Forming a Pennsylvania LLC takes a lot of planning. Between the Certificate of Formation, business licenses, franchise taxes, and more, there’s a lot to consider. And paperwork and startup costs aren’t the only necessary tasks.
You’ll also want to set up your LLC to run smoothly and avoid legal troubles after it’s been registered with the state.
That’s where the LLC operating agreement comes in.
What is an LLC Operating Agreement?
An operating agreement gives your business structure and official procedures. It designates ownership, establishes operations, defines member responsibilities, and provides legal protection. Essentially, it lays out everything someone might need to know about your LLC. And it’s an internal document, so there’s no filing or fees involved.
Whether you’re starting a multi-member or single-member LLC, we strongly recommend completing an operating agreement. It’ll benefit and protect you for as long as you’re in business.
Am I Required to Have an Operating Agreement in Pennsylvania?
No, operating agreements are not mandatory documents for Pennsylvania LLCs. Still, adopting one will provide your business with procedural stability and serve as a valuable safety net in legal disputes, so it’s in your best interest to have one on file.
When you conduct business activities without an operating agreement, you’re putting your LLC at a disadvantage and giving up control over many of its processes. The agreement’s benefits will be well worth the time that you spend writing it.
Benefits of Creating an Operating Agreement
You want what’s best for your business. Months or years in the future, you want it to be a profitable and thriving endeavor. Having an operating agreement in place will set up your LLC for sustained success.
It requires some legwork, but it’s well worth it. Just look at some of the benefits:
- Officially designates how the ownership is split up (the percentage each member/manager owns), so there are no disputes.
- Standardizes office and company operations to improve efficiency
- Outlines the procedures for member additions and resignations, registered office changes, dissolutions, and more, so there is no confusion.
- Avoids Pennsylvania’s “default rules,” which define baseline procedures for any LLC without an operating agreement and aren’t necessarily the best for your business.
- Grants you greater respect from Pennsylvania courts.
Free Pennsylvania LLC Operating Agreement
So, you’ve decided to create an operating agreement, but where do you start? It’s a big, complex document, so you’ll likely want to consult resources as you work. However, the Department of State – the authority on most LLC resources – doesn’t offer any official forms or instructions.
You’ll need to create your own, but don’t be intimidated! You don’t need to be an attorney or expert writer to draft an effective agreement. Plus, you can find plenty of free templates online to help you with the structure and legal terminology. While most of these templates are good options, a great starting point is one that you can get free through an affordable LLC service like ZenBusiness or Northwest Registered Agent.
Whether you’re using a template or starting from scratch, here’s a quick and easy guide for what to include:
Owner or Member Information: Names and mailing addresses.
Company Information: Your LLC’s name, registered office, and principal office.
Registered Office Information: The address of your registered office and, if applicable, the registered agent’s information.
LLC Formation: The date you filed or will file your Certificate of Organization with the Department of State.
Business Purpose: The type(s) of business your LLC will be doing in Pennsylvania.
Term: How long your LLC in Pennsylvania will be valid, typically until you file for termination.
Capital Contributions: The amount of money each member has invested in the LLC.
Profits, Losses, and Distributions: How income and debts are allocated among members and methods for distributing funds.
Ownership Percentage: How much of the company each member owns.
Management and Roles: The managerial structure and decision-making processes, naming who is in charge or certain operations.
Compensation: How members/managers are compensated and reimbursed.
Bookkeeping: Accounting procedures and member account policies.
Tax Treatment: Whether your LLC will be taxed as a Sole Proprietorship, Partnership, S-Corporation, or C-Corporation.
Member Additions: The procedure for bringing on new members – how they will be admitted, if they’re entitled to income, any expenses they will owe, their roles, etc.
Member Withdrawal: Procedures for the resignation, expulsion, retirement, or death of an existing member.
Amendment Procedures: How your LLC will approve changes to the operating agreement. Usually, it’s through a majority vote by the members.
Dissolution: What happens when you terminate your LLC. How your members will split up the remaining assets or debts.
You don’t always need to include all of the above. If any don’t apply to your LLC, feel free to leave them out. Still, it’s a good idea to cover as many bases as possible. Even if you’re a single-member LLC, you should consider including as many sections as possible to accommodate future changes. Otherwise, years into the life of your business, you may run into a dispute over something you didn’t include, and you won’t be able to fall back on the operating agreement.
When you finish a draft of the agreement, double check to make sure that you didn’t miss anything important. You’ll also need to get it approved by each LLC member before it can officially take effect. There’s no need to send it to the Department of State. It’s an internal filing, so you can put it with your other business documents – you’ll probably need to review and revise it later.
Making Changes to Your Operating Agreement
For better or worse, your business is going to change. As you begin doing business in Pennsylvania and, hopefully, raking in profits, the LLC will grow and evolve. It will develop different needs and more complicated processes. Keep everything running smoothly but updating your operating agreement as changes occur.
First, all LLC managers/members must approve the change. To seek approval, follow the guidelines you already outlined in your operating agreement for ratifying amendments.
Because it isn’t recorded with the Commonwealth, modifying your agreement is as simple as making changes to the Word document or PDF you keep in your own files.
For example: your registered agent resigns and, following Pennsylvania law, you appoint a registered agent service to take their place. Simply pull up your electronic file, enter the new agent information, save it, and print a copy. Make sure you keep a draft of the previous document as well so you can track the changes you’ve made, just in case the Commonwealth ever has questions.
Hiring an Attorney
Worried that you might miss a critical detail? Uncomfortable with legal minutiae? If you want to ensure your operating agreement provides for all possible outcomes and disputes, you might consider hiring an attorney to review it or write it entirely.
Some attorneys have a flat rate for drafting an operating agreement; others bill by the hour. Either way, you’ll only need their assistance for a limited period of time. Use a site like Avvo to find the right fit for your business. Avvo’s database lets you sort by location, rate, and more – it even shows Pennsylvania lawyers that specialize in LLCs.
Hiring an LLC Formation Service
The LLC formation process, with its forms and fees, might make you want to throw up your hands and surrender. Don’t do that! Instead, consider hiring an online service like ZenBusiness or Northwest Registered Agent.
An online service like we mentioned earlier can quickly take care of all your necessary filings. Plus, they’ll create a customized operating agreement for you!
Given the amount of time you would spend drafting an agreement from scratch, a formation service is worth it. Not only will you receive a meticulously researched and crafted operating agreement, but you’ll also be able to spend more time growing your business, planning your next move, or just relaxing.
It’s not a required document, but the Commonwealth of Pennsylvania still has a lengthy list of guidelines about what operating agreements can or cannot do.
According to Pennsylvania Consolidated Statutes § 8815, your operating agreement has the power to govern:
- Relations among members and between members and the LLC
- The rights and duties of managers
- Your LLC’s activities, affairs, and conduct
- The means for amending the agreement
- The means for approving transactions
Looking at these five points, it might seem like the operating agreement is the highest authority for your LLC, but this isn’t true – that role belongs to the Commonwealth. The Consolidated Statutes § 8815 contains a long list of operating agreement limitations. You should review it as your draft your document.
But most importantly, remember that your operating agreement cannot authorize actions that break Commonwealth or federal law and it can’t preclude your LLC from the Commonwealth’s maintenance requirements and their affiliated penalties. For example, if you fail to maintain a valid registered office, your operating agreement can’t stop the Commonwealth from administratively dissolving your LLC.
These legal restrictions and consequences associated with your operating agreement might seem intimidating, but as long as you follow the advice in this guide, you’ll end up with a detailed document that prepares your LLC for success.