Puerto Rico LLC Operating Agreement: Drafting Checklist

As you prepare to start your small business in Puerto Rico, you must consider the state requirements to get it up and running. Having chosen a limited liability company as your business structure, you have to register within the territory, completing both annual forms and re-registering every year to ensure your LLC remains valid.[1]

Creating an operating agreement isn’t required by state law for LLC formation or incorporation. However, it IS recommended. The document does a lot to protect your LLC and its members. This article explains the agreement and how to create an effective one.

Key Takeaways

• You’re not legally required to create a written LLC operating agreement in Puerto Rico.

• An operating agreement solidifies the liability protection offered to an LLC’s members.

• Operating agreements allow small businesses to define the rules and processes for day-to-day operations.

What Is an LLC Operating Agreement?

Your limited liability company needs structure. Unlike incorporation, where business formation itself grants that structure, you’re in charge of creating and overseeing an LLC’s structure. That’s where an operating agreement comes into play. It’s a legal document you use to state your LLC members and assign the “rules” for running your LLC.

It’s not the same as your Articles of Organization (called a Certificate of Formation in Puerto Rico). That document goes to the state and is legally required to transact business, whereas an operating agreement is an internal document used to run your Puerto Rico LLC.

You can use your operating agreement to confirm the owners and members of your LLC, define your registered office, and outline the processes you’ll follow when specific circumstances arise.

State Requirements

A Puerto Rico limited liability company isn’t legally required to have an operating agreement. The Commonwealth of Puerto Rico places no obligation on you to create it, and your Puerto Rico LLC can transact business in the territory without it.

But there are caveats to this lack of documentation. Without an operating agreement, your LLC is subject to any applicable law implemented by the territory’s Department of State. If a dispute arises involving your business, the legal process defaults to the state laws to make a judgment, with no consideration for the intent you had when creating your business.

For instance, imagine a dispute about membership percentages in your LLC. With your own operating agreement, you have a document you can refer to when resolving these disputes. Without one, you’re left with Puerto Rico’s default laws, which may not cover the specificities of your company.

LLC Operating Agreement Benefits

Given that there’s no legal requirement to create an operating agreement, you have an obvious question in mind:

Why dedicate time to drafting one for your LLC?

The answer is that an operating agreement is a little like a business plan — it’s not legally required, but it comes with several benefits that make it near-essential.

Benefit 1: Protecting your limited liability status

Getting limited liability to protect your personal assets in the case of business disputes is one of the best reasons to form an LLC. The business entity acts like a suit of armor, guarding any assets you own in your name from creditors and lawsuits.

An operating agreement reinforces that protection by confirming that you own your LLC. It does the same for all members noted in the agreement. You get a legal document, enshrined by law, that you can point to if financial issues threaten your personal assets.

This added protection is beneficial if you’re the sole member of a single-member LLC. It ensures there’s no chance that others could confuse your business for a sole proprietorship.

Benefit 2: Settle disputes between members

In a perfect world, your LLC runs without a hitch, and every member gets along. In the real world, that isn’t always the case. Disputes can arise, especially when ownership percentages and contributions come into play. Those disputes can force you to seek expensive legal advice if you cannot resolve them.

Resolution can come in the form of an operating agreement.

You use this internal document to outline processes for members to follow when disputes arise. Better yet, all members must agree to the terms of the operating agreement to become members of your LLC. The operating agreement is legally enforceable, and your members must do what it says when disputes occur.

Benefit 3: Override Puerto Rico’s default laws

Control is another primary reason why you formed your LLC, as you want complete control over your business and how it’s run. That control diminishes if you don’t have an operating agreement to define your processes. The result is that any dispute gets resolved using Puerto Rico’s default laws for LLCs rather than your own rules.

That may be fine for some (the default laws essentially act as an operating agreement in their own right), but it can lead to situations with unwanted outcomes.

With an operating agreement, you create rules that make sense for your specific business structure.

Who Needs an Operating Agreement?

No one needs an operating agreement because Puerto Rico state law doesn’t require one. At the same time, everyone who has an LLC should create an operating agreement, especially if they want to avoid the following situations:

• Being forced to abide by state default rules if a dispute arises within the LLC

• Getting mistaken for a sole proprietorship when legal or financial issues arise

• Enabling questions about your place of business or how your company operates

Beyond avoiding these issues, an operating agreement also allows business owners to lay the groundwork for future growth. For instance, what if you consider future incorporation or using the S-Corp tax structure? In both cases, having an operating agreement allows you to develop a system that makes the transition easier.

An operating agreement isn’t required for LLC formation. However, it’s a crucial part of business formation due to the protections and benefits the document offers.

Drafting Your Puerto Rico LLC Operating Agreement

On the surface, creating an operating agreement seems simple. You don’t have to write one every calendar year, pay a filing fee, or submit the document to a Secretary of State or the Department of State. You could even get away with using an LLC operating agreement template to get an operating agreement in place quickly.

