What is an Operating Agreement Form for a PLLC?
Like other limited liability companies, a Professional Limited Liability Company (PLLC) is formed by filing Articles of Organization with the state. However, unlike a limited liability company (LLC) that is restricted from providing certain "professional" services, the members of a PLLC can provide those services. And, just like LLCs, a PLLC needs a written operating agreement. An operating agreement serves three primary purposes: First, the operating agreement governs the relationship between the PLLC members. A PLLC is very similar to a typical general partnership. In fact, unless the members have a PLLC operating agreement with terms which govern its operations, the default statutory provisions will potentially apply. A PLLC operating agreement essentially specifies the terms of the members’ agreement above and beyond what might be mandated by statute. Second, an operating agreement permits the PLLC members to organize themselves and their operations in accordance with their desires. These members may want to deviate from the basic structure provided by statute. A PLLC operating agreement permits them to do so. It allows the members to draft provisions according to their individual preferences. For example, suppose a PLLC has four members and two of them are licensed medical doctors. The PLLC operating agreement might authorize the two physicians to act on behalf of the PLLC without obtaining the written consent of the other two members. The two doctors might be more sensitive to medical malpractice issues than to non-legal liability and harm , and therefore they might reasonably want to structure the LLC to suit their specific concerns. (Please note that the physician’s license would permit him or her to engage in solo professional practice, but not in a joint medical practice with the other physician in a format potentially shielded by limited liability concerns). Third, a PLLC operating agreement may create a binding contract between the PLLC members with respect to their membership. This agreement is typically enforced as any other contract would be. In some cases, a member may be bound by contract, but not be able to enforce the contract due to professional obligations regarding joint and several liability or other legal doctrines beyond the members’ control. If a PLLC does not have an operating agreement, it may be appropriate to consider both (1) whether to create an agreement at all, and (2) what should be included in the agreement and when it should be created. For example, members may want to consider creating an operating agreement at the time of the PLLC’s inception, or at least upon hiring any employees (or independent contractors), if the PLLC will be bringing on a partner, or if the PLLC will be expanding to be a larger, multi-practice entity.
Contents of a PLLC Operating Agreement
Members’ roles: Members of a PLLC, also known as a professional limited liability company, may be corporations or individuals that wish to engage in the practice of a particular profession. A PLLC operating agreement usually defines the members and establishes their respective roles within the company.
Management structure: Generally, in a PLLC operating agreement, members possess the right to manage the business under its articles of organization. The document may designate an individual member, a class of members or non-member managers to oversee the PLLC’s daily operations.
Distributions of profits and losses: An operating agreement will typically provide for the distribution of profits and the allocation of losses among the members of the PLLC.
How to Create a PLLC Operating Agreement Form
The process of drafting a PLLC operating agreement form usually starts with a template. This is the first document that we provide to our clients. They can then modify it as they see fit. However, most of our clients will opt for one of our standard, preset agreements that match their circumstances.
Using Forms
Templates are easy to come by. You can find them all over the internet. However, some are much better than others. The American Bar Association has some good examples, as does the LegalZoom website.
All templates will give you a starting point. But you will always need to change them based on your specific situation. When preparing a template, you must be certain that the form is legally correct for your state. For North Carolina customers, see our PLLC Operating Agreement Form. If you need legal advice about whether and how a template fits your situation, please consult our attorneys.
Templates are good for situations that are straightforward and do not require a lot of changes. Templates will also save you money if all you need is the basic forms and no legal advice.
Consulting a Lawyer
If you need someone to draft an operating agreement that fits your specific requirements, we can help. We draft the forms in our office so that you know that it fits your needs. We will go through all of your requirements during a personal interview.
Although you may have LLC attorneys on staff, you may want to draft your agreements from scratch. That’s a good idea. For members, it will provide peace of mind that you have a good agreement that fits your own needs and those of your partners. For managers, you will know beforehand where the members are setting the boundaries.
If you use our template operating agreement, you may have some time leftover for us to add some custom clauses for your agreement. Although many of our clients don’t list special clauses, if the operating agreement will govern multiple affairs (like member loans) it’s a good idea to add a few custom agreements.
The most important requirement of any operating agreement is that you feel comfortable with it. If you think it’s too brief or it doesn’t contain anything you need, please let us know.
State-Specific Provisions for PLLC Operating Agreements
A PLLC is a "professional" limited liability company, essentially a variation of the LLC entity reserved for licensed professionals in states that have enacted PLLC laws. A PLLC shields from personal liability members, managers, and employees for virtually all but professional negligence (ômalpracticeö) (e.g., contracts, torts, employment law, etc.); they are taxed as pass-through entities; and their creation is less burdensome than an LLP. However, many state PLLC laws require an operating agreement. The text that follows sets forth examples of basic and state-specific requirements for such agreements.
