The Basics of a Pennsylvania Limited Liability Company
A limited liability company formed in Pennsylvania (“LLC”) is an entity which, once properly formed and registered with the Pennsylvania Department of State, Corporation Bureau, is then controlled by its owners (called “Members”). Sometimes Members appoint a designated person or other entity to control the day to day operation of the LLC. This person or entity is then classified as the “Manager.” A Manager can be a Member but that is not necessary. If there is no Manager, then the Members control the business operations of the LLC directly.
Creating a written agreement between the Members at the time the LLC is formed is important. It should state how the Members will make decisions affecting all aspects of the LLC. A key issue to cover in the agreement is whether a simple majority or greater majority vote is required between two or more Members in order to make a binding decision on behalf of the LLC. This agreement, when placed in writing, is called an Operating Agreement. It should also govern other issues including how to value a Member’s interest in the LLC and each Member’s right to sell his individual membership interest.
Members in an LLC enjoy substantial, but not complete, immunity from personal liability for the activities of the LLC. Personal liability can still attach to individual Members under certain circumstances which would include, but not necessarily be limited to:
- Failing to operate the LLC as an entity separate from its Members’ personal financial affairs. Examples of this would include commingling personal and LLC funds in bank accounts and other type of accounts;
- Lack of adequate record keeping to distinguish personal activities from business activities of the LLC;
- Using LLC funds to pay for personal expenses or vice versa;
- Failing to require all legal documents for necessary LLC operations to be in the name of the LLC and failure of the Members to not properly sign such documents in their capacity as “Member of XYZ, LLC”;
- Direct action by a Member of an LLC which actually caused loss or injury to a third party may cause the individual to be individually or jointly liable with the LLC and may certainly result in the individual being sued, whether or not liability is established.
The initial and ongoing expenses of creating and operating an LLC would include:
- The state filing fees and legal fees to form and register the LLC;
- The legal fees for preparing a written Operating Agreement between the Members;
- Cost of preparation of a separate tax return for Pa. taxes and either a separate return or schedule for federal taxes.
Forming any business entity should involve considerable analysis. An LLC is only one type available. Others include a corporation, general partnership and limited partnership. Each offers advantages and disadvantages. Invest in some competent legal advice before creating a business entity. You may even find out that you do not need one.