What is an Operating Agreement?

By: Renee Sealy

When starting a Limited Liability Company (LLC) in Florida, an operating agreement is strongly recommended but not legally required under the Florida Revised Limited Liability Company Act under Chapter 605 of the 2025 Florida Statutes.

An operating agreement is a written document that essentially serves as the LLC’s Constitution, or governing document. An operating agreement prevents default statutory rules from applying and helps avoid disputes. The operating agreement should align with the Articles of Organization and reflect the specific needs of the business.

Before drafting an operating agreement, members of an LLC should consider the purpose, membership structure, and management structure of the LLC. The purposes of an LLC may be broad for flexibility or narrow for liability or conflict control concerns. The membership structure should identify a single or multi-member structure and/or identify different classes of membership interests (for example: economic, voting rights, etc.). The management structure default for LLC’s is member-managed, unless otherwise specified. Some members may prefer manager-managed or board-managed structures, but can specify that distinction in the operating agreement.

Key Sections Every Operating Agreement Should Include

Formation

This section should include basic details of the company: name, address, effective date, articles of organization filing, and initial members list. The formation should reference the registered office and agent.

Capitalization

Capitalization is the process of providing funds or assets needed for the company to operate. This section defines capital contributions (cash, assets, equity rollovers, etc.) and percentage interests. This can also include future capital calls, rules for defaulting members, and preemptive rights to prevent dilution. This section is especially important in authorizing the issuance of new membership interests under specific conditions.

Distributions

A distribution is a payment of cash or property made by the LLC to the LLC’s owners. This section should specify how and when profits are distributed (required vs. discretionary), as well as operating distributions, tax distributions (to cover tax liabilities), and sale/liquidation distributions. It is important to remember that distributions cannot occur if they would render the company insolvent.

Tax Provisions

This section details how profits and losses are allocated and reported (“book” vs. “tax” allocations). Most LLCs are pass-through entities (taxed as partnerships). To be taxed as a partnership, the business itself does not pay federal income tax, instead the profits and losses are “passed through” to the partners, who then report their share on their personal tax returns. Some LLC’s elect corporate or S-corporation taxation and/or appoint a tax matters representative or partnership representative.

Management

This section defines member-managed, manager-managed, or board-managed LLC structure. Members may retain approval rights for major decisions (e.g., sale of assets, mergers). This section allows customization of voting thresholds for various actions.

Fiduciary Duties

A fiduciary duty is a legal and ethical obligation for fiduciaries to act in the best interest of the company. Duties of loyalty and care apply to members (member-managed) or managers (manager-managed). These fiduciary duties can be modified or limited by agreement (e.g., limiting common-law fiduciary duties), and includes good faith and fair dealing obligations.

Indemnification and Advancement

Indemnification is a contractual obligation under Florida law (not automatic) that shields members and managers from financial losses and liabilities.
Advancement is contractual protection that requires the LLC to pay the legal expenses of its managers or members as they arise during legal disputes.
The operating agreement may provide mandatory indemnification and advancement of expenses unless misconduct or bad faith occurs. The operating agreements should clearly define scope and limitations (whether members and/or managers are covered, expenses paid, conditions for repayment).

Restrictive Covenants

A restrictive covenant is a clause that limits an individual or LLC from certain activities to protect business interests, trade secrets, etc., that are reasonable in scope, in writing, and supported by legitimate business interests. Restrictive covenants may include noncompete provisions or alternatively allow competing activities, must comply with Florida law, and depend on the members’ roles and business nature.

Transfer of Membership Interests

This section outlines the specific rules, restrictions, or required procedures for transferring interests. Transfer of membership interests are typically restricted, which requires manager or member approval. This includes:

Permitted Transfers (e.g., to family or affiliates)
Right of First Refusal (ROFR); Drag-Along and Tag-Along Rights (protect majority or minority owners)
Call/Put Options for buyouts or triggering events (death, bankruptcy, etc.)
Valuation procedures for interests (fixed price, formula, or third-party appraisal)
Admission of substitute members upon approval.

Dissolution and Winding Up

The Dissolution and Winding Up section describes when and how the LLC may be dissolved (e.g., by member vote, expiration, or court order) and explains liquidation procedures and distribution of remaining assets.

Conclusion

After incorporating these sections, a well-drafted operating agreement will highlight and define rights, obligations, governance, and ownership structures. These sections will assist in avoiding the unintended application of statutory defaults in the state of Florida.

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It should be noted that I am not your lawyer (unless you have presently retained my services through a retainer agreement). This post is not intended as legal advice, it is purely educational and informational, and no attorney-client relationship shall result after reading it. Please consult your own attorney for legal advice. If you do not have one and would like to retain my legal services, please contact me using the contact information listed above.

All information and references made to laws, rules, regulations, and advisory opinions were accurate based on the law as it existed at this time, but laws are constantly evolving. Please contact me to be sure that the law which will govern your business is current. Thank you.