affiliates of existing members.  Finally, the operating agreement should provide that, before any transfer of an LLC interest, the existing owners/members should be offered the right of first refusal of any such interest.

Key Provision No. 3:  LLC Owners’ Ability to Resign or Withdraw (“Dissociate”) or Be Expelled from the LLC

The Act allows LLC members to resign or withdraw (also known as dissociate) at any time, rightfully or wrongfully.  See 605.0601, Fla. Stat.  Therefore, it is critical for your operating agreement to articulate exactly how the process of dissociation will be handled.  

For example, does the dissociating member need to provide 30 days’ written notice of his/her intent to dissociate? Do members/owners want a provision that prevents a member from dissociating, unless there is a dissolution of the LLC?  The operating agreement should also address the valuation method for a dissociating member’s shares.  

When dealing with a dissociating LLC member, the operating agreement should address all situations where such dissociation is considered wrongful, subjecting that member to claims for breach of contract and resulting damages.  

In addition, the operating agreement should state whether and how a member can be expelled from the LLC.  Under Florida law, and unless otherwise stated in the operating agreement, expulsion of an LLC member is governed by 605.0602, Fla. Stat.  If the LLC members wish to vary those requirements, the operating agreement should include those requirements.  While the Act also provides for member liability and damages in the event of wrongful dissociations (See 605.0601(3), Fla. Stat.), if the members desire additional consequences, or to vary those set forth in the statute, the operating agreement should so specify. 

Key Provision No. 4:  Funding the LLC

Unless specified in an operating agreement, members of Florida LLCs are not required to make contributions to the LLC.  See section 605.0401, Fla. Stat.  However, if/when the LLC requires additional funds to operate, over and above the members’ initial contributions (if any), the operating agreement should address how those funds are paid by the LLC’s members.  That funding mechanism is often referred to as a capital call.  The operating agreement should specifically address the power (or prohibition) to make such capital calls, when such calls may be required (i.e. on certain specified dates or specific events), as well as the consequences for a member not paying when a capital call is mandated (i.e. forced sale of that member’s interest or reduction of that member’s interest in the LLC). 

Key Provision No. 5:  Payments and Distributions to LLC Members

The LLC operating agreement should also include provisions regarding how profits and losses will be allocated amongst members.  If not so specified, those profits and losses will be governed by 605.0404, Fla. Stat.  

Under Florida law, there is no requirement for an LLC to make any distributions to its members.  The LLC members, however, can write into the operating agreement how and when distributions will be made, as well as the person who makes the decision on those distributions.  LLC members should also consider whether to include a right to a distribution for a dissociating member.  

Key Provision No. 6:  Dispute Resolution 

The operating agreement should provide for how disputes involving the LLC and its members will be resolved.  Whether those disputes are decided by litigation, arbitration, or in some other fashion, the operating agreement should also specify what law applies and the venue for resolution of any such disputes.  In many instances, the law of the state where the entity is located should be used, with venue being where the LLC’s principal place of business is located.  The LLC members should also consider whether to include a waiver of jury trial provision in the operating agreement.

Forming an LLC in Florida has many benefits, including the ability for its owners to craft an agreement that clearly outlines how they want their business run.  When drafting an operating agreement, you should consider including the provisions referenced above, and consult counsel to ensure that your operating agreement is comprehensive.