Why Your Pennsylvania LLC Needs a Written Operating Agreement

Limited Liability Corporations, or LLCs, are one of the most popular entities for new businesses. It is not hard to understand why. LLCs combine the liability protection of a corporation with the available tax structure of a partnership. Additionally, they give business owners freedom to setup and manage their company however they like, with few restrictions. The key to the creation of this form of business entity is the operating agreement.

An operating agreement is a contract between the members (i.e. owners) of an LLC. It sets the business’s structure. It can address anything the members find important. Typically, they address things like initial contributions, how major decisions will be made, selling of interests in the LLC, and dissociation.

One of the most common mistakes people make when forming an LLC, is doing so without creating a written operating agreement. An LLC without a written operating agreement is like a car without a steering wheel. As long as the road is smooth and straight you are good to go. However, if an obstacle appears you have set yourself up for disaster. The following post explains why it is so important to have written operating agreement, especially if your LLC will have multiple members.

Operating Agreements Determine Who Manages the LLC

One important function of an operating agreement is determining who will manage the business. LLCs can have a virtually unlimited number of members. However, getting multiple people to agree on day to day decisions can be difficult and time consuming. Members can avoid this issue by choosing certain individuals to manage the business.

Members are free to choose anyone to manage their LLC. They can choose specific members with particular skills, or bring in an outside professional. If a member wants to have the power to make certain decisions, that can also be included. Designating managers sets clear expectations about decision making. This will help avoid potential disputes in the future.

Operating Agreements Set Member Rights and Responsibilities

Operating agreements also spell out member rights and responsibilities. For example, they can state when and how profits will be distributed. Once again, this helps set expectations and avoid future disputes. With regard to profits in particular, it also safeguards your personal liability protection. Without clear expectations, people may be tempted to treat LLC funds as if they are personal funds. That is the number one way to lose your personal liability protection.

Similarly, operating agreements set expectations regarding member responsibilities. An example would be setting each member’s initial contribution. If everyone agrees to contribute a certain amount towards starting the business, you can put that in the agreement. The agreement can also state what happens if individual members do not follow through. In this way, it serves as a form of accountability by ensuring that everyone follows through on their commitments.

What if You Don’t Create an Operating Agreement?

All LLCs have operating agreements. However, Pennsylvania law does not require members to create one. How does that work? Well, when the members of an LLC do not create their own agreement, the default rules in the Pennsylvania ULLC Act stand in. In short, the law provides an operating agreement for you.

So why is it important to create a written operating agreement if the law already provides one? First, the rules provided by the ULLC are bare bones. They provide very few rules about what LLCs and their members can and cannot do. If an issue arises, no one will know how to handle it. This increases the likelihood of a legal dispute. Likewise, if your operating agreement is verbal instead of written it is unlikely to be helpful if a disagreement arises. In short, a written operating agreement decreases the risk members will end up in a dispute that results in the death of the business.

Do You Have Questions About Starting a Business in Pennsylvania?

If you are considering forming a business entity in Pennsylvania, M. Zane {+} Associates is here to help. We take the time to understand your goals, so we can provide a solution that best meets your needs. M. Zane {+} Associates has the knowledge and skill to set your business on the path towards success. To learn more about creating your own business entity give us a call at 267-475-7052, or schedule a consultation today.

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