An operating agreement is an agreement between the members of the LLC in which the members can set forth in writing the particular agreements that they have among themselves. An Operating Agreement can override or modify the provisions of the Pennsylvania Limited Liability Company law which otherwise control in the absence of an Operating Agreement.
An Operating Agreement may address, among other things, the following subjects:
- Business Purpose of the LLC
- Term of Existence
- Capital Contributions of members
- Allocation of Profits and Losses
- Distribution of Net Cash Flow
- Management by Manager or Members
- Who will be the Manager (if any)
- Hiring and firing of employees
- Compensation of member/employees
- Bonus provisions
- Decisions that require member approval
- Buy-Sell obligations, options or rights of first refusal
- Events that cause termination and dissolution of the LLC
- Disability provisions
- Retirement provisions
- Termination of employment of a member
- Arbitration, mediation or other dispute resolution mechanisms
An Operating Agreement is essential for an LLC. LLC’s typically do not have bylaws like a corporation and LLC laws have fewer guidelines than those usually provided for corporations.
Operating Agreements can also contain a “right of first refusal” which gives either the LLC or the other members the first opportunity to buy the membership interest, at a designated price, before it is sold to outsiders. (See Buy-Sell Agreements subpage). For example, if an employee-member dies, becomes disabled or leaves the employment of the LLC, the Operating Agreement can require that the individual sells his membership interest back to the LLC or to the other members.