Pennsylvania LLC Operating Agreement: Required Provisions + Free Template

Pennsylvania's LLC Statute: Act 170

Pennsylvania modernized its LLC law with Act 170 of 2016, replacing the older Pennsylvania Limited Liability Company Law with a new Chapter 88 of the Business Corporation Law. The updated statute follows the Uniform Limited Liability Company Act (ULLCA) more closely and introduced several quirks Pennsylvania LLC owners need to understand.

Key points: - LLCs formed before April 2017 are grandfathered under the old statute UNLESS they opt in - New LLCs formed after April 2017 are automatically subject to Chapter 88 - Operating agreements can override most default provisions — but not all

Is an Operating Agreement Required in Pennsylvania?

**Technically no** — Pennsylvania doesn't require you to HAVE or FILE an operating agreement. But Chapter 88 §8815 makes clear the operating agreement governs the LLC's internal affairs, and if you don't have one, the default statute applies.

The default statute works for single-member LLCs with simple operations. It falls apart for multi-member LLCs, for single-member LLCs with outside investors, and for any LLC wanting non-standard provisions.

**Practical answer**: yes, get an operating agreement. It's one of the most important documents you'll create for your PA LLC.

What Pennsylvania's Default Statute Assumes (If You Don't Have an Agreement)

If your PA LLC has no operating agreement, Chapter 88 defaults apply:

Management Unless you elect manager-managed at filing, your LLC is **member-managed** by default. All members have equal voting rights regardless of capital contribution.

Profit/loss distribution Default: equal shares among members, regardless of capital contribution or work contributed. This almost never matches what members actually intend.

Amendments Requires unanimous consent of all members.

Admission of new members Requires unanimous consent of all current members.

Transfer of interests A member can assign economic rights to a third party WITHOUT consent, but the assignee becomes a **member** only with unanimous consent. Until then, the assignee just gets distributions, no voting rights.

Dissociation A member can withdraw at any time with written notice. On dissociation, they lose management rights but keep their economic rights (unless agreement says otherwise).

Dissolution events LLC dissolves on: - Expiration of term (if specified in certificate) - Unanimous member consent - Passage of 90 days with no members - Judicial dissolution - Administrative dissolution by the Commonwealth

Fiduciary duties Members owe duties of loyalty and care. Loyalty includes: - Accounting for profits from LLC property or transactions - Not dealing with the LLC as an adverse party (without consent) - Not competing with the LLC

Care means refraining from grossly negligent or reckless conduct, intentional misconduct, or knowing violations of law.

These defaults are a floor, not a ceiling — you can modify them (with some limits) in your operating agreement.

What You MUST Address in a PA Operating Agreement

Pennsylvania allows modification of nearly all default rules, but certain things can't be waived (per §8815(c)):

Cannot waive or eliminate: - The duty of good faith and fair dealing - The right to receive distributions in kind - Rights to receive information (reasonable access to LLC books and records) - Applicable law (generally can't elect a foreign state's law) - The power to dissolve the LLC under specific statutory conditions - Rights of third parties without their consent

Can modify (but must be "reasonable"): - Duty of loyalty: you can permit specific conflicts of interest if approved by disinterested members or explicitly permitted in the agreement - Duty of care: you can lower the standard but can't eliminate gross negligence liability

Fully customizable: - Management structure (member-managed vs manager-managed) - Voting thresholds - Profit/loss allocation - Distribution rules - Admission of new members - Transfer restrictions - Buy-sell provisions - Capital call requirements

The Section-by-Section PA Operating Agreement

Section 1: Formation - LLC name, state (Pennsylvania), filing date, certificate of organization details - Principal place of business - Registered office and registered agent - Purpose (broad "any lawful purpose" or specific) - Term (perpetual vs fixed)

Section 2: Members and Capital Contributions - Initial members, their contributions (cash, property, services), and membership interests (percentage or units) - Additional capital contributions (if required) - Capital accounts and how they're maintained - Loans from members (vs contributions — big tax difference) - What happens if a member fails to make a required contribution (dilution, loan with interest, loss of voting rights)

Section 3: Management - Member-managed or manager-managed - If manager-managed: appointment process, authority, compensation, removal - Officers (if applicable): president, secretary, treasurer - Decision-making thresholds for: - Ordinary course of business (often simple majority) - Major decisions (often supermajority or unanimous): amendments, new members, sale of assets, dissolution, debt over threshold, hiring/firing key employees - Meeting requirements (or waiver of formal meetings for small LLCs) - Notice and quorum rules

