Why an Operating Agreement is Critical for Your LLC

Why an Operating Agreement is Critical for Your LLC

Many business owners make the choice to operate as a limited liability company (LLC) for the personal liability protection this business entity provides. Beyond that, they may not give much thought to creating an LLC operating agreement since most states have LLC laws with default provisions that dictate how the LLC will be managed. However, your state’s default provisions may not be the right fit for how you want your company to operate.

For example, many states provide that the voting power of each LLC member should be in proportion to their investment in the company. This may not necessarily work for you, especially if you want to recognize the “sweat equity” contribution of a member as equal to another member’s financial contribution.

Under most states’ LLC default provisions, the ability for members to transfer their interest in the LLC is unrestricted. But you may not want to potentially be in business with a partner you don’t know or don’t care to deal with as a member of your LLC.

An LLC operating agreement can also help members avoid costly and stressful events, including:

Disputes among members on rights and responsibilities of each owner. An operating agreement will detail the specific rights and responsibilities of each LLC owner so there is no confusion.

Harm that could arise from state default laws.   State default laws are one-size-fits-all, which may not be a good fit for your company. If your state laws dictate that corporate actions are subject to a unanimous vote by members, and you have problems getting everyone to agree, this could hamper the growth of your company. An operating agreement allows you to create custom rules for the operation of your LLC.

Disputes that arise due to lack of clarity. Many state default laws do not adequately address disputes. By preemptively planning for potential scenarios that could arise, such as the need for capital and the responsibilities of each member to provide it, you can address these in advance so each LLC member knows what to expect, thus avoiding potential disputes in the future.

It is important that your LLC’s operating agreement be as comprehensive as possible so that you do not become subject to the default provisions of the Florida Revised LLC Act. Jurado & Farshchian, P.L. assists businesses with all their entity formation and corporate needs. Please call one of our experienced attorneys at (305) 921-0440, or email us at info@jflawfirm.com. We offer free consultations to business owners seeking to find the right attorney to meet their business’ legal needs.

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