An LLC operating agreement is a contract between owners, or members, of a Florida LLC that regulates, among other things, members’ contributions of money to the LLC, distributions of LLC profits, and how decisions are made within the LLC. Unlike the Articles of Organization, an LLC operating agreement in Florida is not required. However, it is usually a good idea to formalize the agreement among the LLC members in an operating agreement.
An LLC operating agreement drafted with asset protection provisions can substantially diminish a creditor’s ability to collect or seize assets or income of the debtor’s interest in the LLC.
A properly drafted Florida LLC operating agreement should include:
LLCs without operating agreements are governed by default rules and regulations of the Florida Revised Limited Liability Company Act. The default statutory rules may not be appropriate in LLCs involving unrelated members or LLCs with a particular legal goal such as asset protection. Provisions in an LLC operating agreement supersede corresponding statutory default rules
A properly drafted LLC operating agreement demonstrates the seriousness of the LLC business and avoids unanticipated consequences imposed by the statutory default LLC provisions. Members may customize their operating agreement as they wish to express their business relationship, provided, however, that Florida statutes do not permit operating agreements to waive some member rights, obligations, or protections.
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An LLC operating does not have to be written in Florida. The Florida statutes expressly state that an operating agreement may be, in full or in part, an oral agreement or an agreement implied by conduct. Oral operating agreements save time and legal costs, but an oral agreement can lead to misunderstandings and conflicts between members because members have different recollections of prior oral promises. Oral agreements are harder than written operating agreements to enforce in court.
Florida law does not require LLC operating agreements to be filed. An LLC operating agreement is a private contract among the LLC members. The general public cannot search or view an LLC’s operating agreement. However, during litigation involving the LLC or its individual members, a court may compel discovery of the LLC’s operating agreement.
Tip: We advise our clients that a properly drafted operating agreement could provide a better negotiating position to a judgment debtor if it convinces a judgment creditor that collection of LLC profits will be difficult.
New LLC businesses in Florida that are within the above descriptions may do well with a simplified and inexpensive operating agreement, or they may rely on oral agreements.
Simple operating agreement forms are available without charge on the internet. Examples include the sample LLC operating agreement form provided by eforms.com or the form provided by startbusiness.org.
Most serious businesses with significant capitalization need something more than a free operating agreement to express the participating members’ business relationship. Customized operating agreements are appropriate whenever the members are unrelated partners or when the members are investing significant amounts of money and expect to grow the LLC into a substantially profitable business operation.
An LLC that will elect taxation as a subchapter-S entity requires special provisions in its operating agreement. An operating agreement that is inconsistent with the IRS rules for S-corps may forfeit the S election with adverse tax consequences for the LLC owners.
In-depth operating agreements are also strongly recommended when any LLC member faces creditor or judgment issues to take advantage of customized asset protection provisions.
LLC members—especially unrelated business partners—may wish to discuss the following list of questions, among others, as they start a new business. Their agreed answers to these questions should be included in their Florida LLC operating agreement.
The above list is only a sample representation of the legal and financial issues people should consider when they start a new business. It is easier for LLC members to resolve these issues before starting their LLC business than to fight over the issues as they come up in the course of an already busy and profitable business.
Tip: In our practice, we see that an LLC operating agreement drafted with asset protection provisions can substantially diminish a creditor’s ability to collect or seize assets or income of the debtor’s interest in the LLC.
An LLC can be an effective asset protection tool in Florida in two ways: (1) protection from claims against the LLC and (2) protection from claims against the LLC member.
First, the LLC shields its members from individual liability from claims made against the LLC. A person with a claim against the business can recover on a judgment against the LLC only from LLC assets rather than from the personal assets of individual members. This protection is referred to as a “corporate shield.” People with multiple investment assets should have each asset owned by a separate LLC to isolate each LLC’s exposure to only the affected LLC’s own assets.
There are exceptions to this legal shield. One exception is when a member personally guarantees an LLC obligation. The creditor may sue the owner individually based on the guaranty whether or not the creditor sues the LLC. Another exception is when an LLC is established to defraud creditors. The affected creditor may pursue an action to pierce the LLC liability shield and hold the LLC owners liable.
The primary asset protection purpose of an LLC is the protection of a member’s LLC interest from the member’s individual creditors.
While a judgment creditor can levy upon and force the sale of a debtor’s stock interest in a corporation, the same creditor is limited by Florida law to a charging lien against the debtor member’s interests in LLC distributions, if any are made.
The extent to which an LLC protects a member’s LLC interest from their individual creditors depends significantly upon the terms and conditions of the Florida LLC operating agreement.
To best protect the LLC membership interests from creditors, an LLC operating agreement in Florida should include at minimum the following features:
The above legal concepts are not included in a typical simple form LLC operating agreement in Florida. But all these features, and others, are important for effective asset protection of an investment through a Florida LLC.
An LLC operating agreement can be created by:
In some circumstances, an operating agreement can be helpful even for single-member LLCs to provide evidence as to the owner of the LLC. An attorney-drafted operating agreement will be the most expensive option. However, these operating agreements can be particularly helpful for business owners facing creditor issues or for ambitious businesses owned among non-family members (friends or business partners).
No, Florida law does not require an LLC to have an operating agreement. Instead, the LLC must have an Articles of Organization, which is a simple document using a form provided by the Division of Corporations.
Still, for most business owners an operating agreement provides clarity and asset protection.
A person is not legally required to have an attorney draft an operating agreement. However, an operating agreement is a legally enforceable document. Improper drafting could lead to member disagreement and tax issues. Sometimes, an improperly written agreement can diminish asset protection.
An operating agreement does not need to be notarized in Florida. However, sometimes notarization can be helpful if needing to prove that the operating agreement existed on a certain date, or if the members want to record the agreement in the public record.
An LLC without an operating agreement functions according to the default set of rules established by Florida statutes.
Gideon Alper is an attorney who specializes in asset protection planning. He graduated with honors from Emory University Law School and has been practicing law for almost 15 years.
Gideon and the Alper Law firm have advised thousands of clients about how to protect their assets from creditors.
