Limited Liability Company (LLC) Operating Agreements
It generally takes a law suit to bring about some recognition regarding a need when it comes to planning a business operation. Consider the Limited Liability Company and its progeny which provides the average citizen the ability to own a company and have their personal property protected against losing those assets creditors.
Historically, the idea of an LLC started about 50 years ago out West, and has evolved in almost every state of the union. The State statutes recognizing an LLC was established in Wyoming in 1977, followed by Florida in 1982. It generally affords protection to a person’s personal assets against law suits while not requiring double taxation to the government. The size of the company can be a single individual to multiple members and millions of dollars in assets. Setting up an LLC is just as simple, register with the State, get an EIN number from the government and open an account with a bank (which is not absolutely required).
The key to having a successful LLC is the preparation of an operating agreement where there are two or more members; however, you can also have single member LLC’s and receive the same protections as a multi-member LLC. In Florida, LLC organizations are treated very similar to partnerships. One of the major exceptions is when it comes to single member LLCs because there is no such thing as a single member partnership. Unlike a corporation, the individuals who are part of an LLC are called members.
Each member owes a duty to the other members. The duty owed gives each member the right to sue any other members when they breach some requirements contained in the Operating Agreement or fail to protect the company. The right to file suit against other members can be done directly as opposed to derivatively. A derivative action is one where an individual files suit on behalf of the company as opposed to themselves personally.
LLC’s generally follow the Business Judgment Rule when determining if a member misuses the authority they are granted by the operating agreement or by statute. The Business Judgment Rule affords a great deal of latitude when it comes to decision making. When a decision is made concerning the outcome of how a business will act is made without the benefit of any information, the member who makes such decision is vulnerable to being sued and held accountable for any losses. However, members are protected when making decisions when relying on information and opinions presented by others, including employees, committees, legal counsel and accountants.
An operating agreement gives each member a basis of understanding how the entity will operate. It will also provide each member with the rules the company will operate under including what profits will be shared among the members. This includes profits, losses, transferability and distribution of expenses.
If you are considering filing with the State for recognition of an LLC organization, consider contacting the lawyer of your choice to assist you in preparing an Operating Agreement. What you don’t want to have happen is to find out someone in the organization is not pulling their weight or worse is sabotaging the company with no recourse to protect you or the company. An Operating Agreement sets out the means by which the company will operate, profits distributed and who is in charge when final decisions need to be made.
This article is intended for informational use only and is not for purposes of providing legal advice or association of a lawyer – client relationship.
