LLC Operating Agreements — The Document That Prevents Disputes

Pennsylvania doesn't require LLCs to have an operating agreement, but not having one is like owning a house without homeowner's insurance — everything is fine until it isn't, and then it's catastrophic. The operating agreement is the internal governing document that defines how the LLC works: who makes decisions, how profits are split, what happens when someone wants to leave, and how disputes are resolved.

Without one, Pennsylvania's default LLC rules (15 Pa.C.S. Chapter 89) apply — and those defaults often produce results that none of the members actually intended.

What Every Operating Agreement Must Address

Capital contributions: Who put in what, when? Not all members contribute equally — some invest cash, others contribute services, equipment, or intellectual property. The operating agreement should document each member's initial and ongoing contributions and clarify whether additional capital calls can be made (and what happens if a member doesn't participate).

Profit and loss allocation: By default, Pennsylvania allocates profits and losses based on each member's contribution. But many businesses allocate differently — a managing member might receive a larger share because they're running the daily operations. The operating agreement can override the default to reflect the actual deal between the parties.

Management structure: Is the LLC member-managed (all members participate in decisions) or manager-managed (one or more designated managers run the business)? Who has authority to sign contracts, hire employees, borrow money, or commit the LLC to obligations? Without clear management provisions, every member can bind the LLC — which is a recipe for problems.

Voting and decision-making: Which decisions require a simple majority? Which require unanimous consent? Major decisions — selling the business, taking on debt, admitting new members, changing the business purpose — typically require supermajority or unanimous approval. Day-to-day decisions should require less.

The Exit Problem — Buyout Provisions

The number one cause of LLC disputes is a member who wants to leave (or who other members want to remove) and there's no mechanism for a buyout. An operating agreement should address:

• Voluntary withdrawal: Can a member resign? Under what conditions? With what notice?
• Involuntary removal: Can a member be expelled? For cause only, or by majority vote?
• Valuation method: How is the departing member's interest valued? Book value? Appraised fair market value? A formula? An agreed-upon multiple of revenue? This is the most heavily negotiated provision in any operating agreement.
• Payment terms: Lump sum or installments? Over what period? With interest?
• Triggering events: Death, disability, bankruptcy, or breach of fiduciary duty — each may trigger a different buyout mechanism.
• Right of first refusal: If a member wants to sell their interest to an outsider, do the remaining members get the first opportunity to buy it?

Deadlock Provisions

Two-member LLCs (50/50 splits) are extremely common — and extremely dangerous without deadlock provisions. If the two members can't agree on a major decision, the business can grind to a halt. The operating agreement should include a deadlock resolution mechanism: mediation, binding arbitration, a buy-sell "shotgun" provision (where one member names a price and the other must either buy or sell at that price), or judicial dissolution as a last resort.

Fiduciary Duties

LLC members and managers owe fiduciary duties to each other and to the LLC — including duties of loyalty and care. The operating agreement can modify (but not entirely eliminate) these duties under Pennsylvania law. It should also address what happens when a member has a personal interest in a transaction involving the LLC (conflict-of-interest transactions).