Pennsylvania LLC Operating Agreement
A Pennsylvania operating agreement is a legal document that outlines the rules and structure of your LLC. It serves as a binding contract between members, establishing how your LLC will handle important processes like voting, transfer of membership interest, allocation of profits and losses, mergers, and dissolution.
An operating agreement is an internal document—meaning you don’t need to file it with the Pennsylvania Bureau of Corporations and Charitable Organizations. But your operating agreement shouldn’t be an afterthought. Since we know that creating an operating agreement for the first time can be intimidating, Northwest provides free operating agreement templates specific to Pennsylvania that have been drafted by an attorney and can be customized to fit your LLC’s requirements.
Why should a Pennsylvania LLC have an operating agreement?
A Pennsylvania LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.
Though it’s not required by Pennsylvania law, any good lawyer will recommend having a written operating agreement for your LLC. Here’s why.
1. Your operating agreement proves you own your LLC.
Pennsylvania doesn’t require you to list members’ names or addresses on the Certificate of Organization. This is great for privacy but makes it tricky to prove who owns your LLC with the Certificate of Organization alone. Most banks require you to show a written operating agreement when you open company bank account, since this document has all your members’ names and addresses listed.
2. An operating agreement can help reinforce your limited liability status.
To benefit from limited liability protection, you must be able to prove that your LLC is a legally separate entity from the people who own it. This requires you to take certain steps like keeping business and personal spending separate. Another way to demonstrate that your LLC is a separate entity is by following the rules and procedures set out in your operating agreement. If you ever face a lawsuit, an operating agreement will be a huge asset.
3. An operating agreement can help prevent disputes between members.
When you start a company with other people, you’re not always going to see eye-to-eye. Since your operating agreement is a contract you’ve all agreed to and addresses how you’ll handle a range of important situations, it can help you resolve conflict early on.
4. An operating agreement can override Pennsylvania’s default laws.
If your LLC doesn’t have an operating agreement, it will be governed by Pennsylvania’s default LLC laws. These laws might not meet the needs of your business. Adopting a customized operating agreement lets you override these default laws and run your business on your own terms.
Pennsylvania Case Law
We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*
“Consider the case of Staiger v Holohan, where the failure to actually adopt and maintain a clear and understandable operating agreement led to disputes among the members resulting in extensive and expensive litigation. The Staiger case is also a prime example of why it is important to not have equal 50-50 split ownership, as it can result in a ‘deadlock’ of LLC operations or management. In those circumstances, valuable resources will inevitably be lost as a direct result of a disagreement between the members and their failure to foresee, prepare for, and memorialize the process to resolving the disagreement without hindering LLC operations or destroying the relationship of the members.
“Such a situation can be avoided if the members of the LLC had taken the time to memorialize and distill their understanding into a clear and understandable operating agreement.”
What is included in a Pennsylvania Operating Agreement?
Your operating agreement is the blueprint for how your Pennsylvania LLC will function internally. You’re allowed to cover pretty much anything in your operating agreement, as long as it complies with Pennsylvania law. But you should include these key topics:
- Transfer of membership interest
- Voting rights and decision-making powers
- Initial contributions
- Profits, losses, and distributions
- Bookkeeping procedures
Is an operating agreement required in Pennsylvania?
There is no law requiring Pennsylvania LLCs to adopt an operating agreement. However, an operating agreement is usually necessary for opening a business bank account, maintaining limited liability status, and resolving disputes.
Do I have to file my operating agreement in Pennsylvania?
No, you aren’t required to file your operating agreement with the Pennsylvania Bureau of Corporations and Charitable Organizations. The operating agreement is an internal document that your LLC keeps on record.
Does a single-member LLC need an operating agreement?
Yes! While you might feel funny signing an agreement with yourself, operating agreements are vital for single-member LLCs. If you’re ever served with a lawsuit, an operating agreement helps prove that your LLC is a distinct entity with limited liability status. Without an operating agreement, a single-member LLC is at greater risk of being viewed by a court as a sole proprietorship.
*This is informational commentary, not advice. This information is intended strictly for informational purposes and does not constitute legal advice or a substitute for legal counsel. This information is not intended to create, nor does your receipt, viewing, or use of it constitute, an attorney-client relationship. More information is available in our Terms of Service.