What records must a Florida limited liability company (”LLC”) maintain?

The purpose of this article is to explain the basic records requirements of a LLC under Florida law. A LLC is the preferred type of entity for many start-up businesses, especially those engaging in entrepreneurial and ecommerce ventures.

What is the law?

Section 608.4101, Florida Statutes (Records to be kept; right to information), sets forth the record requirements for a Florida limited liability company. Section 608.4101 states, in part, as follows:

(1)Each limited liability company shall keep at its principal office the following records:

(a) A current list of the full names and last known business, residence, or mailing addresses of all members, managers, and managing members.

(b) A copy of the articles of organization, all certificates of conversion, and any other documents filed with the Department of State concerning the limited liability company, together with executed copies of any powers of attorney pursuant to which any articles of organization or certificates were executed.

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

(d) Copies of any then-effective operating agreement and any financial statements of the limited liability company for the 3 most recent years.

(e) Unless contained in the articles of organization or the operating agreement, a writing setting out:

1.The amount of cash and a description and statement of the agreed value of any other property or services contributed by each member and which each member has agreed to contribute.

2.The times at which or events on the happening of which any additional contributions agreed to be made by each member are to be made.

3.Any events upon the happening of which the limited liability company is to be dissolved and its affairs wound up.

Key Issues

One of the advantages of forming a Florida limited liability company is that the statutory records requirements are substantially less onerous than the requirements for a Florida corporation. With a Florida corporation, the annual records requirements included minutes of annual meetings of both the shareholders and Board of Directors.

In addition, the records requirements for a Florida limited liability company allow the members of the LLC to maintain privacy about the internal business affairs of the company. The LLC’s Operating Agreement is an internal document for the use of the members and managers. The Operating Agreement is not filed with the Secretary of State.

How to stay out of trouble

Although straightforward and simple, the records requirements specified in Section 608.4101 mandate that a LLC maintain specific records (copies of the Articles of Organization, documents filed with the Secretary of State, tax returns, the then-existing Operating Agreement, etc.). In order to comply with Florida law, I recommend that you meet each of these specific requirements. Please note that the records requirements do not require annual minutes.

Since the initial formation of a Florida LLC is such a simple process, the second step of the process is often not done properly – preparing an Operating Agreement. Although Florida law does not require that an Operating Agreement be in writing, I highly recommend it. Without a clear, written Operating Agreement, the right and obligations of the members and managers are subject to dispute. Inevitably, a dispute about the rights and obligations of the parties will arise at an inopportune time and may potentially cripple the LLC.

Finally, Florida law requires that a LLC provide members and their agents and attorneys with access to the LLC’s records. I recommend that a LLC provide its members with an annual update of the company’s activities including a copy of the tax returns. Routinely providing this information will go a long way toward maintaining harmonious relationships among the members of the LLC.

About the Author

Fred Reilly became an attorney in 1986 and is a Member of the California Bar Association, District of Columbia Bar Association, and Florida Bar Association. Mr. Reilly is also a Solicitor and Member of The Law Society of the United Kingdom.

He is admitted to practice before the United States Supreme Court and United States Court of International Trade.

Mr. Reilly graduated from The London School of Economics and Political Science (Master’s degree in International Business Law), The Cumberland School of Law at Samford University (J.D.) and The Krannert School of Management at Purdue University (B.S. Management).

He practices international business and eCommerce law. Mr. Reilly frequently travels to Florida, California, London, and Moscow.

Important Notice

This purpose of this blog is to inform and not to advise. The statements are general and individual facts in any given situation may alter their application or involve other laws not referred to here. You should always seek advice from a competent professional if any questions arise.

I’ve been an attorney for 24 years and here’s the insider version of my basic approach to resolving a legal problem.

GET ALL THE FACTS

Most legal problems are multifaceted. The appropriate solution will depend on analysis of all relevant facts. Often, its difficult for both the attorney and the client to separate the relevant from the irrelevant – that’s why a frank and open discussion is important.

It may be cliché, but the first step to solving the problem is recognizing that you’ve got a problem. The second step is assembling all of the relevant facts so that there will be a sound basis for your legal analysis. Let’s face it, your failure to identify a crucial fact can cripple your case. To uncover the relevant facts, ask informed questions and dig to get reliable answers.

DETERMINE WHAT LEGAL STANDARD APPLIES

When a legal problem strikes, it triggers an emotional response in most people. Rather than attempting to identify the applicable legal standard, they immediately focus on the injustice of their situation. Although the injustice of any given situation may be important, you cannot properly analyze the problem with first identifying the applicable legal standard.

