Have you ever wondered what would happen to your organization if you ever had a disgruntlement between the members? Unfortunately, some businesspeople do not, and by the time things take a turn for the worse, it’s too late to turn their affairs around. Many people have been caught off guard by such instances and without a legal document to guide the way forward, they have had to deal with Pennsylvania’s “default rules”. Take the example of where a person wants to sell their share of the business to an outsider yet other members are adamant that the share should go to an existing member. If no rules are in place to govern such transactions, it’s easy for in-fighting to take place, taking away from the core purpose of the business. This article will look into why having a limited liability company operating agreement in Pennsylvania in place is important for your LLC Pennsylvania and what you must include in yours.
Why is an Operating Agreement important?
First of all, an operating agreement in Pennsylvania shows how you have organized your business. By looking at it, a person can tell who is in charge of the operations, how many rights the members have, how you share out the profits and losses, what you would do in the event of dissolution etc. It’s a detailed overview of what you do and how you do it. Investors, future partners, the bank and other players can benefit from this information.
Secondly, according to the Pennsylvania Consolidated Statutes Section 8812(a), having such laws is important as it prevents you from having to go through the default law route. Without an agreement in place, the court system will refer to what’s written under the law and will make a judgment based on that. It’s easy to be on the losing end if such an action is taken and it’s always best to have an upper hand by agreeing to the operating procedures of an LLC from the start.
Benefits of Creating an Operating Agreement
Having an operating agreement in place is highly important as it ensures:
- Reduced Future Conflicts: You all understand what your role is and it’s easier to hold people accountable this way.
- Greater respect from Pennsylvania courts: If you ever end up in court, you will not have to abide by generic laws and you will have more say in the outcome of the case. In most cases, you will not end up feeling cheated out of what belongs to you.
- Better Relations: You and your other members will have an easier time being amicable to each other, knowing that you have rules in place to foster good relations.
- More Professionalism: Potential investors and partners and other players will look at your setup and give you credit for it. You’ll see that they’ll be more willing to invest in a company with clear policies.
- Easier Tracking: It becomes easy to check why a change was made and how it affected the company. For example, if you make registered office changes, you will document why this is the case. If any problem arises in the future, you can justify your basis.
- Increased Efficiency: By having standardized office and company operations, it becomes easier to maintain a high level of productivity by avoiding small glitches in the system.
How can an Operating Agreement be drawn up?’
When drafting your operating agreement, you must include pertinent details such as:
- Organization Information: Here, you should include the names of the owners, where their addresses are, who represents you and where they can be found and when you formed the organization. Additionally, include how long you plan on running your operations.
- Finances: You need to show how much each person brought into the PA LLC, how much they own and how you plan on dividing the profits and losses. Some people choose to do this by the number of shares while others go with an equal basis.
- Roles: Some people will have more authority than others and you should show who the decision-makers will be, how they will get paid, how they will keep the books of account and how they plan on paying the taxes.
- Operations: Finally, include if and how you will add new people to the organization as well as the removal of existing members (procedures for member additions and resignations), how you will change the operating agreement for LLC if need be and how you will close the business when the time comes.
In some cases, you will not include some of this information and in others, you will include much more. Gauge what’s important to you and make sure you do not omit anything that could cost you in the future.
How much does an Operating Agreement cost in Pennsylvania?
The amount paid comes down to the method you use. You can opt to:
- Do it yourself: By mastering what these agreements require, you can sit down with other members of your organization and figure out what you need to include. In this case, you would spend close to nothing.
- Use agreement generator forms: Online sites now offer a variety of legal LLC operating agreement templates you can use. Others even guide you through each step to help you draft a complete document that can hold up in a court of law. There are plenty of free templates online, others come at a one-off cost and others require you to pay a subscription fee. Costs vary from $0 to $100.
- Use a business formation service: Many companies now offer to help you get your business off the ground, with some even doing so for free. As a way to maintain their competitive edge, these companies are now offering agreements as part of the package. The amount paid depends on the site and the tier you choose. You can pay as little as $0 or to the tunes of hundreds of dollars.
- Use an attorney: In the past, most people went for this option as it was hard to navigate legal grounds without having gone to law school. Attorneys generally charge anything from $200 to $5,000 for one document, making them the costliest option. However, when dealing with technical matters that require a lot of detail, this is the safest option. But if you’re dealing with simple issues, you can save the money and rely on less expensive alternatives.
Making Changes to Your Operating Agreement
Luckily, this agreement is not like your registration document where changes require a lot of documentation between you and the state. It is highly unlikely that you’ll run your operations without necessitating changes in the way you operate. The more you grow, the more money you make and the more people you partner with, changes will come along. So, how can you make sure you integrate these easily?
One, everyone has to be on board. As you make the operating agreement for LLC in Pennsylvania, you must decide how many people such a change will require. For example, if the initial understanding requires 90% vote and you get this, you can proceed with the change. If you cannot meet this requirement, you will have to think about what’s wrong with the change and why it’s not easily accepted by the rest of the members. Don’t forget to put such clauses in your agreement to avoid any misunderstandings when the time comes to make a change.
Secondly, you can make a change without having to notify the authorities. Suppose the LLC operating agreement Pennsylvania is in a word file. All you need is to access the document, make the changes and save the document which you must now present to the authorized members for signing. Keep a copy of both documents safely, indicating the date in each and recording the changes made. While it may never happen, the Commonwealth may want to see these changes someday if things go haywire. You want to make it easy to justify your actions by having a good paper trail.
It’s that easy! You may also want to provide the bank and other institutions with the updated file to ensure smooth transactions in the future. Otherwise, you do not have to file this document with the state.
If you feel that drafting the document is too much work or it requires special skill to cover some matters, do not hesitate to engage professionals to avoid making costly mistakes. You can try business formation services or attorneys, weighing the pros and cons of both alternatives.