FLORIDA LIMITED LIABILITY COMPANY DOES NOT HAVE AN OPERATING AGREEMENT? FLORIDA’S STATUTES MAY PROVIDE SOME HELP

Limited liability companies (“LLC”) are formed in Florida on a daily basis and seem to be more common than ever.? However, as with corporations and their respective shareholders, the members of LLCs often times do not take the time to prepare an Operating Agreement to govern the rights and liabilities of the LLC’s members.? Therefore, the manner in which the LLC will be operated is often left to chance with no formal guidance.? This article will outline several of the Florida’s statutes that provide some baseline guidance to members of Florida LLCs, who do not have an Operating Agreement. ??The starting point of this discussion is in Florida’s LLC statute, which is found in Chapter 605 of the Florida Statutes, under the title “Florida Revised Limited Liability Company Act” (for the purpose of this article the “LLC Act”).? This article will discuss several parts of the LLC Act.

Management of an LLC

Day-to-day management of an LLC depends in part on whether the LLC is “member-managed” or “manager-managed”. ?An LLC is manager-managed if the articles of organization include a statement that the company is to be manager-managed.[i] The articles of organization may also include a description of the authority or limitations thereon of a specific person in the LLC.[ii] Furthermore, an LLC may file a statement of authority with Florida’s Department of State, Division of Corporations, stating the authority or limitations on the authority of persons to execute instruments or otherwise enter into business transactions on behalf of the LLC.[iii]

In a member-managed LLC, each member is an agent of the LLC for purposes of its business and may, therefore, to the extent that they are not limited by the articles of organization or statement of authority, execute instruments on behalf of, or otherwise enter into, business transactions on behalf of the LLC.[iv]

Generally, a member’s act, made in the course of the ordinary course of business of the LLC, binds the LLC.[v] However, if a member lacks actual authority to carry out a certain act for the LLC, and the person dealing with the particular member has notice of the lack of authority, the member’s act does not bind the LLC. ?In addition, an act of a member of the LLC not carrying on “in the ordinary course of business” affairs of the LLC will not bind the LLC (unless the act was authorized by either the required member vote or an operating agreement).[vi]

If, on the other hand, the LLC is manager-managed, a member is not an agent of the LLC and the member’s acts do not bind the LLC. ?However, manager acts that are not apparently taken in the ordinary course of business are only binding if authorized by member vote.[vii]

Voting Rights of Members of an LLC

In a member-managed LLC, all LLC members are entitled to vote and the weight of an individual member’s vote is proportionate to that member’s membership percentage or other allocable interest in the profits of the LLC at the time the vote is taken.[viii] The fact that a member has assigned all or part of his economic interest in the LLC to a person who is not an admitted member, makes no difference in calculating the weight of the member’s vote.[ix] Where a member vote is required, a vote of a majority-in-interest of the members is sufficient unless otherwise provided in either the articles of organization (or in an operating agreement).[x]

If members act without a meeting, which is allowed, and the action is taken by fewer than all of the members, written notice of the action must be given to those members who do not have the right to vote or who did not consent within 10 days.[xi]

In a manager-managed LLC, the manager has all rights to the day-to-day running of the LLC and only those actions taken outside the ordinary course of business require a member vote. The member consent for actions taken outside of the ordinary course of business is handled in the same manner as member consent is handled in a member-managed LLC situation.[xii]? In all respects, a member or manager may appoint a proxy to act for the member or manager.[xiii]

Acts that Involve Member Consent

Some acts, regardless of whether the company is member or manager managed LLC, require member consent. ?Certain other actions may be taken by members of an LLC but may also be accomplished in other ways. ?The following is an outline of certain actions that the LLC Act allows and/or requires be taken by an LLC’s members.

1.???????? Amendment to the Articles of Organization

Amendment to an LLC’s articles of organization requires the consent of all members, regardless of whether the LLC is member or manager managed.[xiv]

2.???????? Merger

The plan of a merger for an LLC must be approved in writing by a majority-in-interest of the members.[xv]

3.???????? Admission of Additional Members

A person may be admitted as a member with the consent of all members (or as provided for in the operating agreement).[xvi]?

