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Creating a Legal LLC to Protect Your Business
These are the many questions that must be answered when forming a business entity in Florida. If you’re starting a business or you’re in the middle of a business dispute, talk with attorney L. Reed Bloodworth about how Bloodworth Law can help you or your business.
What Should Go Into a Florida Business Operating Agreement?
When Reed puts together an operating agreement, the first thing he wants to do is set forth what type of organization it is. You decide the type of partnership, LLC, or corporation it is going to become. In any business, it goes back to the original operating agreement.
What Else Goes Into An Operating Agreement?
You say, “We’re forming an LLC; this is the name of it; here’s the registered agent and office.” And then, “What’s the purpose of this company? Why are we forming this company? What are we going to be doing?”
You’ll identify who’s taking part in the company, and if it’s an LLC, who are the members?
A big question is, what type of entity are you going to select in terms of taxation and liability?
You want to verify the membership interests and then start getting into the business aspects of it.
Establishing the Duties
Who’s responsible for the books and records? What method of accounting are you going to use? Who’s going to prepare the tax reports? You can designate an individual tax member who is in charge of taking care of the LLC’s tax issues and returns. You can do all those things, including who has access to the bank accounts and who is responsible for overseeing them.
Capital Contributions
The next thing that an LLC should have is a discussion of the capital contributions. Who’s making them; how much are they; what are the conditions for requiring additional capital contributions? What are the conditions of returning capital contributions; what is considered company property versus an individual interest property?
Capital Accounts
Can a member get advances or put advances toward the LLC? And then you have the capital accounts: What are they? Where are they kept? Does each member have a capital account? Who keeps track of that?
Duties of Members
Then, you’ll have to get into the kind of actual duties of the members, and that often overlaps with restrictive covenants. So, if you were going to be a member of this LLC, then you need to not do business and work for, or be a member of another LLC, or work against it.
Profit and Finances
Going back to the duty that you have, the first duty is to make money. How do you produce profits for the company? And who is overseeing loans and other financial transactions for the company?
Handling Business Agreements
By putting alternative dispute resolution clauses into a business operating agreement, members establish how to handle disagreements when litigation arises.
Mediation Procedures
Reed explains that you can put in a requirement that before any lawsuit is filed, you have to attend a mediation, and you can set up the procedures on how that mediation is going to happen.
How do you select a mediator? Make sure you agree to the time and place, maybe even an exchange of information before the mediation, and obviously, give information to the mediator.
You can decide whether or not the members are allowed to be represented by attorneys at this mediation.
If you spent the money to set a mediation in place, and if something goes astray, wouldn’t everyone want to have legal counsel to look out for their rights and to allow an attorney to give their professional opinion on what the terms say in the operating agreement?
Include the Arbitration Clause
And should that mediation fail, you could also include the arbitration clause. How is the mediator going to get paid, or how the arbitrator’s going to get paid. Who’s going to pay for mediation, or who’s going to pay for the arbitration? Is it all going to be confidential?
That’s something you’d want to discuss at the beginning, which includes: what are the pros and cons of arbitration versus just being allowed to file a lawsuit?
There’s a lot that can be done at the very beginning of forming an LLC, or other business entity, that will clarify how the entity will ultimately grow or break up. Hopefully, it’s done with fewer lawsuits and more of just going back to review what the written operating agreement established.
Hire an Attorney to Draft Your Agreement
If you’re going to do business with other people, it’s imperative to hire an attorney, draft a solid operating agreement so that you have a guideline by which everything’s going to happen.
Because otherwise, you’re looking at all of the above: mediation, arbitration, litigation — whether it’s a lawsuit, or someone takes half of everything, or someone takes over the entire business.
Conflicts of Interest
Reed said that whenever he prepares an operating agreement, he has entire sections dedicated to conflicts of interest. And where you don’t want one partner or LLC member doing something that is beneficial for them individually, but detrimental to the entity.
In a partnership agreement, Reed designates everyone who has certain rights, who has certain powers, or the obligations held, and then how to transfer interests.
Who’s Going to Manage the Company?
For example, who’s going to manage the company? For an LLC, there is manager-managed, or you can appoint a manager, and it doesn’t necessarily have to be a member.
Then there is, member-managed, where the actual members can manage. They can all vote on it, or you could appoint managing members or a member. There are different ways that you can manage an LLC. And then what are the authorities and powers of those managing people?
What Limitations Will Be Placed On Which Members?