The legal standard may be a federal law, state statute, local code, administrative rule, case law, or (more likely) a combination thereof. I highly recommend that you read and re-read the legal standard several times – you‘ll be amazed how people gloss over the most critical aspects of the legal standard and base their argument on everything but the most critical aspects. You cannot afford to make that mistake.

For example, if you’re cited by your local Code Enforcement official for an overgrown lawn, your first move should be to read the specific Code provision that defines “overgrown grass.” Does “overgrown” mean grass that is eight inches tall, 12 inches tall, or 24 inches tall? If the Code provision prohibits grass that is 12 inches or taller and your lawn is only 10 inches tall, then you can present a great defense that you have not violated the Code section.

CONSIDER THE RANGE OF OPTIONS AVAILABLE

I’ve found that people often want to select a course of action without ever thinking through the range of options available to resolve the problem. Your ability to select the best option and achieve an advantageous outcome will be dramatically increased when there’s a range of options on the table. While there are many ways to solve a legal problem, recognize that some may be effective and others may not.

Each potential option should be evaluated on whether there’s a sound legal basis for the strategy, who will likely oppose your strategy and why, the likelihood that the strategy will actually resolve the problem, whether the strategy could cause unintended consequences, and the expenses associated with the strategy.

SELECT A STRATEGY AND TAKE ACTION

If you’ve assembled all of the relevant facts, determined what legal standard applies, and considered the range of options, then you’re in a good position to select a strategy and take action.

If you either fail to formulate a strategy or fail to implement it, your outcome will remain in jeopardy. It’s been my experience that very few legal problems resolve themselves and inaction frequently makes matters worse.

During the course of implementing your strategy, monitor how the strategy is working and whether a course change is necessary. It’s a mistake to just charge ahead with blinders. Taking a “Damn the torpedoes” attitude will get you sunk. Remain nimble and flexible – you never know when an opportunity to achieve a more advantageous result may materialize.

ABOUT THE AUTHOR

Fred Reilly became an attorney in 1986 and is a Member of the California Bar Association, District of Columbia Bar Association, and Florida Bar Association. Mr. Reilly is also a Solicitor and Member of The Law Society of the United Kingdom.

He is admitted to practice before the United States Supreme Court and United States Court of International Trade.

Mr. Reilly graduated from The London School of Economics and Political Science (Master’s degree in International Business Law), The Cumberland School of Law at Samford University (J.D.) and The Krannert School of Management at Purdue University (B.S. Management).

He practices international business and eCommerce law. Mr. Reilly frequently travels to Florida, California, London, and Moscow.

IMPORTANT NOTICE
This purpose of this blog is to inform and not to advise. The statements are general and individual facts in any given situation may alter their application or involve other laws not referred to here. You should always seek advice from a competent professional if any questions arise.

In the past week, there’s been wild speculation on the technology news and blog sites about the claims made in a bombshell lawsuit filed against Facebook.

According to published reports, a New York man filed a lawsuit claiming that he owns a majority ownership interest in the $25 Billion company by virtue of a contract that he signed in 2003 with Facebook founder and CEO Mark Zuckerberg. An email from Facebook has asserted that “the claims are absurd and we strongly suspect that the contract is forged.”

The Facebook lawsuit raises five critical points that every company and entrepreneur should consider when formalizing its business relationship with a written contract.

FORMALITY COUNTS

In the Facebook case, the company has asserted that the contract is a forgery. There’s no doubt this issue will be addressed at the initial phase of the litigation. If the contract is in fact a forgery, the case will be summarily dismissed. If the contract is legitimate, the litigation will proceed on the merits to determine the rights and obligations of the parties to the contract.

Do you formalize each important business relationship with a written contract? If so, do you have a filing system for maintaining these important documents in a safe and secure place?

The appropriate degree of formality for a specific contract is dependent on the gravity of the business relationship. A relatively minor contract (i.e., a gentlemen’s wager on a sporting event with $1 is at stake) can be written on the back of a napkin or an envelope and signed by the parties. By contrast, a integrated written contract is needed when there’s a company-to-company relationship involving substantial performance obligations, the use of complex intellectual property rights, and substantial money is at stake.

If the parties to a deal ever had any reason to believe that the subject matter of their deal would someday be worth $25 Billion, then they probably would have insisted on a much more formalized written contract.

CLARITY IS CRUCIAL

The second lesson of the Facebook case is the compelling need for parties to a deal to strive for clarity in stating the rights and obligations of the contract. The rights and obligations of the parties constitute the bulk of the contractual terms.

In the context of the Facebook case, the parties should have addressed relevant rights and obligations including:

· The ownership rights related to the intellectual property, name of the venture/entity, interest in ancillary ventures/entities, and stock/shares of the venture/entity.

