One reason for the popularity of limited liability companies (“LLC”) in Florida and elsewhere is the relaxed formality in operating an LLC compared with a corporation. In recent years, many LLC members have decided to form their Florida LLC without the assistance of a lawyer by utilizing the Florida Department of State’s e-filing process. Those members have not paid much attention to the LLC’s organizational structure beyond creating the articles of organization which are required under Florida law.
Operating agreements for LLCs are analogous to shareholder agreements for corporations, with at least one major exception. Under Florida law, unlike a shareholder agreement, an LLC operating agreement need not be in writing. And so, oral operating agreements have come into existence through members merely operating their LLC. Sometimes, members will orally agree on how various LLC ownership matters are to be treated, but never reduce those agreements to writing. The risk of such oral agreements lies in the question of whether a court will enforce them if called upon to do so.
In Olson v. Halvorsen, C.A. No. 1884-VCL (Del. Ch. Ct. Oct. 22, 2008), a Delaware chancery court ruled that the Statute of Frauds will prohibit enforcement of any portion of an LLC oral operating agreement which is impossible to be fully performed within one year of the making of the agreement. Delaware chancery court rulings have been authoritative in the area of corporate law, and the same is expected to hold true concerning the area of limited liability company law.
If your LLC is presently operating under an oral operating agreement, you may wish to consult with a qualified attorney to find out which, if any, of its terms may be unenforceable and what you can do to reduce the chances of your operating agreement not being enforced as you may have expected.