Don’t Be Up Schitt’s Creek: Why Your LLC Should Have an Operating Agreement

Posted on August 21, 2024, by Starlett Massey

It is common in the state of Florida for individuals desiring to operate their businesses as a company to start a Florida limited liability company (“LLC”). They often do so by registering an LLC with the Florida Division of Corporations (sunbiz.org) without retaining a business lawyer to prepare an operating agreement for the company.  

However, this approach has certain pitfalls, as discussed in this article, of which business owners should be aware.  

How are LLCs governed in Florida?

Florida LLCs are governed by the Florida Revised Limited Liability Company Act, Florida Statutes Chapter 605.0101, et seq. (the “FRLLCA”).  The FRLLCA provides that an LLC’s operating agreement governs:

1. Relations among the members as members and between the members and the limited liability company;
2. The rights and duties under this chapter of a person in the capacity of manager;
3. The activities and affairs of the company and the conduct of those activities and affairs;
4. The means and conditions for amending the operating agreement.

See Florida Statute § 605.0105.

An LLC that operates without an operating agreement is essentially choosing to operate without the protections of an operating agreement that controls the rights and duties of the members and the manager.  This blog series contemplates three hypothetical scenarios that may arise where an owner (“member”) of an LLC may find that they would have substantially benefited by putting an operating agreement in place at the time of the formation of the company.

LLCs without operating agreements and unauthorized actions by members 

In the first blog of this series on why your LLC should have an operating agreement, we will explore unauthorized actions by members.

There are two types of management of Florida LLCs: (1) member-managed LLCs where the member(s) control the company, and (2) manager-managed LLCs where the manager(s) control the company.  If the only evidence of a Florida LLC is its registration with the Division and any annual reports, and there is no statement in the Articles of Organization or operating agreement that the LLC is manager-managed, then the LLC is a member-managed LLC.  See F.S. § 605.0407(1).  

Where an LLC is set up by filing electronic Articles of Organization on the Division’s website, there is no opportunity to select whether the company will be manager-managed or member-managed.  Thus, a Florida LLC that is formed by filing electronic Articles of Organization on www.sunbiz.org is deemed a member-managed LLC.

A member-managed Florida LLC acts, e.g., opens accounts, enters into contracts, etc., through its individual members.  Of course, any individual member should have the authority to act for the company, but this is not always the case.  Regardless of a member’s actual authority, an act of an individual member “binds the company unless the member had no authority to act for the company in the particular matter and the person with whom the member was dealing knew or had notice that the member lacked authority.”  See F.S. § 605.04074(1)(a) (emphasis added).  

This means that any third party may rely upon its review of the public records of the Division to determine whether an individual is a member of the company and is therefore authorized to act on its behalf.  

Why is it problematic for an LLC not to have an operating agreement?  

It is common for members of an LLC to have an agreement that the members have unequal or different ownership interests in the company.  It is similarly common for members of an LLC to have an agreement that decisions must be made by all members of the company.  However, if these agreements are not documented in the company’s operating agreement and/or there is no manager appointed in the company’s registration with the Division of Corporations, there is no way to enforce these agreements.  

An operating agreement establishes the respective ownership percentages of each member and the identity of the manager or individual members who are required to assent to a decision.  Without an operating agreement and the appointment of a manager with the Division, any member may be deemed to have the authority to act on behalf of the company, even where the other members have not authorized that member to take the action.

Hypothetical: David, Alexis, and Moira open a Company to recruit talent for local theater productions.  They agree that Moira will have 60% ownership interest, and David and Alexis will each have a 20% ownership interest in the Company.  They agree – without documentation – that Moira will need to approve all contracts to be entered by the Company.  

However, neither David, Alexis, nor Moira insist upon the Company implementing an operating agreement that clarifies either (a) their respective ownership interests or (b) appointing Moira as manager.  The Company’s registration with the Florida Division of Corporations indicates only that David, Alexis, and Moira are all members of the Company.  

Several years into the successful operation of their Company, Alexis determines unilaterally that the Company would benefit from entering into a 10-year lease of a theater building so they can have weekly performances.  Alexis does not share this information with David or Moira.  The theater building owner checks the Florida Division of Corporations prior to entering into the lease with the Company and sees that Alexis is, in fact, a member of the Company.  

In reliance upon Alexis’s authority to bind the Company, the building owner offers the lease to the Company through Alexis as an authorized representative of the Company.  Without the agreement or knowledge of David and Moira, Alexis signs the 10-year commercial lease for the theater in the Company’s name for $10,000 per month.  Upon learning of the Company’s new lease, Moira becomes enraged and seeks to unravel the costly lease for the Company.  Because the theater building owner did not know or have any notice that Alexis, a member, lacked authority to bind the Company to the lease, the Company is now liable for the 10-year, $1.2M lease, much to Moira’s and David’s chagrin.

Are you ready to prevent the pitfalls of doing business as an LLC without an operating agreement? To schedule an appointment and explore the benefits for your business, contact MLG today.

Stay tuned! In the next blog in the “Don’t Be Up Schitt’s Creek: Why Your LLC Should Have an Operating Agreement” series, we will examine additional risks, including theft or conversion of a member’s interest by a third party and failed succession planning.