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Starting a business is a time for excitement and stress. There are many steps to keep track of, whether choosing an appropriate business name, filing the right paperwork, or remaining compliant with various laws.
Among the important steps that you need to remember is the creation of an Operating Agreement. In this guide, we will outline what an Operating Agreement is, why it’s important, how to create one that fits your business needs, and what to do if your Operating Agreement needs revisions.
An Operating Agreement is a document that you create with other members of your LLC. It outlines how to run your business, who is responsible for what, how profits are shared, how changes can be made, and much more.
The idea behind an Operating Agreement is to have a legal foundation for, well, agreement about the many aspects of your business. It provides a reference for solving problems and disagreements down the road, and it serves to protect members and the business.
These agreements are often created from a template or with the assistance of a professional. While you are not legally required to have an Operating Agreement in Florida, it’s a good idea to draft one to clarify your business operations and protect all members.
While Operating Agreements are not legally required, they are legally binding. This means that whatever you put in your Operating Agreement will have to be adhered to by law. Many Florida statutes describe how Operating Agreements are enforced and what they may include.
Once you create an Operating Agreement, and all members sign it, you should keep this document safe with other important business documents. You are not required to file it with the state, but you will need to produce it if you encounter a legal dispute related to something included in it.
As mentioned, even though Operating Agreements are not required in Florida, going without one is a huge risk. Not only that, but the very act of creating the agreement can help you pin down the rules and procedures by which you wish to operate your business.
Without an Operating Agreement, all disputes about ownership, contributions, duties, changes, etc., will default to whatever state law requires and that a judge decides. Since every business is different, general laws often do not fit well and may have significant negative consequences in such a situation. By creating an Operating Agreement, you can establish clear legal guidelines that apply to your business.
More specifically, reasons to have an Operating Agreement include:
The great thing about an Operating Agreement is that it allows you to set the rules and regulations for your business (within reason and in alignment with state laws). It’s important to include as much detail and cover as many aspects as possible.
Some items you might want to include in your Florida Operating Agreement are:
Your Operating Agreement should include the name of your LLC. It should be written as it appears in the Articles of Organization that you filed when you registered your business with the state. This also means including the LLC designator that you chose.
Including the name of your LLC in the Operating Agreement isn’t just a practical matter of making it clear which business it applies to, but having the exact legal name makes the items within the agreement legally enforceable.
Your agreement should also include a list of each member — their full legal names and addresses — to establish who is involved. In addition, you should specify what percentage of ownership each member has.
For example, you may split ownership equally among four members, each owning 25% (the total should always equal 100%), or you may choose to attribute ownership based on capital contribution. For example, if one member contributed 50% of the capital (startup funds), they may own 50% of the company.
You are free to split the ownership how you would like. It doesn’t need to be an equal distribution or tied to capital contributions. The only requirement is that all members agree on it.
In Florida, an LLC can be managed by the members (owners) or by one or more assigned managers. The managers can be appointed members of the LLC, someone hired from outside the membership, or both. It is important to decide which management structure is right for your business and be aware of your decision’s legal consequences.
In a member-managed LLC, the members take on the responsibilities of managing the business and deciding how things work. In a manager-managed LLC, the members relinquish their authority to the manager or managers.
Your Operating Agreement should spell out who the managers are, whether one or more of them are members, and what rights the members and managers have in the decision-making process.
In addition to establishing who occupies the member and management roles in your LLC, it is important to establish each person’s responsibilities, duties, and rights.
Your Operating Agreement should spell out the obligations of each person in the LLC, what parts of running the business are their responsibility, which parts they have a say in, and so on.
Even if some or all members aren’t involved in the day-to-day business operations, they may still need to attend meetings and participate in voting. This should be included in your Operating Agreement.
Businesses face many decisions during their operation and growth. Sometimes, they may want to add a member, change up the management structure, or add an amendment to the initial Operating Agreement.
The Operating Agreement should spell out who has voting rights and whether those votes are equal or apportioned based on ownership or other factors. Sometimes, it makes sense for certain members to be involved in some voting decisions and not others. You may want to specify which issues members will vote on.
In the course of doing business, there may be profits and losses, which may vary from year to year. Often, businesses just starting up are more likely to see losses.
When the business makes or loses money, those profits and losses must be distributed among the members somehow, and how this is done can be spelled out in the Operating Agreement.
You may wish to share all profits and losses equally among members or in proportion to ownership percentages. If ownership percentages are not already aligned with capital contributions, you may alternatively share profits and losses according to how much each individual financially contributed to the startup funds for the business.
There is no right or wrong way to do this. It is entirely up to you but should be aligned with your business’s best interests and agreed upon by all members.
This part of the Operating Agreement should spell out how these profits and losses will be distributed. For example, will it happen at the end of the fiscal year? Will members be paid by check or direct deposit?
You may also wish to specify that each member is responsible for paying taxes on any distributions, as LLCs are pass-through entities (they are not taxed at the business level; instead, members pay personal income tax on their share of the profits).
While there is no legal requirement for LLCs to hold regular meetings, it’s often a good idea to do so anyway, so that everyone can check in regularly, discuss any issues that arise, and determine if anything needs to be addressed or changed.
