Why Should an LLC Have an Operating Agreement?

Your LLC operating agreement will be one of the most important documents your company creates.  Although having an operating agreement is not legally required, it is highly beneficial to have one.  You can think of the operating agreement as similar in purpose to a prenuptial agreement for your business – or perhaps it will be more like a post-nuptial agreement, if you’ve skipped this crucial step! It is not too late to create one now.

Does one size fit ALL?

As a threshold matter, the idea of one size fits all is an interesting concept. This motto is actually one of the reasons for having an operating agreement.  The LLC operating agreement allows you to modify, customize, or change the default rules that automatically apply to all Florida LLCs. You can use your operating agreement to customize how you want to handle the internal affairs of your LLC, as well as the liability of a member (as either an LLC member or as an LLC manager) for the debts, obligations, or other liabilities of the LLC. It can be a custom guide for management of the LLC. So one size does not have to fit all, and you can easily make your own alterations for bespoke rules for your LLC.

So what does a well-planned and well-drafted LLC operating agreement do?

Having a thoughtfully prepared LLC operating agreement can give owners more control over how issues are handled and which outcomes are achieved.  It also provides stability and certainty in business operations, and prevents headaches down the road. The operating agreement is also beneficial because it helps the members of the LLC, as well as outside companies and businesses (such as banks, investors, future members), know what the internal rules are for your company.

A quick point for single-member LLCs…

I often find that single-member LLCs often bypass having an operating agreement all together.  I’ve heard: Well it’s just me, so why do I need that?  It’s worth pointing out here for the single-member LLC owners that many of the benefits referenced above do in fact benefit multi-member LLCs…but YES….they also benefit single-member LLCs too.  First, the operating agreement’s ability to serve as an informational and persuasive tool with banks, investors, and future stakeholders, is also a consideration for single-member LLCs. Harnessing the operating agreement’s ability to change the default law to what you want is also a tremendous power.

An Operating Agreement establishes protocols for difficult situations

In challenging situations your operating agreement can serve as an established protocol to make sure your wishes are carried out, how you have intended them to.  In that sense it can be viewed as a Last Will and Testament for your LLC (morbid but true). After all, who wants to develop an emergency response on the fly during the actual emergency with emotions running high?  If there are unique foreseeable circumstances likely to arise in the business or industry, this response protocols can potentially be addressed at a high-level in the operating agreement.

It is important to think about what you would want to happen in a specific event, and how it would best serve the needs of the LLC members.  Even the unpleasant aspects may require a customized solution.  For example, what do the members want to happen to a member’s interest upon the death or divorce of a member? What if a member wants to sell its interests against the wishes of the other members?  Sometimes “breaking up” is hard to do. Winding down can require customized solutions. Yes, “business break ups” and wind downs can be tough and possibly messy without proper planning. 

Closing Thoughts…

  1. Some interesting analogies have popped up in this article. To recap some of them, an LLC Operating agreement is like a pre-nuptial agreement (or post-nuptial agreement), management handbook, emergency response plan, and a last will and testament for your business, combined all into one.

  2. Compare the potential benefits of customizing your preferences to the potential benefits of the default rules, and determine which will be a better fit for your situation.

  3. If you decide that you want to have an LLC operating agreement, you may also consider involving a Florida business lawyer to assist you in preparing your operating agreement.

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.