An individual, corporation or other entities can form a limited liability company in Pennsylvania by filing a Certificate of Organization, accompanied by a docketing statement with the Bureau of Corporations and Charitable Organizations. The law doesn’t require or compel one to prepare an operating agreement; however, because of the complex legal issues involved when forming and running an LLC, it’s strongly recommended.
Understanding an LLC operating agreement
An LLC operating agreement is a contract between the members of the LLC that outlines how they’ll manage the business, including such things as capital contributions, voting rights, distribution of profits and losses, member responsibilities and other matters. It is similar to a corporate bylaws document in that it sets out expectations for members regarding their roles within the company. The operating agreement also serves as evidence that personal liability protection exists for each member since one of the primary purposes of forming an LLC is to provide limited liability protection for its members.
Many states have adopted statutes providing default rules when there’s no written operating agreement or when business associates haven’t addressed certain issues in their contracts; however, Pennsylvania does not have a limited liability company (LLC) statute. This means that, without an operating agreement, the common business law will govern the LLC, and the members would not have the assurance of relying on statutory guidance.
Elements of an LLC operating agreement
LLC members should tailor the elements of an operating agreement to fit their specific needs. But, some of the common factors that cut across most businesses include:
- How members will make decisions
- Capital contributions and ownership interest of each member
- Distribution of profits and losses
- A management structure for the company, including appointing or electing officers, delegating responsibilities, etc.
- Rules on the transferability of membership interests
- Dispute resolution mechanisms such as arbitration or litigation rules
It’s always best to prepare an LLC operating agreement before starting a business; however, if you haven’t created one yet, it’s still possible to do so any time afterward. In Pennsylvania, all aspects of the operating agreement can be set out in a single document or in multiple documents — this is up to the discretion of those forming and running the LLC. It’s important to note that no two businesses are exactly alike, and therefore no two operating agreements should be identical.
