Articles

LLC 101 - Installment Three:  The Operating Agreement

 

By Richard Barra, Esq.

Now you have officially formed your limited liability company by filing articles of organization with the Florida Department of State. You now need to create an operating agreement for the LLC. An operating agreement functions as a hybrid between a shareholders agreement, bylaws, and a partnership agreement. The operating agreement sets forth the terms and provisions pursuant to which the company will be operated and managed and how membership interests may be issued and transferred.


One of the main benefits presented by limited liability companies is the flexibility they allow in the operation of the company. This benefit, however, also necessitates preparation of an operating agreement specifically tailored to your needs and intentions. There is no “standard” or typically accepted “form” for operating agreements.


These are some of the issues you should consider when preparing the operating agreement:

  1. Will the company be managed directly by the members or by managers? If you have a few principals who will be involved in the company, direct management by the members usually works best. If you have many principals or investors, you may wish to create a “manager-managed” LLC for convenience of operation.
     
  2. If the company will be directly managed by the members, will decisions require unanimous consent or some lesser number of the members? This issue typically ends up being a tricky one. If you require unanimous consent on all decisions, any one member can veto or block any decision. If you don’t require unanimous consent, a “minority” member can be forced into decisions with which he or she does not agree (such as investment in a new venture). Even if you do not require unanimous consent on all decisions, you may wish to designate certain major decisions that do require unanimous consent (such as amendments to the operating agreement; admission of new member; etc.).
     
  3. Should the transfer of a member’s ownership interest in the company require the consent of the remaining members or should ownership interests be freely transferrable? This answer will depend on the type of company and the nature of the investors. If various parties will be members but will not participate in the operations of the LLC, you may want to allow free transferability. If there will only be a few members and the success of the venture depends on the active involvement of those members, you may want to severely restrict the right of a member to transfer his or her interest without the consent of the remaining members.
     
  4. How can additional members be admitted to the company? Do all of the existing members have to consent? If a company admits additional members, the respective ownership interests of the original members will be reduced. For that reason, you may want to require unanimous consent to the admission of any new members to prevent dilution of ownership interests.
     

TO BE CONTINUED…..



Rick welcomes your questions about this article at rkbarra@scott-harris.com