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Why is it important for your LLC to have an operating agreement?

On Behalf of | Oct 12, 2023 | Business Formation, Business Organization

When forming a limited liability company (LLC), you must address how your LLC will be permitted to operate. One way to formally outline these decisions is to create an operating agreement for your business.

Are you required to have an operating agreement for your LLC?

Pennsylvania law does not require limited liability companies to have an operating agreement. However, an operating agreement can be important to support and protect your business.

Not only can these agreements add structure to your business, but they can also ensure that all members of your organization understand that structure and their duties. This can prevent many conflicts that arise from misunderstandings and miscommunication.

Operating agreements can also provide financial benefits. An operating agreement draws a clear line between the company and its members, which can clarify their protection from personal liability for company debts. It can also detail how the company will be taxed.  Failure to have an operating agreement may be utilized to help “pierce the corporate veil” which is required to obtain personal liability of LLC members.

Additionally, an LLC is a separate legal entity, so death can present difficulties if an operating agreement is not available to provide legal authorization for wrapping up or continuing the business.

What details can an operating agreement include?

Operating agreements can clarify many details about your company, your current structure, and the procedures to be  utilized when future challenges arise. Your operating agreement will answer a variety of questions, including:

  • What name will your company use?
  • What product or service will your company provide to customers or clients?
  • How often will the members of your company meet?
  • Who are the members of your LLC, and what responsibilities do they have to the company?
  • How will you resolve disputes between members?
  • How can members exit the LLC?
  • How will new members join the LLC?
  • What procedure will you use to close the company?
  • What happens when a member dies, or the last member of the LLC?

Because of the many details an LLC operating agreement can address, you may want experienced guidance as you create this document. With help, you can create a legally sound document and identify areas where more information could support and protect the company you are building.