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Is an Operating Agreement Really Necessary?


Written By: Scott Costello

A Common Scenario:

A married couple or friends have discovered a need in the market for a product or service they can provide. They want the business to be jointly owned. They have heard that LLCs are the way to go. They would like to do things the right way, but want to save as much money as possible and avoid legal fees. They Google search, “How do I start a new LLC in Florida?” and discover companies willing to register their business. They select the cheapest company, pay the fee and receive their new LLC paperwork a short time later.  The business does great for two years. But then there is a falling out with the married couple, or the business partner unexpectedly passes away or becomes disabled. If the couple cannot work out disputes while married, how likely are they to operate the business in a unified manner after the divorce? If the business partner passes away or becomes disabled, does that mean the remaining partner is now in business with the other partner’s extremely annoying spouse?

 

What Might Happen to the Business?

It depends. Yes, these are the most common words spoken by attorneys, but it really does depend. If there is no operating agreement (or shareholder agreement for corporations) in place for the business, then the owners have to rely upon what the State of Florida has provided by statute. For those who believe the government knows your business better than you do, you can sit back and simply rely upon the wisdom of Tallahassee. For the rest of you, you might consider having an operating agreement prepared for your business. While the State of Florida does not legally require your LLC to have an operating agreement, it is imprudent to run an LLC without one, even for sole owner LLCs.

 

What Is an Operating Agreement?

An LLC operating agreement is a private internal business contract signed by each of the owners. The operating agreement allows the owners to specifically tailor the business relationship to suit the specific needs of the business and its owners. In the operating agreement, the owners can establish the percentage of ownership in the LLC, the share of profits and losses, each owner’s rights and responsibilities, each owner’s voting powers, how the LLC will be managed, when organizational meetings will be held, and what will happen to the business if one owner leaves or new owners would like to join the LLC.

 

Why is the Operating Agreement so Important?  

While verbal deals followed by a handshake may have been sufficient in the past, unfortunately, that era has come and gone for the most part. Even if the partners have orally agreed to certain terms, misunderstandings can arise. It is always best to have the deal detailed in writing so that it can be referred to in times of dispute. For instance, if the owners did not invest in equal amounts into the LLC, then likely both owners do not want to allocate profits equally. An operating agreement which spells out how the owners will split profits and losses will avoid a fight down the road. If one owner does not want to be in business with his or her now ex-spouse or the business partner’s widow, then an operating agreement providing buyout terms can avoid a host of legal problems involving the divorce court or probate proceeding. Furthermore, the great benefit of forming an LLC is to help shield the owners from personal liability in case the business fails or becomes liable to another person. Without a formal operating agreement in place, the owners may potentially jeopardize their protections from personal liability.

 

Consult an Attorney!

In short, an operating agreement can help owners guard against personal liability, head off financial and management misunderstandings, and make sure your business is governed by your own rules, not default rules created in Tallahassee. Spending a little money up front to have a qualified attorney review your circumstances and prepare necessary documents will give you peace of mind that your intent and rights will be carried out with less stress, headaches and expense in the long run.


Adam Towers is the Managing Partner of the Gainesville office of Bogin, Munns & Munns, P.A., which he opened in 2007. He has been practicing since 2001. For more information, visit boginmunns.com/gainesvillelawoffice.

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