A Pennsylvania LLC Operating Agreement is a regulatory document created by LLC members with the aim of outlining the governing structure, operational guidelines, and member responsibilities of a business.
It provides a legal framework for how the business conducts its operations and can be used by companies or organizations of almost any size. Pennsylvania does not require LLCs operating within the state to adopt an operating agreement
. Despite it not being a requirement, LLCs are advised to implement the document. A Pennsylvania LLC operating agreement provides a legal safety net for members’ personal assets and tax benefits for the business. The following are Statutes about a Pennsylvania LLC operating agreement:
Limited Liability Companies: Chapter 88
Operating agreement Laws: § 8815
State Definition: § 8812
Types of Agreement
Following are the types and templates of the agreement:
Single-member LLC operating agreement
A single-member LLC operating agreement is used by a company with a sole owner that would like to separate personal aspects from the business and to outline the company's policies and procedures.
Download: Microsoft Word (.docx)
Multi-member LLC operating agreement
A multi-member LLC operating agreement is used by businesses that have more than one contributing or managing member. It helps ensure that several aspects of the business are established.
Download: Microsoft Word (.docx)
Benefits of the Agreement
Understanding why an LLC operating agreement should be created ensures that members or owners of the business can reap the benefits associated with the document.
The following are reasons a business should create an LLC operating agreement in Pennsylvania:
Protection of LL status
An operating agreement protects the Limited Liability status of businesses by formalizing the separation of members’ assets from the company’s assets. Without the operating agreement’s protection of the LL status, a business can closely resemble a partnership or sole proprietorship jeopardizing members’ assets.
Clarity in verbal agreements
Verbal agreements can easily be forgotten, leading to misunderstanding, miscommunication, and inaccurate reallocation of the agreed terms. Creating an LLC operating agreement ensures members have a document they can refer to when they disagree. It also ensures that all members are legally bound by the terms of the agreement, which may not be possible if a verbal agreement is made.
Protection of agreements
Pennsylvania’s state default laws govern LLCs without an official operating agreement. As a result, these general state laws may not align with the company’s interests. An operating agreement ensures LLCs protect their management structure and profit distribution policies.
Flexibility offered to the business
An operating agreement ensures that owners of LLCs enjoy the flexibility the document offers on how business operations are conducted. LLC owner’s/members make decisions on what management structure, procedures, and policies work for the business. The flexibility offered by the operating agreement also ensures that owners can make amendments to reflect the changes the business may undergo.
Helpful for bank related tasks
Banks and creditors may request an operating agreement before allowing LLCs to open bank accounts or obtain credit. An operating agreement enables an LLC to prove that it is well structured and organized. It also helps shape a legitimate perception of the LLC in the eyes of investors.
Right mindset
Creating an operating agreement ensures that LLC members are focused on how they would like the business to run. An operating agreement also ensures careful thought is placed on issues that may affect the LLC, like the death of a member or the dissolution of the business.
Information to be Included
A Pennsylvania LLC operating agreement should contain comprehensive information which ensures that all aspects of the LLC’s structure and policy are outlined in the document.
The following information should be included in a Pennsylvania LLC operating agreement:
LLC name
Pennsylvania requires that a unique name be chosen for every LLC opening within the state. In addition, the name of the LLC should be written as it appears on the Certificate of Organization filed during the registration of the business. Writing a clear name on the Pennsylvania operating agreement ensures that its terms can be legally enforced.
Ownership
The legal names and addresses of all contributing members must be mentioned in Pennsylvania LLC operating agreement. Their names will help establish who the involved parties are. Each member’s percentage of ownership should also be indicated. All members must agree on how ownership splits up. Ownership can be equally divided among members or even tied to capital contributions made by members.
Management
A Pennsylvania LLC operating agreement should contain information on the management structure that governs the business. When selecting a management structure, members must consider the legal implications of the chosen governance framework. LLCs governed by their members are referred to as member-managed LLCs, whereas those governed by managers are referred to as manager-managed LLCs.
