Florida’s LLC Act was substantially revised in 2013, as a result, new LLCs were required to comply with the new Act by January 1, 2014 and existing LLCs were required to comply with the new Act by January 1, 2015. For a number of reasons, it is imperative that business owners seek the advice of counsel when opening an LLC and when preparing and maintaining their corporate documents. The provisions of the new Act control if the LLC does not have an Operating Agreement, or if the Operating Agreement fails to mention a specific topic; thus, it is essential that business owners know what the new Act says and what their rights are.
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Below is just a sampling of 7 issues to consider and questions that may arise:
In the Operating Agreement, you should state whether the LLC is member-managed or manager-managed. What are the differences between the two? If the Operating Agreement does not provide this, then the LLC will be deemed member-managed by default, under the new Act. This has significant ramifications on how your business must be conducted.
In the Operating Agreement, you should state that the Operating Agreement can only be amended in writing. Under the new Act, the LLC’s course of conduct can become the new Operating Agreement, as an Operating Agreement can be oral or implied, unless the Operating Agreement provides otherwise. You could be changing your understanding of the agreement without even knowing!
The Operating Agreement should explain what happens to distributions. Under the new Act, distributions will be made in accordance with a member’s contributions unless the Operating Agreement provides otherwise. However, what if one member contributes $1,000 and one member contributes future services – how is the value of future services determined?
The Operating Agreement should set forth each member’s personal liability. For instance, under the new Act, all members have personal liability in a member-managed LLC for consenting to improper distributions, and all managers in a manager-managed LLC; what is your risk even if you personally did not authorize the improper distribution? The Operating Agreement should set forth each member or manager’s voting rights. Under the new Act, a unanimous vote is required for several items, including but not limited to amending the Operating Agreement, dissolving the LLC, dissociating from the LLC and administratively dissolving the LLC; however, voting rights can be changed in the Operating Agreement. There are pros and cons to having a unanimous vote. Will it prevent the company from making essential decisions moving forward?
What if there is a deadlock and decisions cannot be made for the company? The Operating Agreement should provide a provision that breaks a voting deadlock, as the new Act does not provide for this. For example, there are several possible alternatives to break a deadlock, including but not limited to selling the business or a governance change.
Finally, the new Act provides that there are several non-waivable provisions, which cannot be changed in an Operating Agreement, including but not limited to varying the requirement concerning registered agents, eliminating the duty of care or the duty of loyalty, eliminating the obligation of good faith and fair dealing, varying the power of a person to dissociate from the LLC, varying the grounds for dissolution and varying the requirements to wind up the LLC’s business, activities and affairs. Thus, if you prepare an Operating Agreement which attempts to waive any of the non-waivable provisons, those provisions in your Operating Agreement will not be enforceable.
In conclusion, oftentimes business owners decide that they can open an LLC on their own and they choose to save the expense of hiring an attorney to prepare and maintain the corporate documents. Keep in mind that this initial savings may cost you more in the long run, if you are forced to litigate over business issues later. We recommend that all business owners seek the advice of counsel so that they know and understand what their rights are and have the proper documents in place to protect those rights.
The contents of this blog and website are for informational purposes only and do not constitute legal advice. Use of and access to this blog and website do not create an attorney-client relationship between the user and Iurillo Law Group, P.A.