Does Your LLC Need an Operating Agreement?
Businesses ranging from fitness facilities to marketing firms choose the legal business entity of a Limited Liability Company (LLC). This business structure requires less paperwork and documentation than a corporation while still shielding the member-owners from some personal liability.
Yet an LLC can run into a variety of obstacles. Disputes can erupt between members (owners), and single owners risk being viewed as a sole proprietorship with their personal assets no longer safeguarded.
A comprehensive operating agreement (OA) can rectify these dangers. Pennsylvania does not require LLCs to file operating agreements, but having a written legal document provides additional protections for the LLC members.
Purpose of an Operating Agreement
An operating agreement typically includes details of how the company is operated and the specific roles and responsibilities of each member. The document does not need to be filed with the state, but it should be legally binding among all the members.
An OA usually includes the following provisions:
- The ownership stake of each member (for multi-member LLCs)
- How profits – and losses – are distributed among the members
- The role and responsibilities of each member
- Whether the LLC is member-managed or manager-managed
- What procedures are followed if a member leaves the company
- Details of intellectual property ownership
- Whether any member receives guaranteed payments, like a salary
- How to dissolve the business if all members want to end operations
- Indemnification clauses that protect members from third-party lawsuits
With a comprehensive operating agreement, everyone in the company fully understands business operations and their rights and responsibilities. A business law attorney from Scaringi Law can advise and draft an OA that meets the specific needs of your business.
OA Protections for Multi-Member LLCs
Even close-knit families can have occasional disputes. The same is true for multi-member LLCs. An operating agreement sets the framework for known and potential matters the business or its members may encounter. The OA reduces misunderstandings among the members and establishes how disputes are resolved.
A comprehensive agreement for multi-member LLCs typically includes the following:
- How owners can be removed from the business
- How owners can be added to the business
- Succession rules if an owner dies
- How disputes among owners will be resolved
- Non-compete clauses prohibiting owners from leaving and creating competing businesses
OA Protections for Single-Member LLCs
An operating agreement is also important for single-owner LLCs (SMLLC). This document legally clarifies that the individual person owning the business and the business itself are two separate entities. The operating agreement is usually between the single member and the LLC itself. The agreement typically covers the member's rights, duties, and obligations, and the SMLLC's management structure.
The wall of separation created by the OA is important. If the single member is involved in a third-party dispute (contract breach, personal injury, etc.) a court could determine the business operates as a sole proprietorship. This leaves the individual owner personally liable for a loss or incident involving the company.
An OA is also useful with lenders and other businesses. Banks typically require an operating agreement for a commercial loan. The OA is also a critical element in mergers and acquisitions.
In addition to an operating agreement, the single owner should take other steps to separate themselves from the business. The entity should have its own business bank account and credit card. These accounts should be used exclusively for business purposes.
Single-member LLC owners must also keep their business assets separate from their personal. The best way to do this is to maintain a separate business bank account and credit card, and only use these for business expenses.
Protect Your LLC and Its Members with a Strong Operating Agreement
If you are considering creating an LLC, or already have one that does not have an operating agreement, take steps now to protect yourself and the business. Our legal team will ensure your OA provides solid protection through general provisions needed by businesses plus case-specific elements that address the unique circumstances of your LLC.
Scaringi Law’s experienced business law attorneys can answer your questions about operating agreements. Contact us online or call (717) 775-7195 to schedule a consultation.