Tuesday, September 13, 2011

The (Purported) LLC Without an Operating Agreement

The (Purported) LLC Without an Operating Agreement

An LLC may exist without a formal written operating agreement, in which case it will be governed by the default rules of the LLC Act and in the degree permitted the oral and course of conduct agreement of the members.  To the extent no contrary provision is set forth in the operating agreement, the terms of the LLC Act are incorporated into and become part of every operating agreement.  KRS § 275.005 (“A [LLC] may be organized under this chapter”) (emphasis added).  Consequently, it is not possible for an LLC to “not have an operating agreement.”  Rather, at minimum every LLC has an operating agreement comprised of the terms of the Articles of Organization and the LLC Act.  See Racing Investment Fund 2000, LLC v. Clay Ward Agency, Inc., 320 S.W.3d 654, 657 (Ky. 2010) (“If the members of a particular LLC do not adopt a written operating agreement or adopt one that is silent on certain matters, KRS Chapter 275 contains default provisions that will govern the conduct of the entity’s business and affairs.”).  See also Spires v. Casterline, 4 Misc.3d 428, 435 - 36, 778 N.Y.S.2d 259, 265-66 (N.Y.Sup., 2004) (“The statute clearly allows the members to enter into an Operating Agreement wherein the members can agree to certain terms, conduct, and provisions for operating the business. However, when there is no Operating Agreement, or such agreement does not address certain subjects, then the entity is bound by the minimum requirements set forth in the Limited Liability Company Law. In this situation, the entity is required to operate according to the statutory provisions. These statutory default provisions of the Limited Liability Company Law become the ‘Operating Agreement’ of the limited liability company.”)
Further, the qualification that the LLC does not have a “written” operating agreement is incorrect.  To state the obvious, both the Articles of Organization and the LLC Act are in writing.

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