Why You Need an Operating Agreement for your LLC in Florida
Only a handful of states require that new LLC’s set up an operating agreement. However, even if there is no legal requirement to do so, you definitely need one. When things are going good, people don’t see the necessity for the operating agreement, but when disagreements arise, having one can make all the difference. Also, retaining a knowledgeable West Palm Beach LLC and business litigation attorney to assist with your LLC and drafting of an operating agreement can ensure all important topics are covered, thereby making member disputes easier to resolve.
Here are several of the main reasons why you need an LLC operating agreement.
Determines Management Type
The operating agreement will spell out whether the LLC is member-managed or manager-managed. With member-managed LLCs, members/co-owners are involved in the daily management duties and actively make decisions. With manager-managed LLCs, the authority is delegated to a specific person or persons. If you don’t specify how the LLC is to be managed, it will default to member-managed.
How and By Whom Decisions Will be Made
Thinking ahead of time and spelling out how decisions should be made can help with disputes down the line. You can spell out everything from basic daily operational decisions to major business decisions. Does everyone have equal voting rights? Is there a unanimous agreement required? And, what happens if there is a tie?
Procedures When a Member Wants to Sell
If a member of the LLC wants to sell and you don’t have an operating agreement in place, you could find yourself with a new partner that no one else knows or likes. Spell out procedures for what happens when a member wants to sell their interest in the company in the operating agreement. Options may be to restrict a member’s right to sell without majority approval, or a clause that requires the member first offer his interest to other LLC members before offering the same deal to an outside party.
If Someone Needs or Wants Out
This can be an entirely different scenario than a member who just wants to sell their interest. Unfortunately, life events can alter someone’s situation – such as a death in the family, divorce, health problems, or financial issues. Having rules spelled out ahead of time when you are preparing an operating agreement can help solve these issues without involving a lot of emotions during a particularly rough time for the member.
Operating agreements can define how profits are split between members. Because LLCs offer more flexibility on many business aspects, including profits, it’s important to have this spelled out. For example, you could share ownership 50-50 between you and your partner but choose to split profits 75% / 25%, which varies from the traditional corporation business structure, which dictates profits are split based on ownership amounts.
Updating Your Operating Agreement
One of the easiest mistakes to make is not updating your agreement. Did a member leave? Did you gain a new partner? Did you decide to handle business decisions differently? Without updates, you could find yourself in the middle of a big member dispute.
If you have an LLC and are experiencing issues with a member dispute, contact our team at McCabe Rabin, P.A. to schedule a consultation. Our dedicated West Palm Beach attorneys are eager to assist you throughout each step of your case.