What is an LLC Operating Agreement?

An LLC operating agreement goes over nearly every facet of your business. Profits, business owners, contributions, voting rights: it’s all fair game. 

As you run down each category, you should add details that you can refer back to if you have questions about the next steps. For example, if you want your leadership team to have voting rights, you can say your LLC requires a simple majority (>50%) in order to push a change through. If a member demands a unanimous vote, you can refer back to your operating agreement.

The goal of an LLC is to protect members by specifying that the company is a separate legal entity. Usually, people think of this benefit as a financial one. For example, if the business runs into debt for whatever reason, your personal possessions and accounts can’t be seized to pay for those debts. However, it can also be used in court to prevent unnecessary lawsuits or claims. 

Operating agreements essentially clarify the underlying framework of your business. While it’s impossible to predict every potential scenario, an operating agreement establishes firm guidelines that everyone can consult if they have questions or concerns. 

Why Is an Operating Agreement Important for Pennsylvania LLCs?

The biggest reason why an operating agreement is important is because Pennsylvania has default LLC laws. If you don’t have an operating agreement in place when you register your LLC in PA, you’re typically expected to comply with these default laws, which may be very different from what you had in mind for your entity. Operating agreements govern everything from how you add new members to how you distribute profits to how to buy a member out down the line. 

With an operating agreement, you can:

• Specify conflict-resolution: Business strife and lawsuits often stem from a lack of planning. Whether it’s how to pay employees, how quickly to expand, or whether to dissolve the business, an operating agreement spells out the score before members sign on the dotted line. 
• Ownership status: Who owns your LLC? In Pennsylvania, this question is not as straightforward as it may seem. On your Certificate of Organization, which is a requirement in your state, you must list both your LLC name and a Registered Agent. You do not have to list the name or the address of the owners. Whether you need to prove it in court or just to open a business checking account, an operating agreement clarifies the ownership rights of your members. 
• Information rights: Whether it’s financial statements or client partnership contracts, your operating agreement specifies who has access to what information and how they can expect to receive this information. Along with your conflict-resolution measures, this section of the operating agreement keeps everyone on the same page. 

If you fail to draft an operating agreement (or if you rush through it), you may find yourself at odds with the members, court systems, or even your customers. 

Key Components of a Pennsylvania LLC Operating Agreement

Your operating agreement is specific to your LLC, but they all typically include the following sections:

• Membership structure: In Pennsylvania, the default ownership laws specify that every member is an equal owner. If you want a larger share of the company, maybe because you’re taking on more responsibility, you’ll need to negotiate with stakeholders and specify how much you own in the operating agreement. 
• Member role and responsibilities: Your LLC can be member-managed, meaning that all members contribute equally to the day-to-day operations. Or you can choose a manager-managed structure, meaning that you either appoint certain members to manage your daily to-do lists or you choose another manager to oversee daily operations. 
• Voting rights and decision-making: You can specify how you want to make decisions based on who votes and how much their vote counts. For example, if one of your stakeholders/owners is difficult to reach because they live in a different time zone, you might specify that they will only be involved in the most significant votes (e.g., major company expenses). 
• Profit and loss distribution: You can decide how you want your profits distributed among members based on everything from financial investments to sweat equity. If you’re the one who spends 16-hour days at the office, you have the option to request and specify a higher profit share. 
• Dissolution terms: Dissolution can either be voluntary or involuntary in Pennsylvania. If it’s a voluntary dissolution, you’ll need to specify who gets to make the decision and how the decision will get made. If you don’t list this in the operating agreement, you’ll need a unanimous vote to break up the company. You should also specify who’s in charge of the final loose ends, like closing accounts, filing the paperwork, etc. 

How to Create an LLC Operating Agreement in Pennsylvania 

Creating an LLC operating agreement can be as simple as opening a Word or Google doc. You have the right to structure and write it as you see fit. Just remember that you should be thinking about both how you want your business to run now, but how you may want to run it in the future. 

Here are a few things to keep in mind as you draft it:

• Membership: Here, you should outline what members are expected to contribute, how interests and rights are transferred or reassigned, and how members are admitted and dismissed. 
• Roles: Here, you can go into more detail about the general responsibilities of members, including who’s responsible for day-to-day operations, who can take on debt for the company, and how the business conducts its general activities. 
• Financial records: Finances include profit and loss distribution, business spending, and taxes. You’ll need to determine how you want your books kept and who’s responsible for managing profits, revenue, and spending. 
• Dissolution: Whether your company is project-based or a more permanent venture, you’ll need to know how you want assets divided in the event of a dissolution and who will take on the general tasks and responsibilities related to the dissolution. 
• Amendments: It’s unlikely that your initial laws will function the same way today as they will in a decade. Make sure you have a strong system in place if you need to make changes to your operations. 
• Confidentiality: Whether you invest in encryption programs, deadbolts, or cloud services, protecting sensitive information from hackers is a must. Make sure that your members are in agreement about their responsibilities (both digital and physical) before you go forward! 

While you may balk at the idea of hiring an attorney or using an LLC formation service (especially if you’re on a strapped budget), you may want to go the extra mile. These services can help you answer questions you didn’t realize you needed the answer to. 

Pennsylvania-Specific Considerations 

We’ve covered some state-specific laws above, including the default laws and ownership requirements. In Pennsylvania, the LLC rules are largely governed by good faith principles. So, as a general rule, as long as you’re operating both within state and federal law, and you’re making efforts to honor your members, employees, and customers, you’re less likely to run into trouble down the line. Again, working with an employee can help you stay within both state and national guidelines. 

Final Thoughts & Next Steps 

Operating steps are critical for nearly every LLC, but there’s no denying that they can get complex faster than you’re anticipating. Consider starting with a skeleton framework of your operating agreement and then consulting with an expert or service to fill in the rest before you finalize it. 

If you’re feeling overwhelmed, an online LLC formation service can help you nail it on the first try! 

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