· Performance obligations such as who is obligated to do what, the payment of compensation, vesting of ownership rights, breach of contract, and termination of the contract.

· How to handle a dispute including alternate dispute resolution (mediation and arbitration), choice of law, choice of forum, attorney’s fees, and costs.

EXECUTION IS IMPORTANT

What are the appropriate formalities for execution of the contract? This question turns on who has authority to bind each party to the contract. If an individual will be signing the contract, then the individual has the authority to bind themselves to the contract (assuming that he/she has the requisite legal capacity).

If a party to the contract is a legal entity (i.e., a corporation, limited liability company, partnership, etc.), then the appropriate individual with authority to bind the legal entity should be executing the contract on behalf of the corporation. In short, you would want the President of a Fortune 500 company to execute an important contract, not a janitor who works at a remote branch of the corporation.

In order to make it easier to authenticate the contract in court at a later date, you should also consider whether to have multiple persons execute the contract (i.e., President and Secretary, whether there’s a need for witnesses to the execute of the contract, and whether the execution should be notarized.

ENFORCEMENT SHOULDN’T BE AN AFTERTHOUGHT

During the deal-making process, you should always contemplate what action should be taken in the event that the contract is breached. Depending upon the business relationship at issue, the parties should consider inclusion of:

· A non-compete provision that defines whether and how the parties can compete against each other in the event the relationship is terminated.

· A confidentiality provision that protects either or both parties against the unauthorized disclosure of business secrets.

· A liquidated damages provision that requires the party who violates the contract to pay a pre-established sum of money (liquidated damages).

· A provision that provides for injunctive relief so that the non-breaching party can effectively seek a court order that compels the breaching party to immediately stop violating the contract.

GET PREVENTATIVE LEGAL ADVICE

Based on the news reports of the Facebook case, it doesn’t appear that the parties to the alleged deal sought legal advice prior to striking their deal. I think its obvious that if the parties had obtained sound legal advice when the deal was allegedly negotiated, they could have avoided several glaring problems in this case:

· The degree of formality of the contract would have been commensurate with the scope of the deal.

· Whether the contract was legitimate or a forgery would likely not be at issue.

· There would be much more clarity about the rights and obligations of the parties.

· The appropriate means for enforcing the contract would be apparent.

Ultimately, the Facebook case will be resolved. Unfortunately, many of the issues raised at the initial phase of litigation could have been avoided altogether and without the necessity of time-consuming, expensive litigation. Don’t make the same mistakes in your business.

ABOUT THE AUTHOR

Fred Reilly became an attorney in 1986 and is a Member of the California Bar Association, District of Columbia Bar Association, and Florida Bar Association. Mr. Reilly is also a Solicitor and Member of The Law Society of the United Kingdom.

He is admitted to practice before the United States Supreme Court and United States Court of International Trade.

Mr. Reilly graduated from The London School of Economics and Political Science (Master’s degree in International Business Law), The Cumberland School of Law at Samford University (J.D.) and The Krannert School of Management at Purdue University (B.S. Management).

He practices international business and eCommerce law. Mr. Reilly frequently travels to Florida, California, London, and Moscow.

IMPORTANT NOTICE
This purpose of this blog is to inform and not to advise. The statements are general and individual facts in any given situation may alter their application or involve other laws not referred to here. You should always seek advice from a competent professional if any questions arise.

13 COSTLY MISTAKES WHEN NEGOTIATING CONTRACTS

By Fred Reilly, American Attorney and English Solicitor

The goal of the contract negotiation process is to produce a written document that addresses the relevant issues, terms, rights and obligations between two or more parties to the contract. Unfortunately, many negotiators make costly mistakes that ultimately come back to haunt them when a disagreement arises over how the contract should be interpreted or performed. This article will highlight thirteen common mistakes that could cost you a bundle.

