Practice Area: Business Law

An operating agreement is essential if you're forming a limited liability corporation (LLC). An LLC operating agreement, also referred to as an LLC agreement, establishes the business' financial and managerial duties, including rules, regulations, and provisions. In short, it governs the internal operations of the company.

As an LLC, the operating agreement addresses various issues typically governed by the law that enables LLCs in the jurisdiction of formation. In addition, these laws include provisions that protect members from personal liability for the business's debts.

Only California, Delaware, Maine, Missouri, and New York require an LLC agreement. Even though Pennsylvania has no requirements, if you're forming an LLC in the Commonwealth, it remains a worthwhile consideration during business formation.

It's best to talk with a business lawyer near you to ensure you create a sound operating agreement.

Basic Provisions of an LLC Agreement

At the very least, an LLC agreement should cover some essential elements:

1. The name of the LLC, including the address.
2. A statement of intent indicating the agreement is by state laws.
3. The business purpose, including its nature.
4. The term generally shows that the business will continue until terminated or dissolved.
5. Treatment of taxes
6. How new members acquire a business interest

Other Items Covered by an LLC Operating Agreement

An LLC operating agreement is generally brief, ranging from five to 25 pages. But it presses owners and members to agree on financial and operational arrangements.

The main goal of the operating agreement is to name members of the LLC and their percentage of ownership. Apart from that, most LLC operating agreements cover six critical sections:

1. Ownership: Who owns the business, and what is their percentage of ownership?
2. Management and voting: Does each member have a single vote, or is voting based on the percentage of ownership?
3. Capital contributions of members: Is ownership based on the capital contributions of the members?
4. Membership: What happens if a member elects to leave the LLC?
5. Distributions: How will the organization share profits and losses? For example, if a member owns 25% of the business, will they receive 25% of the profits and losses?
6. Dissolution: What happens if your business dissolves? Who is responsible for liabilities, and how will assets get dispersed?

Although these areas represent primary considerations, your agreement can cover additional areas such as business decision-making, selling interests, right of refusal, dispute resolution, meetings and meeting protocols, and more. Many also consider forming an LLC for an investment property portfolio. 

Why is an Operating Agreement Important?

At the very least, an LLC agreement provides proof of ownership for banks and investors.

More importantly, they help prevent future conflicts and disagreements about significant business decisions because the contract covers terms around most major functions and opportunities.

That's critical. For example, even if you feel you've already come to verbal agreements with co-owning members, misunderstanding may arise as years pass or complications occur. By having terms outlined upfront, you eliminate future conflict.

An LLC operating agreement also protects your company's status as a limited liability structure. Otherwise, your LLC might resemble a sole proprietorship or partnership. And that opens the door to personal liabilities for members.

Overriding State Rules for LLC Operation

Moreover, your state's default rules for how an LLC operates apply without an operating agreement. For example, every state has laws on LCC management, admitting new members, dissolution, and other aspects of governance.

Unfortunately, those rules focus on applying the least common denominator, leading to unwanted results. For instance, your state may, upon your death, default your business to a spouse or child.

However, if you want someone else to assume responsibility for your company following your death, your operating agreement needs to state that. You can override Pennsylvania's default rules by having an LLC operating agreement.

Do I Need a Business Lawyer to Draft the Agreement?

Thanks to the internet, free templates are available to draft an LLC operating agreement. Indeed, here's a resource for creating a PA operating agreement. But remember that the LLC agreement governs your company and its members, so it requires careful consideration.

At the very least, if you want to draft your agreement, take the time to run it by a business lawyer for potential issues. Or better still, have an experienced business lawyer draft a contract for your review. And make sure that the lawyer is familiar with Pennsylvania law.

Need Some Help Drafting an Agreement?

Ultimately, you should construct an LLC agreement to the needs of each unique business. Agreements should comply with the laws of the state where the company operates.

If you're forming an LLC or are already operating a company and need help drafting an LLC operating agreement, get in touch with our local law offices in Bucks County, PA, Montgomery County, PA, and Camden County, NJ.

Our business lawyers can support you with business formation and operating agreement creation. Our law firm can also help you with various other legal concerns, including workers' compensation, employment law, and real estate.

U.S. News recognizes High Swartz on the"Best Law Firm" List and cites 14 of our attorneys on the "Best Lawyers List."

For more information, contact Joel D. Rosen at (610) 275-0700. Visit his attorney profile here.