4.???????? Member Appraisal Rights

Members of an LLC, like shareholders in a corporation, have appraisal rights.[xvii] Members entitled to vote on a plan of merger, conversion, interest exchange or sale of substantially all assets, or who are adversely affected by an amendment to the articles of organization are entitled to appraisal rights and to the fair value of the member’s interest in the LLC.[xviii] Appraisal rights for events specified by The Act are only available for members required by the event to accept something other than cash or a proprietary interest of an entity in exchange for their interest in the LLC.[xix]

Another situation in which an appraisal right is available to a member is where a member’s interests are being acquired or converted by a person who is, or at any time in the year proceeding the appraisal event (i) was the beneficial owner of 20% or more of the voting power of the LLC; (ii) had the power to cause appointment or election of the senior executives; or (iii) was a senior executive of the company or any affiliate of the company that will receive a financial benefit not generally available to members as a result of the action (other than certain benefits related to employment, consulting, and retirement).[xx] Notably, the procedures for exercising one’s appraisal rights under The Act closely follow the procedures for exercising appraisal rights for Florida corporations.[xxi]

5.???????? Dissolution

An LLC may be dissolved through consent of all members. The Act also lists other events which may trigger dissolution of an LLC.[xxii]? Notably, if the LLC is solvent at the time of dissolution, a member is entitled to the return of his or her capital contribution.[xxiii]

Upon dissolution, the LLCs assets are distributed in the following order of priority:

(1)????? Creditors (including any members who happen to be creditors;

(2)????? Persons owning a transferable interest for unreturned contributions; and

(3)????? Members’ and former members’ share of profits.[xxiv]

Member’s Financial Rights

A member’s right to a share of profits and losses in an LLC is based on the members’ agreed value of the members’ capital contributions.[xxv]

Member’s Right to Dissociation

A member has the right to dissociate as a member of the LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member.[xxvi]

Member’s Right to Records and Information

Similar to how shareholders have rights to information regarding the corporation in which they are shareholders, members to an LLC also have rights to information. ?As with many aspects of member rights in LLCs, a member’s right to information is dependent on whether the LLC is member or manager managed.

In a member-managed LLC, a member has the right to inspect and copy during reasonable business hours at a reasonable location selected by the company:

(a) a current list of the full names and last known business, residence, or mailing addresses of each member and manager.

(b) a copy of the then-effective operating agreement, if made in a record, and all amendments thereto if made in a record.

(c) a copy of the articles of organization, articles of merger, articles of interest exchange, articles of conversion, and articles of domestication, and other documents and all amendments thereto, concerning the limited liability company which were filed with the department, together with executed copies of any powers of attorney pursuant to which any articles of organization or such other documents were executed.

(d) copies of the limited liability company’s federal, state, and local income tax returns and reports, if any, for the 3 most recent years.

(e) copies of the financial statements of the limited liability company, if any, for the 3 most recent years.

(f) unless contained in an operating agreement made in a record, a record stating the amount of cash and a description and statement of the agreed value of the property or other benefits contributed and agreed to be contributed by each member, and the times at which or occurrence of events upon which additional contributions agreed to be made by each member are to be made;

(g) and any other record concerning the company’s activities, financial conditions and other circumstances so long as and to the extent those materials are material to the members rights and duties.[xxvii]

Without being prompted, the LLC must provide members with any other information, whether that information is part of a company record or not, known to the company to be material to the exercise of the member’s rights and duties. The company is not required to provide this information if the company knows that the member has this information already.[xxviii] Additionally, the company must provide any other information concerning the LLC’s activities, financial condition and other circumstances upon request unless the demand is unreasonable or improper.[xxix]

