Pennsylvania LLC Operating Agreement: Drafting Checklist

Forming a limited liability company can be a complicated process that requires you to follow predefined steps. Each state has its own laws and rules, so it’s essential to confirm the requirements for your desired location.

To become a business owner in Pennsylvania, you must create a unique LLC name and file your Certificate of Organization (also known as the Articles of Organization in other states) and New Entity Docketing Statement to the Pennsylvania Department of State. This also means electing a registered agent so you can legally receive the necessary documentation.[1]

Beyond the required documents, crafting an LLC operating agreement is highly recommended. While not having one won’t put you into noncompliance with the state, it will make running your business easier, especially if your LLC has multiple owners.

The best time to form this document is alongside the initial filing documents, as it will define how your business operates. However, if you didn’t make this document when establishing your business, now is still a good time to do so.

We’ll walk through all the steps needed to fill out an LLC operating agreement in Pennsylvania effectively.

Key Takeaways

• A Pennsylvania LLC operating agreement is an internal legal document that defines member rules and roles in your business.

• Even though no Pennsylvania laws require it, an operating agreement is a great way to ensure your limited liability company stays on the law’s good side.

• You can create and file the document yourself with the help of online templates. However, a more effortless and less stressful option would be to utilize a filing service.

What Is an LLC Operating Agreement?

Every limited liability company is advised to have an LLC operating agreement, even if it’s not required by state law. This is an internal legal document that defines the formation and daily operations of your LLC. It contains your business name, business bank account, who the members are, their respective responsibilities, the financial contributions of each member, the allocation of shares and profits, and the procedure for adding new members.

However, this document does differ from a Certificate of Organization. Crafting an operating agreement doesn’t make your business a company. This document will not be published. Its sole purpose is to help define and regulate how your business operates from now on.

State Requirements

There are over a million small businesses that employ half of the workforce of the Commonwealth of Pennsylvania. However, the state law in Pennsylvania doesn’t require you to have an LLC operating agreement when operating a limited liability company.

According to the Bureau of Corporations and Charitable Organizations, forming a limited liability company requires a Certificate of Organization and a valid EIN.

If you create an operating agreement for your LLC, which you should, you don’t have to file it with the Secretary of State office or any other government body. Keeping it as an internal document is fine, but note that the document existing implies that all LLC members and the company itself implicitly follow the rules written in it.[2]

LLC Operating Agreement Benefits

So far, we have established that filing an LLC operating agreement is optional for your business entity in Pennsylvania. However, your LLC would highly benefit if you create this document.

The LLC agreement defines which member is responsible for which part of the business. It helps everyday tasks run smoothly without losing time in long meetings and having to establish basic rules all over again.

Apart from clarifying tasks, an operating agreement will establish financial responsibilities, each member’s piece of the pie, and how to handle your business bank account and process income taxes. This will reduce the probability of disputes and any legal threats.

This agreement will make you consider long-term goals early in the business entity’s life. It will disable you from running your business without a clear direction.

Most members of an LLC might be worried about their personal assets if the LLC operations do not turn out as expected. This is another situation where the LLC operating agreement comes in handy. In this document, each member will state how much and if the business can use its assets to cover expenses if the LLC runs out of funds.

As you can see, there are many benefits to having this agreement filed for you. You should consider leaving this assignment to professionals, such as filing agencies.

Who Needs an Operating Agreement?

According to Pennsylvania state law, no one is required to file an LLC operating agreement. This does not mean that you should not do it.

The LLC operating agreement can be defined before the formation of the LLC or once the business entity has already been established. 

The agreement is in place to help business owners avoid state default rules regarding decision-making and profit and share division. It’s also valuable for membership changes since everything will be clearly stated, decreasing the possibility of disagreements and disputes. It also has a role when it comes to taxes, as the agreement will include a formula for determining the maximum possible tax liability of each member.[3]

An operating agreement is vital if you work in a niche where laws change frequently. If there’s a legal situation that your agreement doesn’t cover, you will be forced to abide by state default rules. If these change, your position might worsen unexpectedly.

The LLC operating agreement might sound useless if you have a sole proprietorship, but that is not the case. This legal document can outline what will happen in case a new member joins the LLC, and it stops being a single-member entity.

Drafting Your Pennsylvania LLC Operating Agreement

Although it’s not required by state law in Pennsylvania, an LLC operating agreement is still a legal document and should be filled out with care and attention to detail.

Luckily, the process starts out relatively simple and can be separated into a few sections that are easy to understand once you dig a bit deeper and get legal advice.

You can find an LLC operating agreement template online and use it as a guide. However, you’ll probably need to personalize it based on your business requirements.

The written operating agreement doesn’t need to be filed with the Secretary of State’s office, so you can keep it in your personal records and save a bit on filing fees. State law can mandate that your operating agreement be revealed in legal disputes.

Step 1: Provide Business Information

The first part of the LLC operating agreement should include basic information about your LLC. It should consist of the business name of your LLC, the primary office location when you started an LLC, the registered agent’s name, industry, etc. This information is in the Certificate of Organization, a required legal document.