Duties of participants
The duties allocated to each member and manager indicated in the Pennsylvania LLC operating agreement should be stipulated. The duties of silent members (members that are not involved in the day-to-day operations of the LLC) should also be mentioned. A silent member’s duties may include attending meetings and taking part in the voting process.
Rights and responsibilities
The rights and responsibilities of the members or managers tasked with governing the LLC should also be clearly outlined in the Pennsylvania LLC operating agreement. The information should include details on members’ voting rights and their ability to change the business. Names of members that can vote on issues and factors that may impact the equality of their votes, such as capital contribution, should be outlined.
Distributions
The Pennsylvania LLC operating agreement should mention vital information on the distribution policies to divide profits and losses. Members should be unanimously agreed on to divide profits and losses equally or depending on other factors like a member’s contribution or ownership percentage.
Meetings
A Pennsylvania LLC operating agreement should contain information on when meetings should be held and who is authorized to call for them. Holding regular meetings ensures members can address any issues that may be affecting the operations of the LLC. Information on whether all members will be expected to attend the meetings should also be indicated.
Buyout and buy-sell rules
The Pennsylvania LLC operating agreement should indicate rules on the procedures used if a member decides to transfer ownership to a third party through a buyout. Information on how much members can sell their shares and factors that may affect the price, such as ownership percentage, should be provided. Additional information on the monetary contributions that a new member should make in the LLC should also be indicated.
Succession
A Pennsylvania LLC operating agreement should outline the succession plan when a member unfortunately dies. Details on what will happen to a deceased member’s shares should be provided in the operating agreement. Any limits on individuals appointed as successors and their rights should be indicated. A member’s will should be adjusted to align with the information contained in the succession planning clause of a Pennsylvania LLC operating agreement.
Dissolution
Information outlining situations that may warrant the dissolution of the LLC, how it should be voted on, how assets shall be divided among members, and the procedures that should be followed must be indicated in the Pennsylvania LLC operating agreement.
Modification
Modifications or updates may need to be made in the operating agreement due to changes that the LLC may be experiencing. A Pennsylvania LLC operating agreement should outline how modifications should be made, voted on, and implemented by members.
Details should be provided on who can vote, the degree of impact each member’s vote has, and the percentage of the agreement it will take to make modifications. A member authorized to make the amendments or modifications may also be mentioned.
Severability provision
A severability clause is a provision that stipulates that if a part of the operating agreement is discovered to be unenforceable or invalid, the reminder should still apply. Including this provision in the Pennsylvania LLC operating agreement ensures that the document’s legal integrity is retained even when simple errors are made to its contents.
Annual filing requirements
Pennsylvania LLC filing requirements are the regular reports and fees, a business as an LLC must meet to operate in the state. Understanding these annual filing requirements ensures that an LLC is compliant with its stipulated state obligations. Pennsylvania LLC annual filing requirements include:
Annual registration
Pennsylvania doesn’t require annual reports to be filed by LLCs. The state does, however, require Professional Limited Liability Companies and Foreign Limited Liability Companies to file a Certificate of Annual registration (FormDCB:15-8221/8998) with the state department. A fee of $520, multiplied by the number of members an LLC has, must be paid. The filing must be done yearly by April 15th via mail or online.
Business tax
In Pennsylvania, LLCs may be taxed differently depending on how they are formed. LLCs taxed as corporates will have to file an IRS form 25523. Corporation taxes in the state of Pennsylvania are calculated at a flat rate of 9.99 percent of taxable income, which is included in the LLC’s federal corporate income tax return. The state’s corporate income tax return (Form RC-101) is used to file and pay these corporate taxes.
Employer taxes
An employment tax in Pennsylvania is paid by LLCs with employees. An EIN should be obtained to enable withholding of employer taxes from all employee paychecks. Employer tax withholding should be filed periodically, like monthly with the PA -501 form at the Pennsylvania Department of Revenue. The LLCs will be required to include unemployment insurance taxes (UI taxes) which should be paid with the Department of Labor and Industry in Pennsylvania.