An operating agreement is an agreement among members of a PLLC that governs the dealings among its members and management and concerns the relationship between the members and the LLC itself. There is no customary form of operating agreement. Each operating agreement should be tailored to each particular PLLC. A number of state laws address the specific content of PLLC operating agreements. Here are a few selected examples: In Georgia, § 14-11-203 provides that each domestic LLC operating agreement can "enumerate the events or causes of dissolution". It also allows members to agree that the operating agreement will not be amended "without the unanimous written consent of all members". In New Jersey, N.J.S.A. § 42:2B-40(c) provides: In addition to any other requirements, an operating agreement may contain a statement that the business shall be managed by a manager or managers. In that case: (1) The manager or managers shall have full and complete authority, power and discretion to manage the business of the limited liability company subject only to the right of the members to remove the manager or managers with or without cause and to organize the limited liability company; (2) The manager or managers shall designate and appoint such officers and other agents as they may deem advisable to the transaction of business, and in general shall have all powers conferred upon managers, officers, and agents of corporations by the laws of this State, except where the rights of third parties are affected, in which case these powers shall be limited as may be provided by the operating agreement. In Pennsylvania, 15 Pa. C.S.A. § 8834 provides that "the operating agreement may provide for any matter relating to the management, business or affairs of the limited liability company (including the power of approval of members, approval of managers or approval of members and managers, the allocation or apportionment and time of payment of dividends, membership interests or other rights, distributions, voting, liquidation and dissolution and the time, manner and place of member or manager meetings in accordance with section 8835 (relating to meetings)." In Tennessee, Tenn. Code Ann. § 48-249-111 contains extensive provisions to include or address in a PLLC operating agreement, including: 1. "The affairs of the limited liability company shall be managed by its members in the absence of a person or persons designated in the operating agreement to perform the management function." § 48-249-111(a)(1); 2. "One (1) or more members may be designated in the operating agreement or by the members to manage the limited liability company, and any manager so designated shall have full, complete and exclusive authority to manage the business and affairs of the limited liability company." § 48-249-111(b); and 3. "Any member shall have the power to assign to one (1) or more other members or managers the right to bind the limited liability company to third parties in accordance with the provisions of the operating agreement." § 48-249-111(c).
Advantages of a PLLC Operating Agreement
The language found in a PLLC operating agreement is important when establishing the relationships between the owners of the company. A well-drafted agreement can avoid future disputes.
The articles of organization for a PLLC often set forth in simple language, the purpose of the PLLC, the amount and class of each member’s membership interest in the company, the names of the members and any other information required pursuant to state law. However, the articles of organization usually do not set forth how the PLLC will be run. The PLLC operating agreement does that. There are a number of reasons why it is recommended that all members of a PLLC enter into a written PLLC operating agreement. First, having a written document demonstrates that the owners of the PLLC have been diligent in their planning and development of the business. This may be important if there is any dispute between any members or the PLLC and a member or even if a member chooses to withdraw from the company.
Second, having an operating agreement reduces the likelihood of future misunderstandings between the members of the PLLC. It reduces the likelihood that one member will feel he or she has been treated unfairly or differently from other members of the PLLC.
Third , having a written operating agreement also demonstrates to the courts, or the Internal Revenue Service that the PLLC truly intends to operate as a separate legal entity. This is particularly important if the PLLC is not able to pay its debts when they become due. In this circumstance, the court will generally look to see if the members of the PLLC properly documented their activities and activities of the PLLC. If the members did not maintain proper documentation, a creditor of the PLLC may be able to pierce the corporate veil and go after the personal assets of the various members of the PLLC which could seriously impact the members’ financial well being and the continued existence of the PLLC.
Finally, the rights of the members and their expectations as owners of the PLLC should be properly documented before entering into the business relationship. A well-drafted operating agreement will, hopefully, meet the expectations of each of the members and their expectations. Disputes frequently arise after one partner feels he or she was not properly included in a business decision. The operating agreement is a useful tool to clearly and legally set forth the various owners of a PLLC and their rights and responsibilities.
Common Errors to Avoid with a PLLC Operating Agreement
The most frequent error we come across in PLLC agreements is the failure of members to clearly define the management structure of the company. This frequently occurs because the parties assume that Delaware business corporate law applies. Not so, as Delaware law does not apply to PLLCs. The manager is an important role and the parties are responsible for agreeing on how the company will be managed.
Another common mistake is failing to specifically identify a "business reason" for forming the PLLC in the first place. We recommend that our clients clearly state their purpose for creating the PLLC which provides a record should a future member or manager ask. This protection may be critical if the IRS brings an action against the PLLC for non-compliance with Internal Revenue Code 7701(a)(3). This section addresses types of organizations that are entitled to be classified as a corporation, association or business trust where the "organizational document of the organization provides otherwise . . ." This means that even though the PLLC is formed as a corporation under state law, for tax purposes it can be classified as a general partnership, limited partnership, or a disregarded entity (single-member LLC).
In summary, when creating a PLLC agreement, it’s important to:
FAQ on PLLC Operating Agreement Forms
Most (if not all) of your questions about PLLC operating agreement forms and PLLC forms will likely be answered here:
Do I even need an operating agreement?
Generally, yes. If you’re operating in a state that requires PLLCs to have operating agreements, you’ll definitely need one. But even if your state doesn’t have that requirement, it still pays to have a solid operating agreement because it makes potential conflict among members less likely.
If I’m the sole member of my New Jersey PLLC, do I even need an operating agreement?
Yes, we generally recommend that you have an operating agreement even if you’re the only member in a PLLC .
Where do I find a PLLC operating agreement form to fill out?
You can find PLLC operating agreement forms online, but we don’t recommend these pre-filled forms because each member’s goals and needs are different. Generic PLLC forms just do not account for the nuances of your organization and its members.
Can I change my PLLC operating agreement later on if I need to?
Yes, a PLLC operating agreement can be amended just like any other contract.
Are there any situations where a PLLC operating agreement isn’t necessary?
If your PLLC is a single-member LLC, then you will not need an operating agreement because there won’t be any governing to do. However, if you plan on one day switching to a multi-member LLC, or if you simply want to protect your interests now, it’s best to get one up and running as soon as possible.