Step 2: List LLC Members

The list of members is the next information about your LLC that you should include in the LLC operating agreement. Even if it’s a sole owner or single-member LLC, you should state who that business owner is.

In multi-member LLCs, each member must have their role, membership interest, and contribution to the LLC. Ownership percentage should be clearly outlined for proof that distributions of profit and any other benefits are divided accordingly.

Outlining the rules and stipulations on the company’s management will make all company members more secure about the investment and effort they put into the LLC. It will also make future business partners more confident in doing business with a company for which they know who stands behind it.

Step 3: Decide Member-managed vs. Manager-managed

The next step would be to decide whether your business will be member-managed or manager-managed LLC management structures.

A member-managed LLC means that its owners take responsibility for its day-to-day operations. They decide who is responsible for what and do it themselves. A single-member LLC would also be considered as member-managed. In this case, the operating agreement should be referred to know each member’s exact responsibilities and salaries.

On the other hand, a manager-managed LLC means that a manager runs the daily LLC operations as decreed and elected by the owner(s). Each manager should know what they’re hired to do and for what compensation, following the management structure outlined. The operating agreement should also outline the rules and regulations when hiring employees.

Step 4: Lay Out Administrative Operations

In this section of the LLC operating agreement, you should outline how you’ll conduct day-to-day business. This will also include serious matters, such as annual reports and tax clarifications.

Any activity will need decision-making, so it’s good to disclose the voting rights and whether they’re closely related to the capital contribution of owners. Doing so will make things easier when starting a business because you won’t lose precious time dealing with all of this when a new significant matter arises. You can also determine how often these meetings will take place and which members must attend each type of meeting.

You will describe a short business plan here. As this is an internal document, you can customize this in case your goals change over time.

Ultimately, you should state who can access or control the business bank account and how members will allocate the profits.

Step 5: Add and Remove LLC Members

As your business grows and develops, new members might come on board, or some existing ones will want to part ways. Either way, you should outline how to handle these situations in this section. This should be discussed sooner rather than later, as you wish to avoid member disputes, even if you start with a single-member LLC. Putting it in an internal document is the best way to prevent any possible disagreement or lawsuit.

Adding new members to your LLC will change the ownership percentage and member contributions. There will be a new division, and you want to know members upfront how the addition of new members can affect their interest here.

If a member decides to leave the LLC, unless it’s a single-member LLC, other members might wish to buy them out and take over their interest and percentage of ownership. You should define here if the transfer of membership interest is possible or if the share of the member leaving will be divided among remaining members. You don’t want to be winding up with members fighting over this.

Create Your Operating Agreement Through a Filing Service

Having seen what goes into an LLC operating agreement, you probably concluded that filing an operating agreement can be very time-consuming and tricky. Even though it’s not required by state law in Pennsylvania, having one is still helpful to keep your business well organized.

If this is too much to handle while working on your business foundation, hire a filing service to take over these documents. Whether you’re creating your LLC or already have one, we can create and fill in the Pennsylvania LLC operating agreement for you. 

FAQs

Is an LLC Operating Agreement required in Pennsylvania?

By state law, an LLC operating agreement is not required in Pennsylvania. However, having one will help you better organize your business from day one and avoid any possible disagreements between members down the road.

How does an LLC Operating Agreement help protect my assets?

In this agreement, a section will be dedicated to the LLC members. Here, it will clearly outline who is a member of the company’s management, the roles and responsibilities, and share percentage and how much each member can expect from the profit. This helps designate personal liability from the entity.

Who needs access to this document once it’s drafted?

The LLC operating agreement is an internal business document. It will not be published, unlike the Certificate of Organization. This document is here to help the owners formally divide the responsibilities and advantages of being part of the LLC. Banks and lenders may need access to it when applying for a bank account or line of credit.

How do I edit information on this document if membership changes?

One section should be dedicated to possible future changes when filing the LLC operating agreement. This section should outline what happens if a member leaves or joins the LLC. You can edit the document with amendments to a new draft.

What other legal documents do I need to draft for my Pennsylvania LLC?

Another legal document, which is, in fact, mandatory, is the Certificate of Organization. This certificate is very similar to the LLC operating agreement at first glance. However, this document is published publicly and, therefore, should not include some sensitive information, which you can save for the operating agreement. You might also need a foreign registration statement in case a member of your LLC is a foreign citizen who takes part in political affairs.[4]

Bibliography

1. Pennsylvania Department of State. “Pennsylvania Limited Liability Company.” Accessed June 28, 2023.

2. Justia US Law. “Chapter 89 - Limited Liability Companies Section 8916 - Operating agreement.” Accessed June 28, 2023.

3. Farrell Fritz. “Tax Considerations for LLC Operating Agreements.” Accessed July 3, 2023.

4. U.S. Department of Justice. “Foreign Agents Registration Act.” Accessed July 3, 2023.