The information above is general: we recommend you consult an attorney regarding your circumstances. This information does not represent legal advice or a substitute for legal representation.

Many business owners had insurance policies that included “business interruption” coverage. If the pandemic isn’t business interruption, what is?

As the global pandemic caused by COVID-19 swept into the United States and stay at home orders and mandatory business closures rolled out of governors’ offices like water over Niagara Falls, business owners, small, medium and large, sought out help from any source possible. Unfortunately, “business interruption” insurance policies have many exclusions and what a layperson would assume would be included is actually excluded from coverage.

Business Interruption in many cases is being linked to one thing

It seems as though the insurance industry linked arms and denied all claims for business interruption caused by the pandemic. Business interruption coverage is usually found in property coverage; meaning there must be property damage that causes the business interruption. The insurance carriers have taken the position that government shut down due to a virus is not covered.

What if a virus is not excluded in my policy? Is my business covered then?

Some policies do have specific exclusions for viruses and mold, among other things. But that raises the question, if a virus rises to the level of being specifically excluded in some policies, what if it is not excluded in my policy? Wouldn’t my losses be covered then? It depends on the type of policy and the language in the policy.

Courts in some jurisdictions have found that business interruption coverage is triggered where “property” is rendered unusable or unfit for its intended purpose, including being contaminated, even where there is no physical property damage.

Don’t throw away those receipts just yet

The approach taken by the insurance industry has given rise to numerous lawsuits seeking coverage under common business interruption clauses under several different theories. More than a dozen cases have already been filed seeking to have state and federal courts in various jurisdictions determine that losses due from closure as a result of the virus actually are included in these property damage policies. Some cases rely on the theory that the property is contaminated as a result of the virus. Some argue that under an “all-risk” policy closures due to orders of civil authorities are covered by the policy’s broad language.

States vs. Insurance Carriers

Not waiting for a decision in these pending cases, Travelers Insurance has filed a declaratory judgment action seeking an order that losses from temporary closures due to governmental actions taken to slow the spread of the pandemic did not result in property damage and was not covered by the Business Income loss provisions of its policy.

And numerous states, including Pennsylvania, have pending legislation to retroactively require insurance carriers to honor these claims (especially for small business owners) with compensation to the carriers coming from other funds.

This is still an ongoing fight, with points of law from prior litigation supporting both sides of the argument. How various courts decide the issue may determine whether business owners have valid claims under the terms of their own policies. It may still come down to the language in a specific type of policy and what exclusions are spelled out. But the approach initially taken of turning down all claims may not hold up. The courts may “deny” the carriers’ claims; an irony not lost on many.

As this is still an evolving issue, you may want stay in touch with your broker or counsel if you have business interruption insurance and you have losses due to state mandated closures. If you have questions regarding your coverage and whether or not you are covered, please contact Joel D. Rosen or one of the business attorneys here at High Swartz at 610.275.0700.

Feeling sick about your business during these uncertain times? Doylestown Attorney Donald Petrille offers a to-do list for small business owners that can help position themselves for what lies ahead.

The COVID-19 virus biggest casualty so far has been our small business community. Washington is working on a number of measures to give our small businesses some form of relief while business are in a forced shutdown in the name of public health. The Families First Coronavirus Response Act was initiated to help many businesses address their needs. Employment law attorney Jim Shrimp talks about it in more detail here. And if you feel the need to speak with a small business lawyer near you in Montgomery and Bucks Counties, we’re always available.

What can small businesses do right now to mitigate their issues?

We understand that small business often work on very thin margins, and they require a dynamic community to thrive. Entrepreneurs and business owners need to take action where they can. Below are several items our clients can do to mitigate the effects of the current economic environment on their businesses:

Contact you lender. Most lenders are working to create relief programs to keep their borrowers in business. Communication is always the best option when you face uncertainty.

Contact your insurance agent. Many of our clients have some form of business interruption insurance. This may be a time when it is effective. Some may even have force majeure clauses. These clauses can protect business owners from various events out of their control like a pandemic or tornado. Attorney Thomas Rees goes into fuller detail here.

Review your marketing plan. The current operating restrictions will not be in place forever. How can you position your business to grow and take advantage of pent-up demand once restrictions start to ease? Keeping your employees, clients, and customers informed should be your main priority. Take a look at your marketing expenses. A good rule of thumb is that if a marketing endeavor can’t be analyzed and reported, you never know if it’s worth your time and money. What parts of your marketing plan fall under that category?

