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Why Every Maryland LLC Needs a Written Agreement

It is an extraordinary risk and ill-advised decision to operate an LLC absent a written agreement regardless of the number of members. Although the both the Maryland and Delaware LLC Acts provide default rules which address the most common issues which an LLC will face, they regularly will conflict or fail to deal with adequately the goals and interests of members.

The above question requires consideration of three separate questions:

• First, what is an "Operating Agreement" (used in Maryland) or "LLC Agreement" (used in Delware)?
• Second, do LLCs need Operating or LLC Agreements?
• Third, if LLCs do need Operating or LLC Agreements, will an oral or "handshake" agreement among the members be sufficient?


To explain:

1. Definition of an LLC Operating or LLC Agreement. Regardless of jurisdiction or term, these documents are an agreement between, on the one hand, the member or members of the LLC and, on the other, the LLC itself. Effectively, in the case of a single-member LLC, an Operating or LLC Agreement functions as a declaration of the structure that the member has chosen for the LLC. In the case of a multi-member LLC, an Operating or LLC agreement is the equivalent of a partnership agreement, establishing the relationship among the members of the LLC.


2. What is a "Statutory Default Rule" and why/when should they be altered?. In keeping with the contractual freedom that is the hallmark of both Maryland and Delaware LLC Acts ("the LLC Acts"), most of the rules in the LLC Acts are "default" rules – that is, they are rules that the LLC Acts themselves permit the members of an LLC to alter by changing them in their Operating or LLC Agreements. (The LLC Acts also contain a number of "mandatory" rules that the members may not validly alter. An experienced LLC attorney can highlight these areas.)
Taking advantage of the freedom of contract in the LLC Acts is often the primary benefit of using an LLC in a business deal. Every small business owner's situation and goals are unique. Accordingly, every Operating or LLC Agreement should be drafted carefully to ensure the each member's interest is reflected and not undermined by a statutory default rule.


3. The need for an Operating or LLC Agreement to address "statutory gap issues." A further critical reason why the members of an LLC are likely to need a written LLC agreement is that there are many issues (sometimes referred to by LLC lawyers as "statutory gap issues") that arise among the members of LLCs that the LLC Acts themselves simply do not address. For example, the LLC Act addresses in only the most vague and general way the duty of members of multimember LLCs not to compete against the LLC, and it does not address at all the many issues that may be significant with respect to member buy-outs upon death or disability.

In addition, the LLC Acts are entirely silent on tax issues and other issues – for example, securities law issues - that do not involve the business organization law issues to which all LLC statutes are necessarily restricted.


4. Requirement of Writing. The LLC Acts provides that the members cannot validly alter undertake certain actions except in an Operating or LLC Agreement that is written. In other words, no matter what the members may agree orally or by handshake, if they don’t have a written Operating or LLC Agreement, their LLC will be governed exclusively by the mandatory and default rules of the LLC Acts. In good times, the members won’t really care what rules govern their LLC. However, in times of conflict among the members, the LLC Act’s default rules may lead to disaster.



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The Kramer Law Firm LLC represents small business clients throughout Washington, D.C. and Montgomery and Prince George's Counties in Maryland, including the communities of Bethesda, Bowie, Chevy Chase, Gaithersburg, Germantown, Laurel, Potomac, Rockville and Silver Spring and all of the surrounding areas.

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