Does Your Business Really Need an Operating Agreement?
If you're launching a business in 2015 you probably have an overflow of ideas, priorities, and questions running through your head. You might be overwhelmed by everything you need to do, or you might be wondering what the next step should look like. A common question we hear from our clients is:
Does my business really need an operating agreement?
An operating agreement dictates the management and operation of a limited liability company (LLC). It could include details about profit and loss sharing, the management structure of the company, and procedures for removal and addition of new members.
We understand why you may want to skip this step. You probably have a great relationship with your business partners, and you're all on the same page about how you want to move forward with the business. What you may not realize is that an absence of an operating agreement means you have to run your business the way the State of Florida dictates. This could cause some major headaches.
Florida law has very specific guidelines regarding the distribution of profits and losses among company members. It's calculated based on each member's capital contribution which could be in the form of cash, services, or property. Each member must also follow tax liability guidelines, regardless of whether or not the profit and loss is actually collected. If your company distributes profit and loss differently, but you don't have an operating agreement in place, members could become liable for tax payments on income they never actually received.
Florida law also requires an LLC to be member-managed, which means that each member's power to make business decisions is legally proportionate to the member's percentage of profit and loss. If you don't have an operating agreement that outlines decision-making procedures, you could unintentionally give individuals authority to make decisions that they were not intended to make.
These are just a few of the possible obstacles your business could encounter without an operating agreement in place. Generally speaking, your operating agreement should cover the following:
- Specification of each member's ownership percentage
- Rights and responsibilities of each member
- Distribution of profits and losses
- Voting rights
- Management structure
- Meeting requirements
- Transitional procedures for the removal, addition, or sale of members and their respective interests
When you prepare an operating agreement, you should always consult with an attorney with experience and knowledge in the formation of new business entities. The future of your business depends on the navigation of legal nuances involved in creating your business, so make sure you're not missing any important details.