In simple terms, an operating agreement governs the internal relationship between an LLC and its owners, while a franchise agreement governs the relationship between a franchisor and the business operating under its brand.
An operating agreement answers questions about who owns the LLC, who manages it, how decisions are made, how money is distributed, and what happens when an owner wants to leave.
A franchise agreement answers different questions. It establishes the conditions under which the business can use the franchisor’s trademarks and business system and may address royalties, operating standards, territory, suppliers, training, reporting, renewal, transfer, default, and termination.
A business can be subject to both agreements at the same time. The important question is therefore not which document is more important, but which relationship and legal issue the particular provision addresses.
Understanding that distinction is important before signing either document.
What Is an Operating Agreement?
An operating agreement establishes many of the rules governing a limited liability company and its owners.
Under Florida’s LLC statute, an operating agreement governs relationships among members, relationships between members and the LLC, the rights and duties of managers, the company’s activities and affairs, and the process for amending the agreement. Florida law also permits operating agreements to establish specific consequences when a member or transferee fails to comply with their terms.
An operating agreement may address:
- Ownership percentages and membership interests
- Capital contributions
- Voting rights
- Management authority
- Allocation of profits and losses
- Distributions
- Member compensation
- Restrictions on transferring ownership interests
- Admission of new members
- Death or incapacity of a member
- Buyout procedures
- Dispute resolution
- Dissolution of the company
- Procedures for amending the agreement
The operating agreement therefore deals primarily with how the LLC and its owners operate together.
It is also important to distinguish the operating agreement from the LLC’s liability protection. The operating agreement establishes contractual and governance rules. It is not itself what creates the legal distinction between the LLC and its members.
What Does an Operating Agreement Actually Control?
Consider two people who form an LLC to purchase and operate a restaurant.
Their operating agreement might establish that one member owns 60 percent and the other owns 40 percent. It might also determine who manages the company, which decisions require member approval, how profits are distributed, and what happens if one member wants to sell their interest.
Those are internal questions.
The agreement may become particularly important when the owners disagree.
In DiMauro v. Martin, a Florida Fourth District Court of Appeal case involving an LLC created to develop and sell a residence, the parties’ amended operating agreement established obligations involving the property, construction funding, capital contributions, membership interests, and the parties’ responsibilities. Litigation later arose over those obligations. The appellate court rejected the trial court’s conclusion that the operating agreement was unenforceable for lack of mutuality of remedy and consideration, although it ultimately affirmed the denial of specific performance on other grounds.
The practical lesson is that an operating agreement is not merely an administrative document kept in a corporate file. Its provisions can become important evidence of the parties’ rights and obligations when an LLC’s members disagree.
What Is a Franchise Agreement?
A franchise agreement addresses a different relationship.
A franchise agreement is a contract governing the relationship between a franchisor and a franchisee. It generally establishes the conditions under which the franchisee can operate a business associated with the franchisor’s brand and business system.
Federal regulations define a franchise based on three elements: the right to operate under the franchisor’s trademark or other commercial identifier, significant control or assistance concerning the franchisee’s method of operation, and a required payment to the franchisor or an affiliate.
A franchise agreement may address:
- Use of trademarks and other intellectual property
- Territory
- Initial franchise fees
- Royalties
- Advertising contributions
- Required products or suppliers
- Training
- Operating standards
- Reporting requirements
- Insurance
- Renewal
- Transfer of the franchise
- Defaults and cure periods
- Termination
- Post termination obligations
- Dispute resolution
- Personal guarantees
A franchise relationship can also involve other documents. The Federal Trade Commission’s Franchise Rule requires covered franchisors to provide prospective franchisees with a Franchise Disclosure Document containing 23 specified categories of information. The FTC states that the FDD generally must be provided at least 14 days before the prospective franchisee is asked to sign a contract or pay money to the franchisor or its affiliate.
For that reason, a prospective franchisee should not evaluate the franchise agreement in isolation.
Operating Agreement vs. Franchise Agreement
The simplest distinction is the relationship each document governs.
| Operating Agreement | Franchise Agreement |
|---|---|
| Governs an LLC | Governs a franchise relationship |
| Primarily concerns the LLC and its members or managers | Primarily concerns the franchisor and franchisee |
| Establishes internal ownership and governance rules | Establishes franchise rights and obligations |
| Addresses voting and management authority | Addresses operation under the franchisor’s brand and system |
| May establish capital contribution and distribution rules | May establish fees, royalties and advertising obligations |
| May restrict transfers of membership interests | May restrict transfers of the franchise |
| Addresses internal disputes among owners | Addresses disputes between franchisor and franchisee |
| May establish buyout and dissolution procedures | May establish renewal, default and termination procedures |
The two documents can therefore apply to the same business without serving the same function.
