LLC Agreement: Put it in writing. Now.

May 16, 2017 - Blog by

The LLC Operating Agreement – It Governs Your Rights, so Write It (and Write It Well)

[The “pilot” episode, in preparation for a “series” of LLC articles]

You have spoken with your lawyer and accountant, and you are convinced that you need an entity for your business operations. Based upon your particular circumstances, you have agreed that a limited liability company (an “LLC”) is the preferred entity for legal and accounting or tax reasons.  

You find the simple form of articles of organization online for the new LLC, and you decide to complete the form and file it online yourself. 

The business grows and then flourishes, and you bring in additional owners — called “members” under Florida’s LLC law (the Florida Revised Limited Liability Company Act).

But you never get around to writing up, or having your lawyer write up, an agreement between you and the LLC (and later, the new members) explaining how the company is to be run, how marketing and growth and money decisions are made, and what happens if there is some disagreement. The articles of organization usually do not address these issues.

The lack of such a written operating agreement is not a problem…  not until you bring in additional members or until there is real money at stake, and then a real dispute arises.

And when the dispute arises, you turn to your agreement, and yes, you have one. It’s called an “operating agreement,” and even if it is not in writing, you do indeed have one.

The LLC law provides that the operating agreement is to govern the relationship between and among the members and the LLC, the management of the LLC, and the conduct of the company’s affair.  

Under the law, this operating agreement can be oral or even implied, that is, based upon your conduct — how the members and the company have acted in the past, how things have been done and how decisions have been made.

All of which was good, until your members don’t agree how to proceed with the business. Then their recollections differ markedly about their past conversations and oral understandings concerning how to run the company, about who gets to hire and fire employees, who gets to negotiate contracts, who gets to borrow money, and who gets distributions and how much.

Who has authority?

 

But at least it’s clear that you remain the member with the majority of the ownership interest in the LLC, so you should call the shots now.

However, in the past you have allowed other members to make some of these important decisions, and they want to continue, and they claim that you gave them that right, that authority.

And if you don’t work it out with them, then they want out of the company. And you are ready for them to go, ready to fire them as employees.

Except that you are not so sure about what rights they may have or about what rights you may have (especially when you learn that under the LLC law, even a member with a small ownership interest can be authorized under the operating agreement to manage the company). 

You never really wrote down much about operations and authority. You just ran the company (or let them run parts of it), and it ran quite well.

But they are signatories on some of the company’s bank accounts, and they have negotiated (and signed) some important contracts for the company. And although you own the majority of the company, there are two (or three or more) of them, and they seem to agree on past understandings (contrary to your recollection).

So the oral agreement (they recall) or the implied agreement (based on your conduct, on how you did things) may not support you now the way you had hoped.

Avoid painful resolutions

 

When you ask your lawyer about the law, Florida’s LLC law will provide the answers to many questions about how the company’s operational issues should be resolved. But many of these provisions (called “default provisions”) can be superseded by the members’ agreements (even the oral agreements).  

So you’re back to competing recollections of long-ago conversations and understandings, all while trying to resolve the disputes.

And soon you are on your way to mediation (and if all goes reasonably well, settlement) or litigation, with the other members demanding damages and buy-outs and attorney’s fees (which may be doubtful).

Eventually it gets resolved, but painfully, and expensively, with relationships destroyed.

And you know that your next LLC will have a complete, comprehensive operating agreement in place, in writing, with some heft, some length and weight, so that everyone will know how things work.

You and your new associates will get along much better then, and everyone can focus on building the business.

 

This is not intended to be legal advice for any specific situation and the reader should consult their attorney regarding their situation.