Why an Operating Agreement is Important for your Business

It seems like so many business owners are conducting business without an operating agreement. Unbeknownst to the owner, this can be a risk. An operating agreement is a document that organizes a business entity; it provides liability protections and makes expectations clear.

Operating agreements can vary in substance depending on the venture. Creating a LLC with the state comes with its own host of statutorily-mandated provisions that apply to the company at its inception just by registering to do business as a LLC.

Many owners are unaware of what's legally imposed on members and managers of a LLC by state statute. The statute allows for most of these provisions to be alleviated by an operating agreement. For example, one fiduciary duty imposed by state law is the requirement not to compete with the business's interests.

Florida Statute 605.04091(2)(c) requires members and managers to refrain from "competing with the company in the conduct of the company's activities and affairs." Members of a LLC may want to alleviate themselves from this fiduciary duty by an operating agreement so they are able to freely engage in business transactions with other companies without being liable. Violating a fiduciary duty can subject a member or manager to litigation. Discussing these provisions amongst members and deciding which statutory mandates to alleviate also provides clarity to the directors, members, officers, and managers of the company.

There are many imposed statutory duties for how members and managers are to operate a business. The noncompete provision is just one example of why it's important to work with a business attorney to create an operating agreement to ensure unwanted mandates are alleviated and all members and managers are on the same page. An operating agreement protects the members' and managers' interests in the company, which reduces the likelihood for conflict down the road and can guide the company through transitions that can be highly conflictual. Having guidelines and provisions for mergers, acquisitions, buy/sell agreements, membership changes, etc. help keep the business running smoothly even during times of change. Determining how a new member will be admitted or how another member's interests are to be acquired are some of the ways an operating agreement can protect members from future conflict.

Operating agreements also protect personal assets of the owners and members of the company. Maintaining the appropriate legal documentation for your company provides guidance to the court in determining if a company is treated as a business or as an alter ego of the owner(s). Corporate formalities are important to the corporate veil piercing analysis and having the proper legal paperwork is one way of demonstrating that the company is being treated as a business and isn't the alter ego of its owner(s).

An operating agreement is important whether you're a new or existing business. If you're considering opening a business or are currently running a business and would like to speak with an attorney about reducing liability by creating an operating agreement/bylaws or other corporate formalities call 352-681-2723.

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