If you’ve decided to create an LLC in Pennsylvania, one of the first steps you should take is to create an operating agreement. Operating agreements are legal agreements made between the members of a limited liability company (LLC) that governs the business and establishes the duties, liabilities, rights, and obligations of the members of the LLC.
Creating an operating agreement for your LLC may seem daunting, but with the help of a Pittsburgh attorney, it can be relatively simple and affordable. At Jones, Gregg, Creehan & Gerace LLP, we have experience drafting operating agreements for LLCs of all sizes and in a wide range of industries. We’ll work with you to understand your business’s unique needs and goals to create an effective operating agreement.
What Is an Operating Agreement?
A Pennsylvania operating agreement is a legal document that outlines the structure and rules of your LLC. When signed by all of the LLC members, it becomes a binding contract between them. Operating agreements should include the rules and standards for how your business will handle important processes like transferring membership interests, allocating profits and losses, and voting. They should also include guidelines for mergers and dissolution.
What Should Be Included in an Operating Agreement in Pennsylvania?
Ultimately, you can decide what terms should be included in your agreement. Your operating agreement will be the blueprint for your company’s daily function. As long as the terms of the agreement comply with Pennsylvania law, you can include provisions related to a wide range of topics, such as the following:
- Management
- Compensation
- Bookkeeping procedures
- Profits and losses
- Distribution to members
- Employee matters
- Initial contributions of members
- Voting and decision-making processes
- Powers how to transfer membership interests
- Dissolution procedures
The agreement should also include the names and contact information of all LLC members and their duties and responsibilities. Including a mission statement or purpose can also be helpful. As your business changes, you can update the agreement to reflect those changes.
Do I Have to File The Operating Agreement?
In Pennsylvania, operating agreements are considered internal documents. You aren’t required to file them with the Pennsylvania Bureau of Corporations and Charitable Organizations when you form your LLC. However, your operating agreement shouldn’t be an afterthought.
Businesses cannot act independently and require humans and other entities to operate. Creating an operating agreement can help you define roles and responsibilities and develop conflict resolution procedures. Even if an operating agreement isn’t required under Pennsylvania business laws, creating one has multiple benefits when you form your LLC. Additionally, an operating agreement may be necessary for you to open a business bank account, depending on the bank’s requirements.
The Operating Agreement Helps You Limit Your Liability
LLCs have become popular because they allow business owners to limit their personal liability without complying with all corporations’ requirements and filings. In order to prove that you have limited liability protection, you will need to provide documentation that your LLC is a legally separate entity from the owners.
You’ll need to take steps to keep the business and spending accounts separate. Complying with the procedures and rules outlined in your operating agreement is another way to prove that your business is a separate entity.
If your business is ever sued, your operating agreement can be a helpful asset. When you can show that you and the other owners signed the agreement and have been adhering to its terms, a court will be more likely to hold you personally responsible for the business’s liabilities. In other words, having a legally binding agreement will reinforce the personal liability protection afforded to you by creating an LLC.
Preventing Disputes Between Owners
Starting a company with other owners can be exciting, and everyone may be on the same page, at least at the start. However, as the days and weeks go by, owners may not always agree on managing the company. Disputes could begin to arise that could negatively affect business operations and customer relationships.
Taking the time to discuss the dispute resolution procedures you’ll take at the start of your company can help you prevent disputes from escalating in the future. You can work with an attorney to address how you’ll handle a range of disputes. For example, you may require members to attend mediation with a third-party mediator before they can pursue their action. Your operating agreement should also include what should happen if one or more members decide to leave the company.
An Operating Agreement Can Supercede Pennsylvania’s Business Laws
Without an operating agreement, a court will generally apply Pennsylvania business laws to disputes related to the company. These laws may not be the most favorable for your company. In your agreement, you can state that you would like the laws of another state to govern any disputes arising out of the agreement. Creating an agreement allows you to customize how disputes will be resolved and avoid default laws that may not provide you with the best outcome.
I’m a Single Member LLC. Do I Need an Operating Agreement?
As the name implies, a single-member LLC has one member or owner. Business owners may choose to form an LLC instead of operating as a sole proprietor to take advantage of the limited liability protection offered by LLCs.
Even if you are in business for yourself and the only company owner, creating an operating agreement is still important. The agreement will help you prove that your business is a separate entity from you personally and protect your personal assets should your business face a lawsuit.
Contact an Operating Agreement Attorney in Pittsburgh
If you are forming an LLC in Pittsburgh or the surrounding area, you’ll benefit from speaking to a business attorney who can help you with your business formation documents. Whether you need help drafting or updating an operating agreement, don’t hesitate to contact Jones, Gregg, Creehan & Gerace LLP.