Does an LLC have to Follow its Own Operating Agreement?

Question time: when does a corporate entity have to follow a contract it never signed? When its an LLC with a written operating agreement!

Ok, this may seem obvious – but if it was, I wouldn’t be writing about it here.

To be fair, an LLC’s obligation to follow its own operating agreement – even if it was not a party to that contract – is a statutory creation (which makes sense to overcome basic contract law).

Under O.C.G.A. 14-11-101(18), the term “Operating agreement” means:

any agreement, written or oral, of the member or members as to the conduct of the business and affairs of a limited liability company. In the case of a limited liability company with only one member, a writing signed by that member stating that it is intended to be a written operating agreement shall constitute a written operating agreement and shall not be unenforceable by reason of there being only one person who is a party to the operating agreement. A limited liability company is not required to execute its operating agreement and, except as otherwise provided in the operating agreement, is bound by its operating agreement whether or not the limited liability company executes the operating agreement. An operating agreement may provide enforceable rights to any person, including a person who is not a party to the operating agreement, to the extent set forth therein.

(bold added).

In all candor, it is possible that a lot of attorneys may not be aware of the controlling part of this definition or its determinative effect. It is, after all, buried in a definition, as opposed to one of the later instructive statutes.

So in Practice Benefits, LLC v. Entera Holdings, LLC, the Georgia Court of Appeals had to reaffirm this rule when it reversed the grant of a motion to dismiss. A16A1946, 797 S.E.2d 250 (February 23, 2017).

And lest you feel bad for not knowing the rule – remember before the Court of Appeals could rule, a party first had to convince a trial judge that the LLC was not bound by its operating agreement.

Sometimes what should be obvious, isn’t.

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