With respect to manager-managed LLCs, members have a right to inspect and copy an LLC’s records listed above in (a) through (f). ?Members also have a right to full information that is just and reasonable about the company if: (i) the member seeks the information for a purpose reasonably related to the member’s interest as a member; (ii) the member makes a demand to the LLC describing with reasonable particularity the information sought and the purpose for seeking the information; and (iii) the information sought is directly related to the member’s stated purpose.[xxx]

Member’s Rights to Legal Action

As often seen in the corporation context, members of an LLC have two types of legal action available: a direct action by which they can sue an LLC directly, if they have been personally harmed by the LLC, and, a derivative action, which allows a member of an LLC to bring an action on behalf of the LLC.[xxxi] Similar to the process for bringing a derivative action in a corporation, the member must first make a written demand on the company to take action. ?If the LLC does not respond within 90 days (unless the demand would be futile or irreparable harm would result from waiting the 90 days), the member may bring the derivative action.[xxxii] On the other hand, if such a demand would be futile or cause irreparable injury, the member won’t need to follow the pre-suit requirement under the Florida Statute § 605.0802.[xxxiii]

Importantly, in order to maintain a derivative action on behalf of an LLC, a member considering bringing the derivative action must have been a member of the LLC: 1. at the time the action is commenced, and, 2. at the time when the conduct giving rise to the action occurred or whose status as a member devolved on her by operation of law from a person who was a member when the conduct giving rise to the action occurred.[xxxiv]

Conclusion

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??????????? The Florida Statutes provide holders of membership interest in a Florida LLC with certain rights. ?Often times these rights are subject to the manner in which the LLC is managed.? This issue is often overlooked and causing confusion and disputes among the members and mangers of LLC.? It is best to discuss these important issues with a business attorney when opening a new LLC, and for existing LLCs, which do not already have an Operating Agreement.?

[i] §605.0201, Fla. Stat. (2021)

[ii] Id.

[iii] §605.0302, Fla. Stat. (2021); Rubinstein v. Keshet Inter Vivos Tr., No. 17-61019-CIV, 2019 WL 4739409, at *5 (S.D. Fla. July 10, 2019) (the court had to determine whether the Plaintiff had an implied knowledge that a member’s wife had authority to transact business on behalf of the limited liability company that the husband owned);

[iv] See §605.04074, Fla. Stat (2021); Skypoint Advisors, LLC v. 3 Amigos Prods. LLC, No. 218CV356FTM29MRM, 2020 WL 2357224, at 4 (M.D. Fla. May 11, 2020) (each manager of a limited liability company is an agent of the limited liability company for the purpose of its activities and affairs..”); Pelfrey v. Mahaffy, No. 17-CV-80920, 2018 WL 3110797, at 4 (S.D. Fla. Feb. 7, 2018) (as it relates to a member-managed LLC, “each member is an agent of the [LLC] for the purpose of its activities and affairs” and an “act of a member ... binds the company… [and]… in a manager-managed LLC, “a member is not an agent of the [LLC] ... solely by reason of being a member,” and “each manager is an agent of the [LLC] for the purpose of its activities and affairs” and “an act of a manager ... binds the company.”).

[v] See §605.04074, Fla. Stat (2021); Skypoint Advisors, LLC v. 3 Amigos Prods. LLC, No. 218CV356FTM29MRM, 2020 WL 2357224, at 4 (M.D. Fla. May 11, 2020); Pelfrey v. Mahaffy, No. 17-CV-80920, 2018 WL 3110797, at 4 (S.D. Fla. Feb. 7, 2018)

[vi] ?See §605.04074, Fla. Stat (2021)

[vii] See Id.

[viii] §605.04073, Fla. Stat. (2021); See Lopez v. Hus, 290 So. 3d 119, 121 (Fla. 4th DCA 2020); In re Melbourne Beach, LLC, No. 6:17-BK-07975-KSJ, 2019 WL 10734081, at *3 (Bankr. M.D. Fla. Aug. 6, 2019);

[ix] §605.04073, Fla. Stat. (2021)

[x] Id.

[xi] Id.

[xii] Id.