Section 4: Allocations and Distributions - Allocations of profits and losses (must comply with IRC §704(b) if you want partnership tax treatment) - Distribution priorities: - Tax distributions (to cover members' tax liability on pass-through income) - Preferred return (for any preferred members) - Return of capital - General distributions - Timing (quarterly, annually, board-discretion) - Distributions in kind vs cash - Clawback provisions (if any)

Section 5: Transfers and Withdrawal - Restrictions on transferring membership interests - Rights of first refusal - Drag-along and tag-along rights - Events of dissociation (death, bankruptcy, withdrawal, expulsion) - Buy-sell provisions: what triggers a buyout, how the price is determined (formula, appraisal, book value), payment terms

Section 6: Dissolution and Wind-Up - Dissolution events - Wind-up procedure: pay creditors, allocate reserves, distribute remaining assets by capital accounts - Member's right to force dissolution (usually limited) - Final accounting

Section 7: Indemnification and Insurance - Members/managers indemnified for good-faith actions in LLC's interest - Exclusions (willful misconduct, knowing violations of law) - D&O insurance authorization

Section 8: Books and Records - What records are kept, where, who has access - Fiscal year (usually calendar) - Tax classification (default disregarded/partnership or S-Corp election) - Information rights

Section 9: Amendments - How the agreement is amended (unanimous consent is strongest; supermajority is common for non-critical changes) - Written amendments only

Section 10: Miscellaneous - Governing law (Pennsylvania) - Severability - Integration / entire agreement clause - Counterparts and electronic signatures - Dispute resolution (mediation, arbitration, court) - Notice provisions

Single-Member LLC Special Rules in Pennsylvania

Even single-member LLCs should have an operating agreement in Pennsylvania. Reasons:

1. **Corporate veil protection**: courts look for operating agreements as evidence the LLC is a real entity. Without one, plus commingled funds, you're inviting a veil-piercing claim. 2. **Banks and lenders require it**: most PA banks will ask for an operating agreement when opening a business account or approving a loan. 3. **Estate planning**: your operating agreement can spell out what happens to your LLC interest on death — avoiding probate of the business. 4. **Future member addition**: if you ever bring on a partner or investor, you'll need an operating agreement in place.

For a SMLLC, the agreement is simpler but still should cover: - Member's sole authority to manage - Member's right to all distributions - Transfer of interest rules - Dissolution on member's death (or continuation by a designated successor) - Tax classification

Multi-Member LLC Critical Provisions

For multi-member PA LLCs, pay special attention to:

Deadlock resolution If members have equal voting rights and can't agree, what happens? Options: - Buy-sell trigger (one member must buy the other out or be bought out) - Mediation then arbitration - Cooling-off period - Forced dissolution

Without a deadlock provision, a two-member LLC with 50/50 ownership can become permanently paralyzed.

Capital call mechanics When the LLC needs more money, can you require existing members to contribute? If yes, what happens if one refuses? Common approaches: - Defaulting member gets diluted (contributing members' % increases) - Contribution treated as a loan with high interest - Defaulting member loses voting rights until paid

Non-compete and non-solicit Members' obligations regarding competing businesses, poaching employees, using LLC information. Pennsylvania enforces reasonable non-competes for LLC members (unlike for employees, which Pennsylvania enforces more narrowly).

Valuation method for buyouts Most common in PA small LLCs: - **Formula**: multiple of trailing 12-month revenue (e.g., 2x revenue) - **Book value**: capital account balance - **Appraisal**: independent business appraiser chosen jointly - **Fair market value**: determined by third-party

Formula is simplest but may produce bad numbers. Appraisal is fairest but costs $5K-$15K. Pick one and stick with it.

Pennsylvania-Specific Quirks

Decennial report (every 10 years) Pennsylvania LLCs file a Decennial Report in years ending in 1 (next: 2031). Fee: $70. Miss it and your LLC's name becomes available for others to claim.

No annual report (most years) Unlike many states, PA doesn't require an annual LLC report. But many registered agents offer "annual report" services — they're generally unnecessary in PA.

