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LLC and Shareholder Agreements


A limited liability company, commonly called an "LLC," is a business structure that is similar to a corporation, but less formal. Business owners form LLCs to protect themselves from being personally liable for business debts.  LLCs combine the pass through taxation of a partnership or sole proprietorship with the limited liability of a corporation. As in a partnership or sole proprietorship, income "passes through" the LLC to the LLC owners, and the owners report the business's income on their personal income tax returns. Unlike a corporation, the LLC itself is not a separate taxable entity.

Limited liability companies generally do not have shareholders. Their contributors are called members, and the agreement between them is the membership, or operating, agreement. In the early stages of forming an LLC, one of the first steps is the membership agreement. Those who form the LLC must decide how the LLC will operate. These issues included who will manage the company, how profits and losses will be divided, how the LLC may terminate and any additional rights that the members will have in making important company decisions.

As a governing document for the company, the membership agreement is a serious legal contract, subject to all requirements of contract law. All members must sign the agreement, as well as any future amendments to the agreement.  Although Florida does not require that a written membership agreement be created, it is not advisable to start a business without one.  A membership agreement helps to ensure that courts will respect your personal liability protection by showing that you have been conscientious about organizing your LLC.  It sets out rules that govern how profits will be split up, how major business decisions will be made, and the procedures for handling the departure and addition of members.  It helps to avert misunderstandings among the owners over finances and management.  It allows you to create your own operating rules rather than being governed by the default rules in Florida’s LLC laws, which might not always be to your benefit.

Similarly, a shareholder’s agreement is a contract between the shareholders of a corporation.  When a company is formed its shareholders may decide on a set of ground rules over and above the basic legislation that will govern their behavior. For example, how do you handle a shareholder who wants "out" (and sell her shares)? Should it be possible to "force" (i.e. buyout) a shareholder? How are disagreements handled? Who gets to sit on the Board? What authority is given to whom for various decision making activities? Can a shareholder (i.e. company founder) be fired?

Shareholder's agreements are key for small closely held businesses where the shareholders are usually active in the day to day affairs of the business. Since those businesses are dependent on the shareholders to work for the business, it is important to deal with the points listed above so that the business is not derailed in the event of unforeseen circumstances.

The business law attorneys at RICE & Rose have extensive experience in creating LLC and shareholder agreements.  Contact us at (386) 257 1222 to see how we can put our knowledge and experience to work for you.

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