Limited liability companies in Pennsylvania are organized by filing with the department of state. But the most important document that an LLC’s owners sign is the operating agreement. The operating agreement serves the same function that bylaws serve for a corporation. They are the constitution that governs the organization’s operations. The operating agreement is generally not filed with the department of state, nor with any other government agency. They are an entirely private document between the owners (called members in an LLC).

Operating Agreements are agreements between the LLC’s owners

The operating agreement is an agreement between the members and the organization itself as to how the LLC will be run. It lays out the ownership interest of the parties and provides for dispute resolution. Below are a few things that every LLC operating agreement should consider including:

1. Ownership interest of the members.

The operating agreement is usually the first document to actually name who the owners of an LLC are. Indeed, it is often the only document to name the owners. The operating agreement should identify who the owners are and what their percentage interest is.

There’s a difference between beneficial and legal ownership in LLCs. Someone may have a non-voting interest in the LLC, meaning that they’re entitled to some of the profits of the entity without having any power to determine how the organization is run. Conversely, someone may have a high voting percentage but not necessarily a high ownership interest.

Most LLCs tend to keep it simple, however. If you have four owners, they each have 25%, or if you have two owners, they’re 50/50. But in the case of an even number of owners, what happens if there’s a tie? If the owners for whatever reason are unable to agree on how to run the organization on a very important issue, how do you break the deadlock?

2. Dispute resolution provisions.

For this reason, a good operating agreement should include dispute resolution provisions. These provide that if the members are tied in an important vote, an outside party can be chosen as an arbiter. Sometimes this arbiter is named, but more often, a guide to how the arbiter should be chosen is laid out in case of such deadlock. In extreme cases, operating agreements that we’ve seen at our firm have dictated a coin flip to make a final determination. We certainly don’t recommend that! But even a coin flip is better than nothing in laying out ahead of time how conflict resolution will occur between the members.

Furthermore, having a plan in place sometimes helps everyone avoid such conflict. Knowing that an important vote might be left to a coin flip or an outside arbiter encourages the members to work harder to resolve things before invoking such provisions.

3. Oppressed minority owner provisions.

In cases where there is a majority owner and minority owner, or even where there are a handful of owners, sometimes you want to write in provisions of what happens if one person or more feel like their interests are no longer represented by the whole. As a simple example, if you have six owners and two of them feel that the other four owners are “forcing them out” of major decisions, what rights do these two have?

When LLCs form, the members are usually getting along. But divorces, inter-personal fights, business or artistic disagreements and more can get in the way. If the majority is outvoting the same minority repeatedly, the minority can begin to feel as though their ownership interest is no longer valuable.

Although Pennsylvania law provides a number of avenues for minority owners to address this, its best if you spell out provisions in your operating agreement to govern these situations. Doing so also avoids fights in many cases by giving everyone ways to avoid conflict before it starts, and by spelling out how everyone loses if anyone is being pushed out.

4. Indemnification of officers and members.

Another thing to consider in your operating agreement is having a clear statement about indemnifying officers or members for their work in the company. In the event that an individual is sued for their work with a company, the question often becomes whether the company should have to pay their legal bills. Making sure that your owner members aren’t left to fend for themselves if sued is an important step to maintaining the long-term commitment of all investors to the company.

5. Buyout provisions.

Perhaps the most important part of an operating agreement is a statement about how a member’s interest is bought out once they’ve decided to sell. This happens both when a member sells voluntarily and involuntarily due to bankruptcy or other proceedings. Will the membership interest be appraised? Must it be sold first to other members or to the company? Or can they sell to an outside investor? These and other important questions should be resolved up front before the problem arises. Doing so can avoid costly litigation and unintended consequences of having an unexpected member buy in from the outside without warning.

Conclusion: Speak to a business lawyer about your LLC operating agreement

If you’re forming an LLC in the commonwealth of Pennsylvania, there are advantages to hiring an experienced business lawyer to help you. At Cornerstone Law Firm, our attorneys help draft operating agreements that foresee the types of problems that you may run into even with a single business partner with whom you’re on good terms. A good operating agreement is not a tool to start fights with; rather it can help to prevent conflict down the road.

Call us today to discuss how we can help you in your business.