Capital Stock/Foreign Franchise Tax (expired) Pennsylvania historically had a Capital Stock Tax on LLCs treated as corporations for federal purposes. This expired in 2016. LLCs now pay no capital stock/franchise tax. Single-member LLCs disregarded for federal tax also have no PA entity-level tax.

Philadelphia Business Privilege Tax (BPT) If you do business in Philadelphia, you must file and pay the Business Income and Receipts Tax (BIRT) + Net Profits Tax annually, regardless of your LLC's state tax status. The city taxes most businesses operating within city limits.

Local taxes vary Allegheny County (Pittsburgh) has its own business taxes. If you're in Pittsburgh, check with the Allegheny County Department of Revenue. Many PA municipalities also have Local Services Tax (LST) for employees.

Certificate of Organization vs Articles PA calls it a "Certificate of Organization" filed with the Bureau of Corporations. Don't confuse with "Articles of Organization" (terminology used in other states).

DIY vs Attorney-Drafted Agreement

| Situation | DIY | Attorney | |---|---|---| | SMLLC with simple operation | Template works fine | Optional | | 2-member 50/50 LLC | Template plus customization | Strongly recommended | | 3+ members | Don't DIY | Required | | Outside investors | Don't DIY | Required | | LLC operating in regulated industry (healthcare, finance) | Don't DIY | Required | | LLC with significant IP | Don't DIY | Required |

For most simple PA LLCs, our free [operating agreement generator](/tools/operating-agreement) produces a solid baseline you can sign immediately.

For complex situations, expect $800-$3,000 for an attorney-drafted agreement. Often worth it.

What to Do After You Have an Agreement

1. **All members sign**: original signatures, one per member, same document 2. **Keep the original**: in a fire-safe or safe deposit box, with copies to each member 3. **Attach to state filings**: if you ever need to prove entity validity 4. **Give a copy to your bank**: required to open business checking 5. **Reference it for decisions**: don't just file it and forget — actually use the decision-making framework for real choices 6. **Update annually**: review with your attorney/CPA; amend as circumstances change

Common Pennsylvania LLC Operating Agreement Mistakes

1. Using a Delaware or California template unchanged States have different statutes. PA defaults and permitted modifications differ. A CA template may reference "limited liability company law" provisions that don't exist in PA.

2. Silent on distributions If your agreement doesn't specify distribution timing, PA default is "at manager's discretion." If there's no manager, it's chaos — courts have to intervene. Specify frequency (quarterly minimum) and tax distribution guarantees.

3. No provision for member death If a member dies, what happens to their interest? Without a provision: - Their estate becomes the economic owner - Their heirs are NOT members (can't vote) unless other members unanimously admit them - Deadlock and litigation often follow

Add a buy-back provision triggered by death, funded by life insurance on each member if practical.

4. Mistaking "member-managed" and "manager-managed" Member-managed: all members have management authority. Manager-managed: one or more managers (could be a member or an outsider) have authority; other members are passive investors. Pick deliberately — default is member-managed.

5. No dispute resolution Without a dispute resolution provision, any disagreement ends up in Pennsylvania court. Add a mediation-then-arbitration clause to save legal fees.

6. Forgetting to address tax elections If you want S-Corp tax treatment, the operating agreement should authorize the manager to make the election on Form 2553. Otherwise, the election may require member amendment.

Summary Checklist

- [ ] Form the LLC (Certificate of Organization at [corporations.pa.gov](https://www.corporations.pa.gov)) - [ ] Get EIN from IRS (required for bank account and tax filings) - [ ] Draft operating agreement (our [free generator](/tools/operating-agreement) is a solid baseline) - [ ] Customize for your specific situation (number of members, capital structure, special provisions) - [ ] Review against Pennsylvania Chapter 88 mandatory provisions - [ ] All members sign (originals, not just digital scans) - [ ] Store original + distribute copies to members - [ ] Open business bank account with agreement in hand - [ ] File S-Corp election (Form 2553) if applicable - [ ] Schedule annual review with attorney/CPA

Pennsylvania's LLC framework is flexible and owner-friendly. But flexibility means you have to actually make choices — the defaults usually don't fit. Get your operating agreement right once, and your PA LLC will be on solid footing for years.

Ready to form your Pennsylvania LLC? [Start with FormifyAI](/sign-up) — we file your Certificate of Organization, handle your EIN, include a free operating agreement, and get you a registered agent for under $100 total.