Review your IT infrastructure. This may be an opportunity to review how you business receives and delivers services. There may be an opportunity to reduce overhead in the long term by changing your business model now.

Explore Relief Funds. The Commonwealth Financing Authority and Pennsylvania Industrial Development Authority has identified new relief programs for small businesses.

Plan for the long term. See what operations and financial products you can restructure. Review and improve your staff capabilities. No one can predict what business will be like after this event. But it’s certain that this event will end and people will need certain services more than others. Successful business plans will address those needs.

Stay Informed. Go to sites such as SBA.gov and your state and federal legislators’ websites to get up to date information on the resources available to help your business through this uncertain time.

Talk to a Small Business Lawyer Near You Today

We know the future is uncertain. Together, we can get through this unique time and help each other prosper! If you are in need of legal services relating to what your small business game plan should be at this time, contact our law offices in Doylestown and Norristown. Call 610-275-0700 or email Don Petrille at dpetrille@highswartz.com.

Anyone who starts or relocates a business goes through exciting and challenging times.  It is understandable that the business owner’s primary focus  is getting established and meeting customer needs.  It stands to reason that a business plan will include big picture items such as marketing strategy and customer satisfaction, which in turn may lead to profits and success.

But there are many other issues to consider, some of which even experienced business owners overlook.  An important part of the original due diligence process and planning period should be attention to the local rules and regulations.  If proper attention is not given to local regulations, the business can have difficulty down the road.  That is why it is important for any person contemplating a change in business location or starting a business to consult not only an experienced financial professional but an experienced municipal attorney.

Three important areas of local regulations are taxation, zoning and land use.  This blog will deal with tax issues.  Zoning and land use issues arise earlier in the process, when a business buys or leases land.  Local ordinances may include additional protections beyond federal or state law (e.g., LGBT), but the pattern of regulation is similar to the federal or state regulations.

But taxation can be a trap for the unwary.  When choosing a business location, business organizers often consult with accountants and financial planners who are familiar with federal and state taxes.  These businesses assume that their consultants are familiar with local tax laws.  But this may not be a correct assumption.  The business owner needs to ask whether there are local taxes or registration requirements to be concerned about.  The answer may be yes and should be answered as soon as possible and before the doors open for business.

Pennsylvania is unique in that it consists of 67 individual counties and 2,500 municipalities – cities, townships and boroughs, each with their own ordinances and regulations.  Allegheny County, containing Pittsburgh, has 130 municipalities!  The four suburban Philadelphia counties contain 238 municipalities, ranging from Chester County’s 73 down to Delaware County’s 49.

Of the Commonwealth’s 2,500 plus municipalities and over 500 school districts, 90% impose Earned Income Tax and 80% impose a Local Services Tax (formerly Occupational Privilege Tax or Municipal and Emergency Services Tax).  These taxes are paid by employees but must be collected and remitted by the employer or the employer may be responsible for penalty, interest and perhaps fines.  The passage of Act 32 of 2008 providing for Central Tax Collection Committees on the County level made the payment, collection and disbursement of Earned Income Tax easier for all parties.  But even this statute requires employers  to collect the taxes from employees and quarterly remit the taxes to the correct county, failure to do so will result in interest and possibly penalty imposed on the employer.

It is at least as important that each business know the registration and tax requirements of any municipality in which it does business.   Failure to register a business when required and remit Business Privilege and Mercantile License Tax (business taxes) can result in penalty and interest assessments by the municipality.  These taxes are often overlooked when starting a new business or moving an existing business because less than 10% of all municipalities in Pennsylvania impose Business Taxes.  The taxes are self reporting, and the responsibility for filing and reporting falls on each business.  It is imperative when moving or starting a business, especially in southeastern Pennsylvania, to consult with an experienced municipal attorney who can guide you through the process of making sure you are properly registered and ready to pay any taxes the way they should be paid to avoid any unnecessary penalty and interest.  This will help you keep your focus on the reason you are in business to begin with – your success and the satisfaction of your customers.

At High Swartz, our business and corporate law attorneys provide businesses of all types and sizes with efficient and precise commercial law solutions. For more information or if you have any questions, please contact Kathleen M. Thomas at 215-345-8888 or kthomas@highswartz.com.

The information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.