Florida law does not require a limited liability company (“LLC”) to have a written operating agreement. When an LLC does not have a written operating agreement, the rights, duties, obligations, and liabilities of the members and managers default to the statutory rules provided in the Florida Revised Limited Liability Company Act (the “Act”). These default rules, while offering many protections, may not align with the governance objectives for the LLC. For this reason, having a written operating agreement that establishes a desired nuanced set of contractual rights and duties can provide more benefits than without one.
This post highlights 6 Florida LLC operating agreement mistakes to avoid.
1. Using Generic, Online, and AI Generated Templates
Generic, online, and AI generated templates may appear convenient, but they can be fraught with inapplicable, irrelevant, incorrect, overly broad, and vague material terms that can create varying levels of legal and financial risks. Bear in mind that generic, online, and AI generated templates are broadly designed and not tailored to address the specific needs of a business.
In addition, generic, online, and AI generated templates may also omit material terms that may result in reduced legal rights and protections for the LLC, its members, its managers, or all three.
Furthermore, using a cookie-cutter operating agreement may neglect to address Florida-specific legal requirements necessary to make the agreement valid.
As such, using a generic, online, or AI generated template in place of a customized operating agreement that is written in compliance with Florida law should be avoided.
2. Failing to Address Capital Contributions
Another common mistake with some written LLC operating agreements is their failure to adequately address member obligations and liabilities for initial and future capital contributions where funding by members is expected. Because funding is typically of grave importance to an LLC, neglecting to sufficiently address this obligation and the liability for failing to contribute may potentially expose the LLC to future financial instability.
In addition, the Act mandates that a promise to contribute to the LLC must be in writing and signed by the applicable members to be enforceable. See Section 605.0403(1), Florida Statutes.
Accordingly, if the objective of the LLC includes initial and future capital contributions by its members, this funding obligation must be addressed in the operating agreement and signed by each applicable member to be enforceable.
3. Lack of Non-Compete and Non-Solicitation Clauses
Failing to include the restrictive covenants of non-compete and non-solicitation in a written operating agreement can place the LLC at a competitive disadvantage. Neglecting to include these types of restrictive covenants in the agreement allows the members or managers, as applicable, to work for, have an ownership interest in, consult for, or start, a business the competes with the LLC. Members and managers, as applicable, would also be free to contact customers and clients of the LLC to induce them to use the services or products of the competing business rather than those of the LLC.
Under Florida law, an agreement restricting competition and solicitation is enforceable if in writing, is signed by the restricted party, supports the legitimate business interests of the LLC, and is reasonable in time, geographic scope, and line of business.
As such, if the objective of the LLC is to maintain a competitive advantage, ensuring the operating agreement includes legally compliant non-competition and non-solicitation provisions is critical to achieve this goal.
4. Failing to Address Alternative Dispute Resolution
Disputes among LLC members is not uncommon. Member disputes are not only unpleasant, but they tend to strain relationships, create disorder, and can potentially lead to protracted and expensive litigation.
To mitigate these risks, an operating agreement should include provisions addressing alternative dispute resolution methods, such as mediation, arbitration, or any other method designed to amicably resolve disputes in good faith without the need to first resort to litigation. Moreover, incorporating provisions that provide for alternative dispute resolution methods tend to be more efficient and cost-effective.
5. Including Prohibited Terms
The Act is intended to provide LLC members the freedom to contract and tailor the terms of their operating agreement that align with their objectives. However, this freedom has some limitations and those are expressly outlined in the Act.
In general, certain rights, duties, obligations, and liabilities of the LLC, its members, and managers, cannot be altered, varied, or eliminated in an operating agreement. Some examples of what an operating agreement may not do include:
relieve a member, manager, or other associated person from liability for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law,
provide that the LLC will indemnify a member or manager for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of the law,
unreasonably restrict a member’s statutory right to file a lawsuit directly against member, a manager, or the LLC,
unreasonably restrict a member’s statutory right to file a lawsuit on behalf of the LLC to enforce a right of the LLC,
identify the governing law other than the State of Florida for matters involving or relating to the internal affairs of the LLC, and
vary the statutory grounds for judicial dissolution.
This list is not exhaustive. Other restrictions exist. Consequently, to ensure the provisions of the operating agreement are legally compliant, valid, and enforceable, it's important to know what the Act prohibits an operating agreement from doing.
6. Failing to Amend Agreements
An LLC may evolve over time. Changes could occur in the ownership structure, membership, membership classes, voting rights, distributions, contribution requirements, and management structure (among others). When changes materialize, the LLC operating agreement should be amended to reflect such changes in accordance with the amendment provision of the agreement. An amendment provision is typically rather simple and short, stating something like, "This Agreement may only be amended or modified in writing and must be signed by all members to be effective."
Updating an operating agreement to reflect changes can be achieved by amending inconsistent terms, deleting inapplicable terms, adding new provisions, or a combination of all three, and finalized in accordance with the terms of the agreement's amendment provision. Neglecting to amend an existing operating agreement to reflect changes to the internal affairs of the LLC creates a potential risk for disputes, disorder, disruptions, and potential drawn-out and pricey litigation.
A Florida LLC operating agreement is designed to govern how the LLC will operate and what its members and managers should expect as to their rights, duties, obligations, and liabilities. It should be drafted with due consideration of the objectives for the LLC to ensure the agreement includes pertinent provisions that are legally compliant, protect interests, and mitigates risk. Bear in mind that this list of 6 common Florida LLC operating agreement mistakes to avoid is not exhaustive. Depending on the specific governance objectives for the LLC, there may be other neglected or inadequate provisions that may create varying levels of financial and legal risks for the LLC, its members, its managers, or all three.
In closing, whether you’re seeking to create or revise an LLC operating agreement, ensure to identify your objectives, address any potential concerns for risk exposure, and that the agreement is written in compliance with Florida law.
The information provided in this post is for general informational purposes and not intended as legal advice or legal opinion for any individual matter. Keep in mind that legal developments or changes to law may occur in the future and, as such, the information contained in this post may not be the most up-to-date legal or other information. Do consult your own attorney for any legal advice you may require. If you do not have an attorney and would like to explore a potential engagement for my services, please reach out to me via the contact submission form or by using the contact information provided in my bio.