Can a Franchise Business Have Both Agreements?
Yes.
This is one of the most important distinctions for a business owner to understand.
Imagine that Maria and David form Sunshine Coffee LLC.
Their operating agreement provides that Maria owns 60 percent of the company and David owns 40 percent. It establishes who manages the LLC, how major decisions are approved, how profits are distributed, and what happens if one member wants to sell an ownership interest.
The LLC then purchases a coffee franchise.
The franchise agreement may require Sunshine Coffee LLC to pay royalties, use the franchisor’s trademarks, follow operating standards, use approved suppliers, maintain insurance, complete required training, and comply with reporting requirements.
The two agreements answer different questions.
If Maria wants to sell her 60 percent ownership interest, the operating agreement may determine what happens inside the LLC.
If the franchisor alleges that Sunshine Coffee LLC violated its brand standards, the franchise agreement may determine the parties’ contractual rights.
A proposed transfer can involve both agreements. The operating agreement may govern the transfer of Maria’s membership interest, while the franchise agreement may require the franchisor’s approval or impose other conditions on the transfer.
The Business May Have More Than Two Important Documents
A franchisee may also have to consider a lease, financing documents, personal guarantees, equipment agreements, development agreements, confidentiality provisions, or other contracts.
The Florida case Rigollet v. Le Macaron Development, LLC illustrates how complicated a franchise relationship can become.
In that case, franchise agreements were accompanied by personal guaranties, a $200,000 loan, and a promissory note. The franchisee’s dispute with the franchisor eventually included claims involving alleged representations about profitability, product quality, and the experience of the franchisor’s personnel. The Florida Second District Court of Appeal reversed dismissal of the franchisee’s counterclaim because the allegations were sufficient to support the claims at the pleading stage.
The court also addressed standing under the Florida Franchise Act. It explained that the person who invested in the franchise has standing under the statute, but the pleadings did not make clear whether the investment had been made by the franchisee entity, the individual, or both.
The same litigation continued into 2025, when the Second District Court of Appeal affirmed the lower court’s ruling in a subsequent appeal.
The practical lesson is important: the legal obligations surrounding a franchise may extend well beyond the basic franchise agreement.
What Happens When a Franchise Relationship Breaks Down?
The terms of a franchise agreement can become particularly important when the relationship between the parties deteriorates.
Case Study: Burger King Franchise Terminations
In Burger King Corp. v. Mason, a long running dispute between Burger King Corporation and a group of franchisees involved development agreements, at least 27 franchise agreements, financing arrangements, leases, supply accounts, royalties, and alleged defaults.
Burger King attempted to terminate all 27 franchises. After extensive litigation and multiple trials, the courts determined that some of the terminations were valid and others were not. In an earlier appeal, the Eleventh Circuit reported that the franchisees ultimately prevailed in nullifying the terminations of 14 franchises, while Burger King successfully defended the termination of 13.
The litigation also addressed what happened after properly terminated franchises continued using Burger King’s trademarks. The court held that continued use of the trademarks after valid termination could constitute trademark infringement.
This case demonstrates why provisions concerning default, termination, renewal, transfer, and trademark use after termination deserve careful attention before a franchise agreement is signed.
Does a Franchise Agreement Give the Franchisor Control Over the Entire Business?
Not necessarily.
Franchise agreements can impose substantial operating requirements while leaving the franchisee as an independently owned business.
In Ferrer v. Jewelry Repair Enterprises, Inc., the Florida Fourth District Court of Appeal considered whether a franchisor could be held responsible for an injury caused by the owner of a franchisee.
The franchise agreement required standardization of products and services and contemplated regular support from the franchisor. But the court found that the agreement did not give the franchisor substantial control over the franchisee’s day to day management. The franchisee remained an independently operated entity with authority over hiring and firing employees. The court therefore affirmed summary judgment for the franchisor.
The case illustrates an important point: franchise standards and franchisor control are not necessarily the same thing.
The specific language of the agreement can matter when a dispute later concerns responsibility for the franchisee’s conduct.
What Should You Review in an Operating Agreement?
Before signing an operating agreement, business owners should understand how it addresses situations that could create disagreements later.
Ownership
- Who owns the LLC, and in what percentages?
Management
- Who has authority to make ordinary business decisions? Which decisions require approval from other members?
Money
- How are capital contributions, profits, losses, and distributions handled?
Transfers
- Can a member sell or transfer an ownership interest freely, or must the other members or the company approve the transaction?
Death or Incapacity
- What happens if a member dies or becomes unable to participate in the business?
Disputes
- What happens if the owners disagree about a major business decision?
Exit and Dissolution
- How can an owner leave the company, and what happens if the LLC ultimately needs to wind down?
