The LLC Operating Agreement – Write it, with the Right Terms in it- Part I
So you have met with your accountant and your attorney; you want a written operating agreement for your new limited liability company. This is good.
Now, what will it say? The articles of organization merely contained the name, some addresses, and the registered agent; it said nothing about how the company would be run or managed, about sales or transfers of the owners’ (the “members’“) interests, about how disputes will be resolved, or about distributions of cash to the members.
The operating agreement should address all these matters and more. A simple checklist of some of the more important issues is set forth below:
LLC OPERATING AGREEMENT CHECKLIST
- Decide who are the initial members.
- Decide the ownership interests of each member.
- Decide the amount of capital each member will contribute; can members be required to make additional capital contributions?
- Will any members be granted an interest solely for the performance of services?
- Will the members face penalties for failing to make their capital contributions?
- Decide how cash will be distributed to the members (pro rata, based on membership interest?)
- Will tax distributions be made to the members?
- Set procedures for admitting new members; must all members agree?
- Decide who will manage the LLC (will the members manage perhaps by majority rule or will one manager or a group of managers manage?); what are the limits on their authority?
- Decide under what circumstances a manager may be removed or resign.
- Will any of the members be employed by LLC? If so, then an employment agreement may be needed.
- Decide how LLC decisions are to be made (i.e. majority voting).
- Decide the rights, duties, and liabilities of the members and managers.
- Decide under what circumstances members may transfer their interest to a third party.
- Decide whether there will be buy-sell provisions (right of first refusal ?); how will the purchase price be determined and be paid? Do you need an appraisal?
- Decide what will happen upon the death or disability of a member; will there be a “key man” insurance?
- Decide who will serve as the “tax matters partner”.
- Decide under what circumstances the LLC may be dissolved and terminated.
- Decide under what circumstances the operating agreement may be amended; do all members need to approve and sign all amendments?
- In the event of a dispute, will there be mandatory mediation and arbitration?
- Decide whether the members will be subject to a confidentiality.
- Decide whether the members will be subject to a non-competition.
Most of these matters can be decided by the members any way they wish. The Florida statute on point – the Florida Revised Limited Liability Company Act – imposes some restrictions on certain aspects of the operation of the company; this is set out in section 605.0105 of the Act.
Among other limitations, section 605.0105 does not allow the operating agreement to eliminate the duties of loyalty and care or the obligations of good faith and fair dealing; these obligations are set forth in section 605.04091. Notably, these duties and obligations are imposed on the management of the company – on the managers of a manager-managed company and on the members of a member-managed company. These obligations are not imposed by the Act on the members of the company if it is managed by one or more managers. So how the company is to be managed directly affects the duties of the members to the company and to the other members.
Part II of this blog will discuss management and other issues relating to the operating agreement.
This is not intended to be legal advice for any specific situation and the reader should consult their attorney regarding their situation.