A written operating agreement is a legal document that may require legal counsel to create. It’s specific to your business. A template may not cover every element you need to cover within your own LLC. So, rather than taking the templated approach, follow these five steps to create your operating agreement in Puerto Rico.

Step 1: Provide Business Information

You start with the basic information about your LLC, which generally mirrors what you write for your Certificate of Formation. That information includes:

• Your LLC’s name

• The address of your place of business, potentially including a separate mailing address

• Information about what your business does and who it serves

Furthermore, every Puerto Rican business needs a registered agent to handle service of process on its behalf.[2] You’ll cover that agent’s details in your Certificate of Formation, including their name and registered office. It doesn’t hurt to replicate those details in your operating agreement so all LLC members know how to find the agent.

Step 2: List LLC Members

Your next step is to solidify the personal liability protection of the LLC structure. So, you create a list of members, whether you have a multi-member LLC or a single-member LLC. That list is what others refer to when establishing the level of protection you have for your personal assets.

The list should include every member’s name and address. You can also include information about the following:

• Membership interest or ownership interest

• Member contributions

• Members’ ownership percentages

• The distributions each member receives

• Which members are responsible for the liabilities of the company

• Processes for calling meetings of the members

Step 3: Decide Member-managed vs. Manager-managed

You have two options when establishing the day-to-day management structure of your LLC:

• Member-managed

• Manager-managed

Member-managed is what it sounds like — one or more of the members of the LLC take over the management of the business. This management usually includes overseeing company property and ensuring that everyone follows the operating agreement’s rules.

The structure is a good choice for a single-member LLC where control is paramount or if you have somebody capable of management within a multi-member LLC.

Puerto Rico also allows manager-managed LLCs, which involves bringing in a third party to conduct these duties.[3] Manager-managed LLCs offer independent oversight. They’re ideal for LLC management when you’re unsure if an existing member could remain impartial when enforcing your operating agreement.

Step 4: Lay Out Administrative Operations

Create the rules for how your LLC operates on the administrative level. This area is where you’re most likely to customize your operating agreement, as each business has its own processes for dealing with different operations. The goal is to create a set of rules within your internal document that govern the day-to-day operations of the LLC.

Examples of processes you can create include but aren’t limited to, the following:

• Rules to follow when determining voting rights offered based on members’ capital contributions

• Allocation of ownership percentages, again often based on contributions

• Definitions of the specific roles each member assumes, such as managing your business bank account or completing your annual report

• Processes for dealing with the Internal Revenue Service (IRS)

Simply put, if it’s a process that covers the specific needs of your business, you should outline it in this step of the operating agreement creation process.

Step 5: Add and Remove LLC Members

As your LLC grows, you’ll add new members, watch existing members depart, and may even be subject to a buyout or some other form of succession. This section of the operating agreement process involves defining your actions for these possibilities.

Processes to cover here include:

• What you’ll do with membership interest when a new member joins

• How you’ll proceed in the case of a buyout

• Steps to follow for the winding up or dissolution of the company

• Details about how ownership percentages and member contributions change when a member leaves or a new member is added

• Processes to follow for indemnification

Don’t assume you don’t need these processes if you have a single-member LLC. Scaling often requires more people, meaning you may add members in the future. This step ensures you’re covered no matter what happens with the members of an LLC.

Create Your Operating Agreement Through a Filing Service

Creating an LLC operating agreement is a time-consuming process for small business owners. The good news is you don’t have to go it alone. With Swyft Filings, we help you complete this document with resources you can trust. We’ve helped over 300,000 businesses with their formation needs.

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FAQs

Is an LLC Operating Agreement required in Puerto Rico?

Puerto Rican law doesn’t require your LLC to have a written operating agreement.

How does an LLC Operating Agreement help protect my assets?

An LLC operating agreement confirms your ownership of an LLC. It eliminates potential confusion and asserts the liability protection you receive from the LLC structure.

Who needs access to this document once it’s drafted?

All members of your LLC need access to the document, as does any third party you introduce via a manager-managed structure. In some cases, you may need to offer access to legal or financial teams.

How do I edit information on this document if membership changes?

You can draft processes for membership changes within the operating agreement, giving you control over how your LLC edits information. You can also add an amendment if the change has a specific effect on the current contents of the document.

What other legal documents do I need to draft for my Puerto Rico LLC?

You must file a Certificate of Formation and annual report to operate an LLC in Puerto Rico.

Bibliography

1. Official Portal of the Government of Puerto Rico. “Registry of Corporations and Entities.” Accessed June 30, 2023.

2. Casetext. “P.R. Laws tit. 14, § 3542.” Accessed June 30, 2023.

3. Casetext. “P.R. Laws tit. 14, § 3967.” Accessed June 30, 2023.