Pennsylvania LLC Operating Agreement
Creation of the LLC Operating Agreement While Forming An LLC in Pennsylvania
An LLC Operating Agreement is a document which spells out the functional structure of an LLC.
It is an official contract between the members of the LLC, and it defines each of the members’ distributive shares.
Whether the LLC has one owner or several, an operating agreement protects the limited liability status of a business.
Having a formal operating agreement ensures that the individual members are protected from being personally liable for any business debts.
Without an operating agreement, an LLC may too closely resemble a sole proprietorship or a partnership, neither of which grants protection of owners’ personal assets as an LLC does.
Forming an LLC in Pennsylvania also protects the owners’ personal assets in the event of a lawsuit.
Personal assets include owners’ homes, cars, and retirement accounts.
It is important to note, however, that the members must run the business properly as a PA limited liability company in order to be afforded this protection.
If the courts conclude that the business was not run properly, they may be able to “pierce the corporate veil,” and thus rule that the owners would be personally liable as a result of the lawsuit.
Creating an operating agreement is a key step in order to avoid having the courts “pierce the corporate veil” should a lawsuit occur.
Other actions needed to show an LLC in PA is run properly as a business to prevent the courts from being able to “pierce the corporate veil” are:
- formally documenting business actions, such as official minutes of meetings;
- maintaining separate business accounts, as in not co-mingling business assets with the owners’ personal assets;
- making sure the business has adequate funding, and that any business loans are in the name of the LLC rather than in the names of the owners themselves;
- and ensuring that the business’ LLC status is known by conducting day-to-day operations in the name of the LLC, such as making business purchases, invoicing clients, and negotiating contracts all in the LLC’s name.
Setting up and following the proper business procedures in a written operating agreement helps to protect the individual business owners and makes it difficult for the courts to “pierce the corporate veil” of the LLC.
An operating agreement also allows the members of the LLC in PA to define the rules which govern their own business.
Without a formal operating agreement, an LLC in PA is subject to the default rules set by the state of Pennsylvania.
An operating agreement sets out the rules by which the business runs.
A clearly written operating agreement helps prevent misunderstandings among the LLC members, particularly regarding management structure and financial responsibilities and rewards.
An LLC Operating Agreement will contain the following:
• The names of the members
• Members’ investment interests and percentage ownership
• How the LLC is to be managed
• Rights and responsibilities of members
• Distribution of profits and losses
• Rules for transferring interest when members leave the LLC
• What happens in the event of the company’s dissolution
The LLC Formation Course™
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