A dilemma that occasionally comes up in talking to LLC owners is: We don’t have an operating agreement and now I’m having serious drama and disagreements with the other LLC members. What can we do? What’s going to happen?
The short answer is that if there is no operating agreement in place, the default rules in the Florida Revised Limited Liability Company Act (the “Act”) will apply to your situation and how it is resolved. As of January 1, 2015, as a default rule, all Florida LLCs are governed by the Act. The Act contains default rules on handling the internal affairs of an LLC, as well as the liability of its members (as LLC members or as LLC managers) for the debts, obligations, or other liabilities of the LLC.
But here is where it gets a bit more interesting…Per the Act, an LLC can actually change many of the default rules—and yes, even change the law that governs the LLC. (Perhaps you wanted your LLC to be governed by an entirely different law than the Act, such as the Delaware LLC Act?)….This makes sense, because each LLC is unique, and one size does not fit all, which is why the law leaves room for changing default rules through your operating agreement. But sticking with the instant situation, assuming there is no operating agreement, and there will not be adequate time to create and execute a proper agreement customized to your preferences, here’s what will likely need to happen. In this scenario, it will be vital to have a look at the Act and determine what the Act’s provisions say about the specific topic or situation you and the other LLC members are dealing with, to sort out a way forward.
Another practical consideration in this type of predicament is just how tumultuous is the drama with the other LLC members? If things are not beyond repair, and the LLC is not on the brink of dissolution or litigation, perhaps there is still time and hope to work together to create and execute an LLC operating agreement. A silver lining perspective here is the mantra that smooth seas don’t make good sailors. So perhaps you will be able to take the lessons gained from navigating this rocky situation, and use them to negotiate and nail down a highly customized operating agreement to meet your needs.
If it seems that you are at an impasse, make an effort to approach the issue from a conflict resolution perspective and really focus on what you can do to proactively help the LLC members resolve the dispute. (Here’s an interesting read on five proven conflict resolution strategies that may help.)
Find out what the Act and the Florida case law interpreting the relevant provisions of the Act say about the issue that is at the heart of the dispute.
If you are able to weather this particular storm and come to realize that one size may not fit all, and you’d prefer to have custom rules to handle situations differently in the future, then make negotiating, drafting, and executing your LLC operating agreement a priority.
Lastly, “business break-ups” or “almost business break-ups” can be difficult. I am hopeful for the very best outcome for you and your LLC. Here’s to working through difficult situations and coming out stronger on the other side.
Other articles that may be helpful….
This post is not intended to be a substitute for legal advice. Consult a licensed Florida business law attorney for specific business law questions that you may have.