[xiii] §605.04073(4), (5), Fla. Stat. (2021)

[xiv] §605.04073, Fla. Stat. (2021)

[xv] §605.1023, Fla. Stat. (2021)

[xvi] §605.0401, Fla. Stat. (2021)

[xvii] See §605.1006, Fla. Stat. (2021)

[xviii] Appraisal rights are not available for membership interests: (i) traded on a national securities exchange; or (ii) issued by an LLC that has at least 2,000 members and all members interest have a market value of at least $20 million (exclusive of any interests held by beneficial members, managers, and other senior executives owning more than 10% of the rights to receive distributions). See §605.1006, Fla. Stat. (2022)

[xix] Id.

[xx] Id.

[xxi] See §605.1062 et seq., Fla. Stat. (2021)

[xxii] §605.0701, Fla. Stat. (2021); Kertesz v. Spa Floral, LLC, 994 So. 2d 473, 475 (Fla. 3d DCA ?2008) (holding that when there are no “deadlock” means there is no basis for judicial dissolution or appointment of a receiver)

[xxiii] §605.0710, Fla. Stat. (2021); See In re Maddox, No. 8:12-BK-05200-MGW, 2022 WL 120192, at *1 (Bankr. M.D. Fla. Jan. 12, 2022).

[xxiv] See §605.0710, Fla. Stat. (2021); See In re Maddox, No. 8:12-BK-05200-MGW, 2022 WL 120192, at *1 (Bankr. M.D. Fla. Jan. 12, 2022).

[xxv] §605.0404, Fla. Stat. (2021).

[xxvi] §605.0601, Fla. Stat. (2021); See Solfire Grp., LLC v. Solfire Enterprises, LLC, No. 14-CV-3054 (MKB), 2016 WL 2596036, at *4 (E.D.N.Y. May 5, 2016) (“A person has the power to dissociate as a member at any time, rightfully or wrongfully, by withdrawing as a member by express will”, or that any of the events enumerated in section 605.0602 of the statute occurred);

[xxvii] §605.0401, Fla. Stat. (2021)

[xxviii] Id.

[xxix] Id.

[xxx] §605.0401, Fla. Stat. (2021)

[xxxi] See §605.0801, .0802, Fla. Stat. (2021)

[xxxii] §605.0802, Fla. Stat. (2021); See Arnold v. PermitRocket Software, LLC, No. A-21-CV-385-LY, 2021 WL 8018074, at *4 (W.D. Tex. Dec. 2, 2021), report and recommendation adopted, No. A-21-CV-00385-LY, 2022 WL 1097816 (W.D. Tex. Jan. 13, 2022)021); see also In re Palm Ave. Partners, LLC, 611 B.R. 457, 470 (Bankr. M.D. Fla. 2019) (holding that a derivative claim is one “in which a stockholder seeks to enforce a corporate right or to prevent or remedy a wrong to the corporation.” A claim that a shareholder was fraudulently induced into investing in a corporation doesn't become a claim to enforce a corporate right or to remedy a corporate wrong just because each of the shareholders were fraudulently induced to invest in the company. Just the opposite. The fraudulent inducement claim—regardless of whether only some of the shareholders were fraudulently induced or all of them were—would not be to remedy a wrong to the corporation; it would be to remedy a wrong by the corporation.)

[xxxiii] §605.0802, Fla. Stat. (2021); See Arnold v. PermitRocket Software, LLC, No. A-21-CV-385-LY, 2021 WL 8018074, at *4 (W.D. Tex. Dec. 2, 2021), report and recommendation adopted, No. A-21-CV-00385-LY, 2022 WL 1097816 (W.D. Tex. Jan. 13, 2022)021); In re Palm Ave. Partners, LLC, 611 B.R. 457, 470 (Bankr. M.D. Fla. 2019).

[xxxiv] §605.0803, Fla. Stat. (2021).

This article was written by Eric Assouline, Esq. of Assouline & Berlowe, P.A. and Davy Karkason, Esq. ACiarb. of Transnational Matters

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