Mastering the Basics of PLLC Operating Agreements
A Professional Limited Liability Company (PLLC) operating agreement is a company internal document that serves as the equivalent of an LLC operating agreement for a regular business. Just as with an LLC, the PLLC agreement sets the terms and conditions under which the company will conduct its business. It also provides a framework to divide the financial profits and legal responsibilities among PLLC members. However, unlike the LLC, PLLC operating agreements must include certain legally required provisions imposed by companies and professional regulations and statutes.
For example, under some states’ PLLC statutes a PLLC is only allowed to provide limited services in which the members are licensed. In such states the PLLC operating agreement’s recitals will typically begin by stating the primary purpose of the PLLC. Dozens of states now require a PLLC to also have one or more members who now hold or have previously held a valid license to practice the company’s field of business within the state .
Professional LLCs will often be required to include specific legal disclaimers regarding any deaths or malfeasance that are "not the fault" of the PLLC or its members. But even if not required by state statute, such disclaimers can be useful in lawsuits brought against a PLLC.
If a member is found liable in a professional malpractice lawsuit, he or she may not be personally responsible for any amounts above what the LLC assets can cover; this is the rule of limited liability. However, over the years courts in some states have, on occasion, pierced the liability shield between the PLLC and the individual due to instances of involvement in a fraudulent or deceitful act. Therefore, an additional provision of a PLLC operating agreement is an indemnity clause between the members and the PLLC that will provide coverage if a court does pierce the liability shield.
Why You Need an Operating Agreement Template
Using an operating agreement template brings plenty of advantages over writing something from scratch. First, it can be one of the biggest time-savers for attorneys and clients, as its basic structure is already laid out. Most of the necessary sections are already accounted for, allowing the drafter to focus on details that distinguish this particular LLC from other types, including additional details that wouldn’t apply to other PLLCs. Second, using a template is also cost-effective for both client and practitioner. PLLC operating agreements require many of the same basic provisions as any other LLC operating agreement. A template allows someone to draft a new document quickly, preventing extra costs on a per-document basis. Third, an operating agreement template ensures that the drafter isn’t forgetting anything crucial or perhaps leaving out basic provisions. If sections aren’t present in a PLLC operating agreement, there’s a chance that they’re missing from essentially every PLLC operating agreement out there. A template can help eliminate this problem by making sure the drafter covers everything necessary.
PLLC Operating Agreement Essentials
A PLLC operating agreement should contain, at a minimum, the following essential components: membership rules, management structure, profit distribution, and dispute resolution.
Membership rules outline the requirements for participation in the PLLC. This can include qualifications, licensure, capitalization, and so forth.
Management structure takes a hard look at how the PLLC will be governed, by whom, and how decisions are made. For example, does the PLLC membership consist solely of equity holders, or does it also include non-equity members or directors, such as in the case of professional organizations that require regular elections, boards of directors, and so on?
Along with management structure is the compensation structure for the members. Are members to be compensated for their services? If so, what may that compensation be? The amount? When is it due? Are there different classes of equity owners having different compensation arrangements, such as in the case of a doctor who owns a one percent interest and receives a paycheck that is separate from the rest of the ownership?
Dispute resolution is a key concept within the operating agreement as members are entering a business that has a finite existence and finite financial resources. Is the members’ only recourse a dissolution of the PLLC, or some other process? That will be determined by the agreement within the operating agreement.
There may be other concepts in addition to the essential components outlined above, but these are the key components that should be present in every PLLC operating agreement.
Customizing Your PLLC Template
Many businesses in the process of setting up an LLC may jump straight into using a template without fully considering customization options. However, the specific situation of the business in question may dictate not only which recommendations are required, but also how to write them.
For example, while all businesses should have written buy-sell agreements that anticipate triggers for the buyout of competing members — that’s simply a part of good business practice — the specific provisions that are included can vary quite a bit between businesses.
That said, there is a range of sections in which specific customization is generally both possible and advisable:
Business termination: Often, an unforeseen event will occur that causes a business to terminate. Partners may want to leave, the market may change, or the company may simply have run its course. Even with a formal dissolution of a PLLC, however, different partners may be entitled to varying amounts of the residual assets of the company, and those payouts shouldn’t occur when there are still debts in the business. Sections should be written that cover closure payment, closure notification and closure timeline , as well as a general explanation of the events that would cause the PLLC to be dissolved.
Conflict resolution: While many PLLC operating agreement templates include language that covers how to resolve conflicts, these tend to be general. As the dynamics of the company shift or different business partnerships are formed, conflicts can develop in ways that don’t always fit with the common language of a PLLC operating agreement. Writing a customized section gives the opportunity to create more specific guidelines.
Liability protection: All PLLC Operating Agreement Templates will contain sections that discuss liability protection for members. However, if a member of a PLLC offers personal guarantees on a loan, their individual assets could be at risk should the business default. A general section may protect members against business debts, but wouldn’t offer this member any additional layer of protection.
Any PLLC operating agreement customizations can require legal assistance. A lawyer will be able to flag any areas where a legal term could be problematic. But it’s crucial to consider how a PLLC operating agreement can be customized to best support the individual needs of the business.
Top Pitfalls to Avoid in PLLC Operating Agreements
When drafting or customizing an operating agreement for a PLLC, also called an "LLC agreement", there are some common mistakes that often occur. First off, don’t confuse this document with a corporate bylaws agreement – there are some very important differences between the two that should not be overlooked. Additionally, while most of the terms in a PLLC operating agreement will not be subject to state specific requirements (as in the case of a corporation bylaws agreement), there are some important provisions that must be included in these agreements to adhere with the law. Therefore, it is highly advised that you work with your PLLC’s founding members on the specifics of this document, and any changes that might be necessary from a legal standpoint. If you find a sample agreement online for an LLC firm, make sure it is for a PLLC, else the document may be considered invalid. A common mistake of PLLC operating agreements is the omission of a monetary start up capital contribution by each member. Many new business owners are under the impression that they do not need to make an initial member capital contribution, which is false. Should one of the founding members try to extract their "free" capital contribution without having a written agreement stating otherwise, the other partners would be able to stop this from happening via a court order. Another common mistake occurs when an equal LLC ownership is not specified in the members agreement. When a PLLC is created, at least one member will hold a controlling ownership of the firm, which results in a disproportionate voting right system. Therefore, it is crucial that you address the voting right system of the PLLC in detail in the operating agreement, and outline the decision making process of the firm. Finally, it is common for business owners to forego the approval of a business litigation attorney for the PLLC operating agreement. Making any changes to the articles of organization or LLC members agreement without the approval of a lawyer can put your company at a significant disadvantage. It is very important to establish a sound partnership agreement from the start, so that litigation does not result down the line.
Dispute Avoidance with Your Operating Agreement
Even the simplest PLLC operating agreement must comply with specific state laws and regulations. It’s well worth the time and expense to make sure that your agreement covers every detail required by the state in which your business is registered, incorporates any additional protections and operating procedures necessary for your specific type of practice or firm size, and doesn’t include any elements that are not permitted in your state . Otherwise, your agreement might be null and void from the start or worse could create a vulnerability that would make it difficult or expensive to defend yourself in the event of a dispute.
As you draft your PLLC operating agreement, it’s critical to get legal input from someone with knowledge of and experience in your state’s laws regarding PLLCs, as well as the special and unique requirements that apply to your particular type of practice. Failing to observe these factors can have serious consequences, and making adjustments to a faulty agreement later could be very difficult.