Sales and use taxes
LLCs involved in product sales will be required to register with the Department of Revenue for sales tax reporting and making of regular payments. A Pennsylvania Sales Tax license must be obtained to enable payment of sales and use tax. The tax should be paid periodically, such as monthly or quarterly, to the Department of Revenue via the online E-tides system.
Operating Agreement Template
A well-formatted Pennsylvania LLC operating agreement ensures that all aspects of the business’s management structure, operations, procedures, and policies are captured. We have provided free downloadable Pennsylvania LLC operating agreements templates that can ease the process of creating your operating agreement.
Use these templates to start the process of formalizing your LLC’s operating details:
How to Form an Operating Agreement?
Entrepreneurs interested in forming an LLC in the state of Pennsylvania must ensure they follow a straightforward step-by-step process. It also helps set the business on the right track to start its operations.
The following guide can be used to form an LLC in Pennsylvania:
P-LLC name
First, a P-LLC name that explains what the business does must be selected. The availability of the name should also be checked through the Pennsylvania Department’s state website to ensure another business does not use it. Finally, the business’s name must end with ‘Limited Liability Company’ or an appropriate abbreviation such as LLC.
Registered agent
Secondly, a registered agent/office that will accept legal correspondence on the LLC’s behalf should be designated. The individual selected as the LLC’s agent should be a resident of the state of Pennsylvania. The physical address of the registered agent/office should be indicated in the LLC’s Certificate of Formation.
Documents
Next, the P-LLC’s Certificate of Organization should be filed with the state department. The Certificate of Organization officially establishes the LLC’s authority to operate in Pennsylvania.
In addition, information on the name of the LLC, the designated registered office, each member’s name, the effective date of the LLC’s formation, the service it provides, and additional provisions members have decided on should be provided. The Certificate of Formation can be filed via mail or online.
Fee
Upon completion of filing, a fee must be paid to the secretary of state. Domestic LLCs should pay $125, while foreign LLCs should pay $ 250. If a filing has taken place online, a credit card may be used to make fee payments and check or money orders for virtual medium.
The applications should be sent to:
Pennsylvania Department of State, Bureau of Corporations and Charitable Organizations, PO Box 8722, Harrisburg, PA 17105-8722.
Operating agreement
Even though an operating agreement is not a mandatory requirement in Pennsylvania, it would be best to draft it. The operating agreement provides a blueprint on how the LLC will be managed. Once drafted, it should be reviewed and signed by all members/owners of the LLC. The operating agreement should be stored among other crucial business documents.
Taxation requirements
The LLC must then comply with tax requirements such as having a federal ID number or EIN. Based on the classification of the LLC, it may be required to pay state taxes. Additional local tax requirements may be imposed on an LLC depending on where it is located within Pennsylvania. A business should ensure it is fully informed on its tax payment obligation to help avoid having issues with the state.
Obtain a license for business
Finally, the LLC should obtain any licenses or additional permits required by the state of Pennsylvania. The licenses and permits required may be profession or occupation-specific. Information on them can be obtained from the state department’s website
Frequently Asked Questions
An LLC operating agreement is not a legal requirement in Pennsylvania; however, it would be best to draft it. The operating agreement provides additional legal protection for the business and its members.
It also ensures that information on the management structure, operations, policies, and procedures that govern the business are well recorded by an internal legally binding document.
It is advisable to have an operating agreement for a single-member LLC. The operating agreement will help separate the owner’s assets from those of the business. It will also help create a legitimate perception of the business in the eyes of third-party vendors and financial institutions such as banks.
A lawyer is not required when creating an LLC operating agreement; however, it is advisable to consult legal counsel. The legal counsel will help members identify aspects they may have forgotten to include. A lawyer will also help advise members on legal terms and options that would best suit the LLC.