What limitations do you want to put on various members? Do you actually set out the authority for the different members?
Name who’s going to be the officers, what’s the compensation, and what type of indemnification the members or managing members get in the event of a lawsuit, or some type of liability arising.
And then similar aspects for just the normal members, you can put into your agreement a limitation of liability for the members.
What Are the Rights and Powers of the Members?
This gets into the rights and powers of the members. So you can say, “This is the power of the company; this is the limitation on the liability of these members.” When and where should the members meet? That typically involves a notice of where and how it’s going to take place.
So if one of the members does something like they’ve run off with a trade secret, or they violate their non-compete agreement. They leave and try to just start up their own company doing the same thing; you will want to have the ability to go shut that down, putting injunctive relief as the ability of the company into your operating agreement.
How Do You Keep Confidential Information Confidential?
What type of agreement do you have to keep your confidential information confidential? Do you want non-compete, non-solicitation clauses in the operating agreement? How do you protect your legitimate business interest? This is something that a company has that is valuable, may not be known necessarily, and can go part and parcel with non-compete, non-solicitation clauses.
Non-Competes and Non-Solicitation
Again, if you are going to include non-compete, non-solicitation clauses, you probably want to put the ability in there to seek injunctive release.
Rights, Revenue, and Rules
When you begin working with someone on a business you’ll want to explain what the voting rights are and what actions members can take at a meeting. For example, can you, as one member, give proxy voting rights to another member if you don’t want to go to the meeting?
Or do you want to make it so that a standard member doesn’t have the right to bind the company? You typically give that to the manager, or managing member, or president, depending on the type of structure of the LLC.
Financial Aspects Are Important
Think about other things, like an LLC member who uses their own personal funds for something, a marketing event, or another aspect like an emergency business expense. You might want to put a provision in there about reimbursing expenses of the members.
And then, what type of insurance should the LLC have? It’s there that you start getting into the money and financial aspects of the business, who’s responsible for what?
Profits and Losses
You have to look at profits and losses and who’s keeping the books. What are the salaries?
And then specifying how distributions of available cash will be made. Can you do a distribution of property in kind? What if one member got $100,000, and then another member — maybe there wasn’t another 100,000 in cash — but maybe the LLC had a piece of property that was worth $100,000, so you can do a distribution in kind.
Then, what happens if you have to return the distribution? And in what circumstances would that happen?
How Will You Elect a Team?
You’ll probably want to put in a section pertaining to elections if you’re going to elect a managing member or elect presidents or officers.
And then, who is in charge of all the things that go along with keeping the company in compliance with whatever rules and regulations may be applicable?
Finally, you’ll get into standard, miscellaneous items: governing law, venues, and attorney’s fees in a dispute. Those are the big, broad-picture overview of what goes into an LLC operating agreement.
Business Partnerships
In Florida, there are four types of partnerships:
- General Partnerships
- Limited Partnerships
- Limited Liability Partnerships
- Limited Liability Limited Partnerships
Reed said he sees partnerships where there isn’t a written agreement; there isn’t something set forth to say this is how we’re going to handle a breakup of the partnership, the liabilities.
Typically the biggest problem when partnership disputes occur, it’s clear by their actions that they were a partnership, but they never created a formal written agreement.
Then, one day, one of the partners locks the other partner out of the business, changes all the computer passcodes, and clears out all the bank accounts. And then it’s a lawsuit between the partners about who gets what.
Easy to Form, Difficult to Run Businesses
Reed explains that while partnerships are less technical, businesses need to plan while they’re forming. It’s easy to form a partnership, an LLC, or a corporation, but it’s very difficult to run the business.
Protection From Liability
Liability can come up in many forms, for example, a car crash. In a partnership, if a partner is doing company business and rear ends someone while using a car owned by the partnership, the liability can spread to the other partners.
Whereas an LLC or a corporation protects the other people involved. That’s one of the many benefits of forming an LLC or forming a corporation.
If you’re going to form an LLC, a partnership, or a corporation, and run it properly, invest upfront and consult with a business attorney about how to run the business and protect those involved.
No matter what stage of the business dispute you’re facing, talk with Reed about how Bloodworth Law can help you, your family, or your business.
Florida attorney L. Reed Bloodworth is the managing partner of Bloodworth Law with offices in Orlando and Winter Haven.
Reed has handled business litigation since 2004 and has seen businesses and business partners try to navigate and then litigate disruptive and sometimes hostile legal disputes.