PLLC Operating Agreement: Everything You Need to Know
A PLLC operating agreement is a legal document used by PLLCs, or professional limited liability companies, to establish the internal rules that regulate the PLLC. 3 min read
What is a PLLC Operating Agreement?
A PLLC operating agreement is a legal document used by PLLCs, or professional limited liability companies, to establish the internal rules that regulate the PLLC. A PLLC differs from an LLC in that it is only concerned with business pertaining to certain specific professions that require a license for one to operate in, such as law, medicine, and accounting.
Although an operating agreement is not required for a PLLC in most states, it is still highly recommended that your PLLC have one. A PLLC operating agreement will detail the internal structure of your business and how it will be run by the members or managers. It may be as simple or as detailed as you wish, and it may cover any aspect of your business that you wish for it to cover.
For single-member PLLCs, a simpler PLLC operating agreement will usually suffice, while multi-member PLLCs will generally need more complex agreements. The level of detail and complexity will vary from business to business.
What Should Be in a PLLC Operating Agreement?
Aside from basic information, like the PLLC’s name, the names and addresses of the members, and the name and address of the registered agent, topics that it may be beneficial to cover in an operating agreement include:
- The PLLC’s purpose. This will state the basic nature of your business, but may include phrasing similar to “and for other lawful business purposes.” Such phrasing will allow for changes in your business purpose, should they arise.
- Member admittance. There may come a time when you wish to expand your business membership beyond your original member or members. If you do not include language that outlines this at the start, you will have to revise the operating agreement later.
- Capital contributions. How much each member contributes and what form the contribution is made in (cash, services, property, etc.). Provisions may be made to allow or bar additional capital contributions being levied at a later date.
- Profit/loss distribution. In most cases, profit/loss distribution will be proportional to a member’s interest in the company, but an operating agreement may set this up in any way that is desired. How often distributions are made should also be considered.
- Meetings and voting. When meetings will be held, what rules will pertain to them, and how voting will be handled are all issues to be considered. Especially important is if voting decisions will be made by majority rule or by some other percentage of the whole.
- Management type. The choice here is member managed or manager managed. Member-managed PLLCs are managed by some or all of the members; manager-managed PLLCs are managed by managers, who are often external, non-member personnel. Salary, powers, and length of service are all important aspects to decide upon here.
Benefits of a PLLC Operating Agreement
Although having a PLLC operating agreement is usually not required, there are many reasons to have one. These include:
- Increased control of your business operation. If you do not set up your own operating agreement, the state’s default operating procedures will be imposed upon you. Setting up a PLLC operating agreement allows you to tailor your PLLC’s internal rules and procedures to your liking.
- Increased limited liability protection. A PLLC operating agreement will increase your personal legal protection from business-related debts or lawsuits by increasing the distinction between the members’ assets and interests and those of the PLLC. Without such an agreement, your PLLC may be mistaken for a sole proprietorship or partnership.
- Reduced possibility of future disputes. If the members of your PLLC agree to the operating agreement, then they will be held to that agreement, thus making it easier to resolve issues in the future. If the agreement is written correctly, there will be a clear road map for handling a variety of future scenarios, should they arise. If a dispute does go to trial, the court will use the operating agreement to help make a ruling.
- Setting out a succession plan. If the owner of the PLLC is incapacitated or dies and cannot fulfill their duties, a succession plan will allow the PLLC to continue, if that is desired, and it will ease the transition from one owner to another. Without it, the PLLC may be forced to fold, or the transition may be fraught with difficulty, including a legal battle.
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