Key Takeaways

  • A PLLC operating agreement governs how a professional limited liability company is managed and operated.
  • Including detailed clauses around ownership structure, voting, and profit distribution is crucial.
  • It serves as a legal safeguard, especially in disputes or transitions like member exits or death.
  • Certain provisions, such as indemnification and non-compete clauses, can enhance risk protection.
  • Customizing your PLLC operating agreement to comply with state-specific laws ensures enforceability.

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.

Professional Licensing and Ethical Requirements

Because PLLCs are reserved for licensed professionals, it’s essential that your operating agreement respects the ethical rules and licensing requirements of your profession. For example:

  • Medical and legal professionals often have strict rules around ownership, confidentiality, and conflict of interest.
  • Your agreement should clearly state that each member must remain licensed and in good standing to continue their role.
  • You may also include protocols for handling ethical violations, license suspensions, or malpractice claims.

Aligning your PLLC operating agreement with your profession’s code of conduct reduces risk and ensures compliance with regulatory bodies.

Additional Provisions to Include in a PLLC Operating Agreement

While the basics of a PLLC operating agreement cover names, purpose, and contributions, a truly comprehensive agreement will go further. Consider adding these clauses to address common legal and operational issues:

  • Indemnification of Members and Managers: This provision protects members or managers from liability when acting in good faith on behalf of the PLLC.
  • Books and Records: Specify what financial records will be maintained, who has access to them, and how often they’ll be reviewed or audited.
  • Non-Compete and Non-Solicitation Clauses: These restrict members from engaging in competing businesses or soliciting clients after departure, safeguarding the PLLC’s client base and goodwill.
  • Dispute Resolution Mechanism: Include whether disputes will be resolved through mediation, arbitration, or litigation, and in which jurisdiction.
  • Buyout or Buy-Sell Provisions: Outline the terms under which members can sell or transfer their interest in the PLLC, including valuation methods and right-of-first-refusal clauses.
  • Amendment Procedures: Define how the operating agreement may be amended in the future, including required vote thresholds.

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.

Importance for Multi-Member PLLCs

Multi-member PLLCs, in particular, benefit from having a detailed operating agreement. Unlike single-member entities, multi-member PLLCs face more complexity in decision-making, profit allocation, and ownership rights. Key benefits for multi-member PLLCs include:

  • Defined Voting Rights: Clarifies how votes are allocated (e.g., per capita or based on capital contribution).
  • Conflict Resolution: Reduces ambiguity when disagreements arise.
  • Exit Strategy: Establishes what happens when a member wants to leave or becomes incapacitated.
  • Continuity: Helps ensure smooth business continuity when membership changes.

These clauses help prevent operational gridlock and protect both the PLLC and its members from disputes.

State Law Considerations and Compliance

Each state has its own laws regarding PLLCs, and while many don’t require an operating agreement, those that do often impose specific requirements. For example:

  • Some states require that all members be licensed professionals in the same field (e.g., all attorneys or all physicians).
  • States may impose restrictions on who can serve as a manager or officer within a PLLC.
  • Without an operating agreement, state default rules apply, which may not align with your business intentions.

To ensure legal enforceability, tailor your PLLC operating agreement to meet your state’s specific laws and licensing board regulations.

Frequently Asked Questions

  1. Is a PLLC operating agreement required by law?
    In most states, it’s not required but highly recommended. Some states may require one, especially for multi-member PLLCs.
  2. Can I use a template for my PLLC operating agreement?
    Templates can provide a starting point, but it’s important to tailor the agreement to your business and state laws. Legal guidance is strongly advised.
  3. What happens if I don’t have a PLLC operating agreement?
    Your PLLC will be governed by state default rules, which may not reflect your preferred business practices or protect your interests.
  4. Can I make changes to a PLLC operating agreement later?
    Yes, most agreements include amendment procedures. Be sure to document any changes formally and have all members agree in writing.
  5. How is a PLLC different from a regular LLC in terms of the operating agreement?
    A PLLC operating agreement must often consider licensing and professional conduct rules, which are not required for standard LLCs.

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