When you are on the board of a nonprofit organization, you are handed the important trust of ensuring that your organization is complying with all legal obligations and is adhering to financial best practices in how it handles donor money. In addition to having a good accountant to help you figure out the best way to handle funds, it is important that you keep up with legal requirements for your nonprofit. Here are a few important steps every nonprofit should take to ensure long-term stability and legal compliance.

1. Draft a Constitution and Bylaws

Most people are vaguely aware of the requirement that nonprofits have bylaws that govern their existence. Once a nonprofit is properly formed, it is important to have an operating agreement that governs the rights and responsibilities that directors, officers, employees, and even sometimes the general public have in regard to the nonprofit. This includes answers to the following questions:

How many members are on your board?

How many committees will the board have?

Will you require more than one signature on checks before expenditures of a certain amount are made?

Does your organization hold to a specific statement of faith or political creed (and what hiring and other decisions will this affect)?

In your bylaws, these questions should be answered. They do not have to be lengthy and shouldn’t be hard to understand. Your bylaws should be setup like an owner’s manual—but one that you’ll actually consult! Good bylaws are empowering, allowing everyone to know their obligations and responsibilities, and foreseeing how to resolve difficult conflicts that inevitably arise in even the best-run nonprofits. Best of all, a good set of constitution and bylaws relieve everyone of the nagging fear that they’re not doing something right.

A common question we hear is what the difference is between a constitution and bylaws. As you can see above, we’ve used the term interchangeably. There once was a difference, but today, one document, called the “bylaws,” is more than enough to get your organization set and running on the right path.

2. Draft Resolutions and Keep Meeting Minutes

Once your bylaws are in place, it is important to produce “meeting minutes” at all of your meetings. These minutes can be the notes that your secretary takes, but ideally are typed up in a standardized format, reflecting the general flow of discussion of the board, and approved at the following meeting after everyone has had a chance to see them.

So what’s the point of meeting minutes? Meeting minutes act as the history of your organization showing what actions were authorized or rejected at various meetings. At first, it can be tempting to rely on one individual’s memory or on the board’s collective memory for these actions. However, in the case of legal action against the board by a donor or government agency, or even by a disgruntled board member, having meeting minutes can strongly support the validity and propriety of actions that the board has taken on behalf of the nonprofit.

Furthermore, organizations which keep track of minutes and are consistent with them provide helpful information for new board members and new officers of the organization to look back on and understand the trajectory of your organization. Meeting minutes are one of the first things to be sacrificed by nonprofits who have just formed. Often, officers and directors feel that they are a lot of work to keep up with. But meeting minutes are a vital form of guaranteeing that your nonprofit is operating according to law and protecting it from threats within and without.

What is the difference between minutes and resolutions? In general, minutes are for meetings that were held, while resolutions are actions the board takes by vote without a formal meeting being called. They are number of situations where this is necessary and many more situations where it is merely the most convenient. Sometimes the organization authorizes bonuses annually, or an emergency comes up in everyone’s absence. A resolution can be signed by everyone authorizing action and confirming that the board is in agreement with a specific proposal.

There’s no reason that meeting minutes are required over resolutions or resolutions over minutes. Both serve the same essential function in different ways.

3. Ensure no excess benefit

For smaller nonprofit organizations, this piece is easy, but as you grow, it presents new challenges. You must avoid excess benefit to any individual or group of individuals arising out of a nonprofit’s property. A few examples of this are when your organization enters into a transaction with a private party or group to give them a piece of real estate at less than full value. Any property exchanged that is not in an “arms-length transaction” can fall under suspicion and can put the nonprofit corporation at risk. Another common example is when an executive director and his family are all driving vehicles owned by the corporation, making money off of their private company’s services to the nonprofit, and bringing in large paychecks from the nonprofit for their labors. While any or all of these can be legal, they must be done in a way that does not transgress the IRS’s rules on excess benefit.

This is a complicated area of law, and sometimes the best you can do is manage the risks. But working with an experienced nonprofit attorney is an important step in ensuring that your nonprofit doesn’t lose tax exempt status or otherwise expose itself to lawsuits or other challenges.

Conclusion: Contact a Nonprofit Lawyer today

At Cornerstone Law Firm, our attorneys help nonprofit boards and leaders to manage their legal responsibilities and ensure compliance with best practices. If your organization could use a helping hand, call us for a consultation on your next steps.