If you want to hold regular meetings and would like attendance to be mandatory, you should include this in your Operating Agreement. This makes expectations clear to everyone, and if certain members refuse to attend or stop participating, you will have legal grounds to hold them responsible and potentially vote them out if necessary.
As your business evolves and people’s priorities change, it may be necessary to welcome new members or say goodbye to old ones. Your Operating Agreement should clarify the process by which this can happen.
If a member wants to leave, but they have partial ownership, you will need a way to determine how much to pay them as a buyout when they do so. Will it be based on their ownership percentage? A specified amount? Dependent on the company’s current capital? Will current owners be given the option to buy portions of this person’s amount as they choose?
When additional members come on board, it is typical to require that they contribute a certain amount of funds to the venture. You should specify what this requirement is and what percentage of ownership may be granted to a new member.
Sometimes, a member passes away, or they wish to retire. This is where succession planning comes in.
When a member passes away, will their shares be distributed among the remaining members? Can it be left to one of their family members or a friend? What will the rights of this family member or friend be?
Once this is spelled out in the Operating Agreement, all members can update their wills to align with whatever is decided.
As they say, all good things must come to an end. Sometimes, in the course of doing business, it becomes time to end your business. If your LLC members decide to end the business, this is called dissolution.
In your section on dissolution, the first thing you should include is how the decision to dissolve may be made. Does it require a unanimous vote? A simple majority? If there is disagreement about dissolving, can the members who wish to stay buyout those who wish to leave?
When a business dissolves, there are usually assets and/or debts and obligations that need to be dealt with and distributed. Your Operating Agreement should spell out how the remaining assets will be divided and who may be responsible for existing debts.
To formally dissolve a business, you must file the Articles of Dissolution with the Secretary of State. You should make it clear who is responsible for carrying this out.
Operating Agreements may need updating from time to time. As your business evolves and grows, what worked in the past may no longer work. Also, there may be items initially included in your Operating Agreement that aren’t working well.
Because of the potential need for changes, your initial Operating Agreement should explain how the changes will be made, voted upon, and implemented. This includes a clear indication of who can vote on changes, how much each person’s vote is weighted, and what percentage of agreement is required to enact a change.
You may also wish to include who is responsible for formalizing any modifications and creating official amendments to your Operating Agreement that are legally binding.
If your LLC only has a single member, you might wonder if there is a point to having an Operating Agreement. It turns out that there is. An Operating Agreement is your way of clarifying your business’s plans and rules.
This can be useful for your own clarity and organization and for any third parties with whom you may seek financing or do business. It still provides you additional protection by giving you a chance to put in writing which assets are tied to the business and not you.
However, you will want to specify in the Operating Agreement that you are the sole owner with 100% voting rights and the ability to make all decisions on behalf of your LLC.
A common clause added to legal documents states that if one or more portions of your Operating Agreement are deemed legally invalid, it does not invalidate the rest of the agreement.
Adding this boilerplate clause protects you from possible errors in your Operating Agreement by making it so that a simple error does not invalidate the entire agreement.
Creating an Operating Agreement is a big responsibility. You want to make sure all portions are legally valid and worded in a way that is consistent with what you intended. ZenBusiness has resources to help you make sure you don’t forget anything when creating your agreement, including a customizable template that can help you get started.
It may be a good idea to seek the advice of a legal professional before you sign your document just to make sure everything is in order.
Businesses change and evolve, so you will need to revisit your Operating Agreement and make changes as needed regularly. In your initial agreement, you should have included clear plans for how these changes are to be made in terms of who votes for them and how they are counted.
You may consider holding an annual meeting to review your Operating Agreement on a regular schedule. Laws change, so you want to make sure you remain compliant, and your agreement doesn’t include provisions that are no longer enforceable.
You should also revisit your Operating Agreement any time you make big changes, such as adding or losing a member, significant additions or changes to capital contributions, or amendments to your management model.
The procedure for updating your Operating Agreement should be spelled out in the initial agreement, so make sure you follow whatever rules you set forth. You may wish to revise the document in its entirety or add amendments as separate documents. Ensure all members sign and store this documentation in a safe place.
Keep in mind that some changes made to your business may need to be updated with the Secretary of State. In this case, you may need to file an amendment document and pay a $25 filing fee.
While an Operating Agreement is not legally required in Florida, it’s a good idea to have one to protect yourself, your business, and to ensure you aren’t subject to default state rules that may not be in your best interest.
You can write one from scratch or utilize an Operating Agreement template to get started. You may also wish to seek the assistance of a legal professional to make sure everything is in order.
Just as multi-member LLCs are not required to have an Operating Agreement in Florida, neither are single-member LLCs. Many people think that since the single member can make all of the decisions, no agreement is required. However, creating an Operating Agreement is still recommended, as it provides additional legal protection and paves the way for working with third parties.
You do not need to file your Operating Agreement; however, you should keep it in a safe place with other important business documents.
You can create your Operating Agreement however you like, but make sure it is consistent with Florida laws and, covers everything you intend.
No lawyers are needed, and you can create this document on your own. However, it can be helpful to consult a lawyer during the process to ensure there are no legal flaws in your agreement.
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