Florida law gives operating agreements substantial flexibility, but that flexibility has statutory limits. For example, an operating agreement cannot eliminate certain duties or authorize conduct involving bad faith, willful or intentional misconduct, or knowing violations of law.
What Should You Review in a Franchise Agreement?
A prospective franchisee should approach a franchise agreement differently.
Important provisions may include:
- Initial franchise fees
- Continuing royalties
- Advertising fees
- Territory
- Required suppliers
- Equipment requirements
- Training
- Operating standards
- Reporting requirements
- Insurance
- Renewal rights
- Transfer restrictions
- Default provisions
- Cure periods
- Termination rights
- Post termination restrictions
- Personal guarantees
- Noncompetition provisions
- Dispute resolution
The Franchise Disclosure Document should also be reviewed alongside the franchise agreement. The FTC advises prospective franchisees to review all 23 numbered items in the FDD and ask for clarification about information they do not understand before investing.
How Florida Law Applies to These Agreements
Florida law treats operating agreements and franchise agreements differently because they govern different relationships.
For LLCs, Florida Statutes section 605.0105 provides that an operating agreement governs relationships among members, between members and the LLC, the rights and duties of managers, the company’s activities and affairs, and procedures for amending the agreement. Florida law gives LLC members substantial flexibility to establish their own internal rules, subject to statutory limitations.
Franchise relationships involve both state and federal requirements. The FTC Franchise Rule requires covered franchisors to provide a Franchise Disclosure Document containing 23 specified categories of information, generally at least 14 days before a prospective franchisee signs the agreement or makes a required payment. Florida law also addresses certain franchise related misrepresentations and provides remedies under section 817.416.
The practical distinction remains simple: the operating agreement governs the LLC’s internal affairs, while the franchise agreement governs the relationship between the franchisor and franchisee. A Florida business operating as a franchise may therefore need to comply with both.
Pay Particular Attention to the Exit Provisions
Business owners often focus on how they will open the business. The documents also need to address what happens when the relationship changes.
An operating agreement may determine what happens when an LLC member wants to leave, dies, becomes incapacitated, or wants to sell an ownership interest.
A franchise agreement may establish what happens when the franchisee wants to sell the franchise, fails to meet contractual requirements, seeks renewal, or faces termination.
These provisions can have substantial practical consequences.
A franchise agreement may also contain obligations that continue after termination, particularly concerning trademarks, confidential information, unpaid amounts, proprietary materials, and other protected aspects of the franchisor’s business system.
The Burger King litigation demonstrates why post termination provisions can matter. After certain franchises were properly terminated, continued use of Burger King’s trademarks became a separate legal issue.
A Word From Stuart G. Reinfeld
“An operating agreement and a franchise agreement may govern the same business, but they answer very different questions. The operating agreement establishes how the owners and the LLC will function together. The franchise agreement establishes the rights and obligations between the business and the franchisor.”
Questions to Ask Before Signing Either Agreement
Before forming an LLC, purchasing a franchise, or doing both, a business owner should be able to answer several basic questions.
Who owns the business?
- The operating agreement should make the LLC’s ownership structure clear.
Who controls the business?
- The LLC’s management provisions and the franchise agreement’s operating requirements can address different aspects of control.
Who gets paid, and how?
- An operating agreement may govern distributions among LLC members, while a franchise agreement may establish royalties and other payments to the franchisor.
What happens if someone wants out?
- The operating agreement may govern the transfer of an ownership interest, while the franchise agreement may impose additional requirements concerning a transfer of the franchise.
What happens if the relationship breaks down?
- Default, dispute resolution, buyout, renewal, and termination provisions can become extremely important once the parties disagree.
Are there personal guarantees?
- An individual owner can sometimes take on obligations separately from those of the business entity. The franchise agreement and related documents should be reviewed carefully to determine whether a personal guarantee is required and what it covers.
Operating Agreements and Franchise Agreements Are Not Substitutes
An operating agreement does not replace a franchise agreement, and a franchise agreement does not replace an LLC’s operating agreement.
They solve different legal and business problems.
For an LLC, the operating agreement helps establish the rules governing ownership, management, decision making, financial arrangements, transfers, disputes, and other internal affairs.
For a franchise, the franchise agreement establishes the contractual relationship with the franchisor and addresses the conditions under which the franchisee may operate under the franchisor’s brand and business system.
A business that uses an LLC to operate a franchise may therefore need to understand both documents and how they interact.
For business owners in Coral Springs, Broward County, and throughout South Florida, reviewing these agreements before signing them can help identify provisions that may affect ownership, management, financial obligations, transfers, disputes, and the future of the business.
If you are forming an LLC, purchasing a franchise, or entering into a business relationship governed by one of these agreements, an attorney can review the documents and explain how their provisions may apply to your particular circumstances.
