Suppose you’re starting a business and forming a limited liability company (LLC) in Pennsylvania. In that case, you’re not required to have an operating agreement, but it’s a good idea to have one in your records.
An operating agreement is significant if your LLC has more than one owner, or member, as it establishes ownership shares, profit and loss distributions, and member roles and responsibilities.
Why You Need an Operating Agreement
A smartly drafted operating agreement can help you in many situations, such as when your LLC merges with another business or a member is no longer capable of working.
The operating agreement establishes each member’s ownership share in the LLC, profit and loss distribution percentages, and how proceeds will be divided if the business is sold. An operating agreement also defines how decisions and member disputes will be resolved.
It also defines each member’s role and responsibilities and how the LLC is managed, clarifying who oversees which aspects of LLC operations.
Pennsylvania laws will apply by default without an operating agreement, and disputes may have to be settled in court, which can have serious negative consequences for the business.
What Should the Pennsylvania Operating Agreement Include?
The Pennsylvania Operating Agreement determines the inner proceedings of an LLC within the state. Familiarizing oneself with its principal components is pivotal for effective operation and potential dispute prevention.
- Each member’s rights and responsibilities: Define the specific duties, rights, and obligations of each member. In Pennsylvania, members have a statutory right to access certain information unless restricted by the operating agreement.
- Capital contribution requirements for each member: Clearly outline the amount, form (whether cash, property, services, etc.), and timing of each member’s capital contribution.
- Procedures for adding and removing members: Ensure these processes align with Pennsylvania’s statutory requirements and any specific needs of the LLC.
- What happens when a member sells their interest, becomes disabled, or dies: Describe transfer restrictions, buy-out procedures, and how successors’ rights are to be addressed.
- Conditions under which a member might become bankrupt or insolvent: Establish the implications and procedures for such scenarios in relation to the LLC.
Management and Voting:
- Management structure and roles of members: Specify if the LLC will be member-managed or manager-managed. This distinction is essential in Pennsylvania for determining operational powers and duties.
- Voting rights of each member: Usually aligned with capital contributions, but can be customized. Detail the specific rights and voting thresholds for decisions.
- Rules for meetings and voting: Set the frequency, notification process, quorum requirements, and voting methods, considering Pennsylvania’s default rules.
- Rules for managing potential conflicts of interest among members: Implement procedures for identifying, disclosing, and resolving conflicts in line with the state’s ethical standards.
- Allocation of profits, losses, and distributions: Typically in proportion to capital contributions, but can be customized. Ensure clarity and fairness in allocation.
- Provision for periodic financial audits or reviews: Define how often these will occur, who will perform them, and the sharing method of results with members.
- Tax treatment of the LLC: While Pennsylvania LLCs generally benefit from pass-through taxation, members can elect different tax structures. Clearly state the chosen tax status.
Changes and Amendments:
- Process for amending the operating agreement: Detail the procedures, including required notice periods and voting thresholds.
- Guidelines for company management during transition events: Describe the continuity plans for significant changes or disruptions.
- Conditions under which the LLC might be sold or merged: Provide clarity on decision-making processes for these major actions.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: Opt for Pennsylvania-specific mediation or arbitration services where possible.
- Guidelines for non-compete and confidentiality agreements: Ensure any non-compete agreements adhere to Pennsylvania’s enforceability criteria.
- Provision for indemnification and limitation of liability: Protect members and managers in accordance with Pennsylvania law and the LLC’s specific needs.
Record Keeping and Communication:
- Details about record keeping requirements: Adhere to Pennsylvania’s record-keeping mandates, specifying the type, storage, and access permissions of records.
- Guidelines for how company-related decisions will be documented or communicated: Promote transparency, clarity, and regular communication.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Articulate the LLC’s mission, vision, and operational activities for alignment.
- Identification of the registered agent and office: As required in Pennsylvania, provide current details of the registered agent and office.
- Procedures for dissolving the LLC: Detail the steps in line with Pennsylvania regulations on dissolution.
- Procedures for winding down or liquidating the company’s assets: Specify the order of settling liabilities and distributing any remaining assets among members.
How to Draft a Pennsylvania Operating Agreement
You can find operating agreement templates online from services like ZenBusiness, which will ensure the standard legal language and allow you to fill in the blanks. You’ll probably be able to find free templates online as well, but it’s advisable not to use those as they may include errors.
Consider having an attorney draw up your operating agreement if your business has multiple members. An attorney will ensure that all bases are covered and all member’s rights are protected. They can also include language that is specific to Pennsylvania laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Certificate of Organization vs. Operating Agreement
The operating agreement should not be confused with your LLC’s certificate of organization. The articles of organization officially form your LLC with the state and include no information about member roles or financial interests.
Your certificate of organization can include additional provisions related to your operating agreement, but your operating agreement takes legal precedence between the two.
Also, the certificate of organization is filed with the state and is part of the public record, while an operating agreement is kept in your LLC’s records and referred to as needed.
Keep Your Pennsylvania Operating Agreement Up to Date
It’s a good idea to review your operating agreement periodically. Circumstances change, and the safest approach is to ensure your operating agreement is entirely up to date. Generally, your operating agreement will state that members have to vote to approve amendments to the operating agreement.
Don’t Skip the Operating Agreement
You’re not required to have an operating agreement in Pennsylvania, but the wise entrepreneur would never do business without one. It’s a document that could be critical to the future of your business. You may think a dispute will never arise, but times and people change.
You don’t want to end up in a bitter court battle because you pushed off creating an operating agreement. It’s a document that will protect the rights and interests of your LLC members and ensure smooth, continued operations in the event of any unexpected hurdles or pitfalls.
Does an LLC operating agreement need to be notarized in Pennsylvania?
No, operating agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if a Pennsylvania LLC does not have an operating agreement?
Pennsylvania default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.