1. Failure to define your negotiation strategy in advance. How can you effectively negotiate when you haven’t yet defined the purpose of your negotiation? Prior to entering negotiations, establish your objectives, identify possible points of contention, consider the impact of any time constraints and determine potential deal breakers. It’s also highly advisable to review your knowledge of the other party, their negotiator (your adversary’s style, tendencies and hot buttons) and the context in which the negotiation will take place (i.e., market conditions that impact the deal).
2. Failure to narrow the issues. After you’ve defined your negotiation strategy, address the issues that are crucial to your deal. During the negotiation, focus on resolving the key issues to your advantage or in a manner that you can live with after the deal has been struck. Be wary whenever your adversary focuses on minor or irrelevant points to the exclusion of the material issues. If it’s difficult to ever get to the substantive points, you’re in for a lengthy negotiation with an unacceptable outcome.
3. Failure to walk away. Some negotiators are afraid to say “No.” One of the soundest negotiation strategies is to reach the conclusion that no deal is better than a bad deal. If your adversary realizes that you are willing to break off negotiations and walk away, he is far more likely to negotiate in good faith and work towards an acceptable deal.
4. Failure to get a written document. Under most business circumstances, an oral contract will be enforceable. A notable exception is an oral real estate contract that violates the Statute of Frauds (which requires that certain contracts must be written). Although an oral contract may be enforceable, there’s always the evidentiary problem of how to prove the terms of the contract at a later date. One of the goals of your negotiation should be to generate a comprehensive written document that accurately describes the terms, rights and obligations of the parties in a manner that provides clarity about how the agreement will be interpreted and performed.
5. Blind reliance on a “standard contract.” When it comes to legal contracts, do not place blind reliance on a “standard contract.” Although standard contracts can be very useful, they simply do not fit every situation. People frequently want to use a “standard contract” because they don’t want to pay an attorney to draft a contract. This often results in a “penny wise and pound-foolish” scenario. Many of the standard contracts that you can purchase at an office supply store for a nominal amount are simply so vague that little protection is afforded and clarity is non-existent. Depending on your specific situation and the issues at stake in your contract, hiring an attorney to draft the contract may be the most cost-effective choice possible. As an alternative strategy, consider modifying a standard contract with specific provisions that closely fit your situation.
6. Failure to Properly Define the Parties. This mistake may seem elementary, but negotiators consistently get this one wrong. It is crucial to properly define the parties to a contract to ensure who will be liable for performing the obligations of the contract and liable in the event the contract is breached. You also need to ensure that the individual executing the contract has the appropriate authority to do so. For example, the President of a corporation will typically have authority to bind the corporation. Don’t be so certain that another officer within the corporation has the same authority to bind the corporation.
7. Using Inconsistent Terms. Once you’ve defined the parties, refer to them in a consistent manner throughout the contract. Do not refer to a “Buyer” in one provision and later refer to a “Purchaser.” Although seldom fatal, this mistake creates confusion and undermines the credibility of the contract. In some cases, this mistake may negatively impact how the contract will be interpreted.
8. The contract is not integrated. Whenever you cut and paste provisions from several model documents, there’s a danger that the new document will not be integrated. For example, references to subsequent provisions may be incorrect or the referenced provision may not even be present in the new document. No one wants a written contract with gaping holes.
9. Failure to get clarity on key issues. Clarity is extremely important when negotiating and drafting contracts. For example, a contract that requires one party to make payments to another party should clearly set forth the conditions that must be met to trigger the payment obligation. If the triggers (conditions) in the written contract are drafted in an ambiguous or vague manner, the payor could assert that the payment obligation has not yet arisen. Thus, this situation could ultimately leave the payee with no choice but to initiate a lawsuit to enforce the terms of the contract.
10. Failure to define those events that constitute breach of the contract. Like the triggers (conditions) mentioned above, it is important to define the specific events that constitute breach. Both parties need to establish the bright line between acceptable performance and unacceptable performance.
11. Failure to include safety-valve provisions. Since the parties have recognized the possibility that a breach may occur, it is highly advisable to contemplate a contractual provision that provides for a “cooling off” period during which they can attempt to resolve the conflict. This type of provision tempers a hothead’s tendency to dig in their heels and immediately initiate legal proceedings.
12. Failure to include a dispute resolution procedure. For many business transactions, mediation and arbitration represent viable dispute resolution procedures and should be considered when drafting the contract. It is imperative to define the procedure to be followed and especially how the mediator(s)/arbitrator(s) will be selected.
13. Failure to designate the applicable law and choice of forum. This common mistake is often simply overlooked. The applicable law governing the contract should be clearly stated. The choice of forum provision establishes the location where disputes will be adjudicated. Obviously, hostile and inconvenient forums should be avoided.

Avoiding these common mistakes will not eliminate all potential problems associated with a contract, but will substantially diminish the likelihood of a later dispute over interpretation or performance.

DISCLAIMER: This article and its content are intended to provide general information on legal topics and shall not serve as a solicitation for services in any jurisdiction where prohibited by law. This article is not, nor is it intended to be used as a substitute for legal advice. You should consult an attorney for individual advice concerning your own situation. Sending an email to the owner of this website, and receiving any response thereto, does not, in and of itself, create an attorney-client relationship.

© Copyright 2007 by Fred Reilly. All rights reserved.