Care should be taken when drafting an LLC operating agreement

Much has been written about the fact that limited liability companies are increasingly popular business entities for those seeking to start a new small business. Generally, those discussing a limited liability company compare it to an S corporation. For example, NBC News reports that LLCs "can give you more flexibility" than S corporations. A CBS News report stated that an LLC "has more flexibility" than traditional corporations. Finally, in discussing last year's changes to Florida's law governing LLCs, the Tampa Bay Business Journal found that the changes were "designed to clarify LLC provisions and provide additional flexibility."

If nothing else, one can hardly help but conclude that one of the primary features that make an LLC highly attractive is its reputed flexibility as a business entity. However, an American Bar Association publication notes that-in too many instances-those forming an LLC often fail to take advantage of the flexibility offered by an LLC despite the fact that the members of an LLC have "considerable freedom to customize" the operating agreement to best achieve their goals and economic objectives. While one cannot draft an LLC agreement that would violate the provisions of the Florida Revised LLC Act, the Act permits members the flexibility to draft-within reason-their own tailor made operating agreement.

According to Entrepreneur magazine, it is absolutely imperative that those considering setting up an LLC have a well written operating agreement that is clearly and unambiguously written. The operating agreement-which is a contract-lies at the very heart of an LLC since it sets forth how members desire their LLC to be operated. As perceptively stated by the Small Business Administration, an LLC's operating agreement "structures the business's financial and functional decisions" and governs its internal operations. Importantly, once the operating agreement is signed by the members, it acts to bind LLC members to its terms.

LLC members' duties

It should never be assumed that all LLC members will forever be in full accord as to how the LLC is being operated on a day-to-day basis. The ABA observes that many drafters of operating agreements fail to take advantage of the flexibility afforded by the LLC business entity format since many operating agreements end up being less than precise when describing the duties and obligations that the parties to the operating agreement owe to the LLC and to each other. Moreover, operating agreements are often vague as to the consequences LLC members will suffer if they breach or violate their duties.

The ABA advises that an operating agreement should clearly and specifically lay out the responsibilities that members have and the extent to which traditional common-law fiduciary duties are modified or supplanted. For example, the operating agreement can address to what extent members can take into account their own self-interest when making decisions or voting on matters affecting the LLC. Further, the operating agreement can address the circumstances under which members can compete against the LLC as to a business opportunity or transact business with the LLC. Importantly, the operating agreement can, and should, detail what methods of accounting should be used to prepare financial reports.

Seeking legal advice

Those who desire to set up an LLC can benefit from an operating agreement which clearly reflects how the members wish to operate their business. A Florida attorney experienced in business entity formation will be glad to assist you in drafting an operating agreement which protects all LLC members' rights and interests while furthering their business goals.