[PA] How can I make sure my Pennsylvania multi-member LLC operating agreement is valid?
The multi-member LLC template I am using asks for ownership percentage. Rather than define a percentage, I would like each of the 3 members to have 10,000 class A shares (voting and economic rights) and class B shares (economic rights) granted at $1 per share for every dollar of capital contributed by each member at the time of formation and afterwards.
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- Duplicate “Capital Contributions” Articles (§ 11 and § 18):
You have two separate “Capital Contributions” articles and two profit-allocation formulas (§ 9 and § 23). Conflicting language invites litigation and can render both sections unenforceable.- Suggestion: Merge capital-contribution rules into a single article defining class A (vote + economics) and class B (economics-only) shares and the dilution formula.
- Over-Broad Duty Waiver (§ 16):
The clause says members “waive any fiduciary duties.” Pennsylvania’s LLC statute lets you limit but not fully eliminate the duty of loyalty or the obligation of good faith (15 PA Cons Stat § 8849.1(b)). Leaving the text as-is risks a court striking the entire provision. - One Member One Vote (Section 4):
Every member gets an equal vote even if future investors own only a small slice. This can let a 5% owner veto big decisions.- Suggestion: Tie votes to class A units.
- Non-Compete (Sections 10 and 25):
A one-year, nationwide ban on “similar business” is unlikely to survive Hess scrutiny. Courts insist on reasonableness in geography and scope and on separate consideration.- Suggestion: Limit it to a certain number of miles (such as 100 miles from a certain location), or if you are statewide, then limit it to within the state.
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The multi-member LLC template I am using asks for ownership percentage. Rather than define a percentage, I would like each of the 3 members to have 10,000 class A shares (voting and economic rights) and class B shares (economic rights) granted at $1 per share for every dollar of capital contributed by each member at the time of formation and afterwards.
Lexi, Chatbot
I understand your situation. How would you like the ownership structure to be reflected in the LLC template?
I just explained how I would like it reflected.
Lexi, Chatbot
Have you already discussed this proposed ownership structure with the other members of the LLC?
Yes.
Lexi, Chatbot
Is there anything else the Lawyer should know before I connect you? Rest assured they’ll be able to help with your ownership structure.
Nothing else at this time.
Carter DJ, Esq.
Hello, welcome to AskaLawyer. My name is DJ. I've been a lawyer for over 20 years.
Carter DJ, Esq.
In reading your posts, are you just stating how you want to do it and confirming that is proper?
File attached (13T1G4S)
The multi member LLC template I am using asks for ownership percentage. Rather than define a percentage, I would like each of the 3 members to have 10,000 class A shares (voting and economic rights) and class B shares (economic rights) granted at $1 per share for every dollar of capital contributed by each member at the time formation and afterwards.
See section 2 and section 11.
Carter DJ, Esq.
Got it. I would like to make some suggestions, if that’s ok.
I’m open to suggestions.
Carter DJ, Esq.
- Duplicate “Capital Contributions” Articles (§ 11 and § 18):
You have two separate “Capital Contributions” articles and two profit-allocation formulas (§ 9 and § 23). Conflicting language invites litigation and can render both sections unenforceable.- Suggestion: Merge capital-contribution rules into a single article defining class A (vote + economics) and class B (economics-only) shares and the dilution formula.
- Over-Broad Duty Waiver (§ 16):
The clause says members “waive any fiduciary duties.” Pennsylvania’s LLC statute lets you limit but not fully eliminate the duty of loyalty or the obligation of good faith (15 PA Cons Stat § 8849.1(b)). Leaving the text as-is risks a court striking the entire provision. - One Member One Vote (Section 4):
Every member gets an equal vote even if future investors own only a small slice. This can let a 5% owner veto big decisions.- Suggestion: Tie votes to class A units.
- Non-Compete (Sections 10 and 25):
A one-year, nationwide ban on “similar business” is unlikely to survive Hess scrutiny. Courts insist on reasonableness in geography and scope and on separate consideration.- Suggestion: Limit it to a certain number of miles (such as 100 miles from a certain location), or if you are statewide, then limit it to within the state.
Carter DJ, Esq.
That’s basically it. Let me know if you have questions. You don’t have to agree to my suggestions—they are just issues to consider.
OK, thank you. Section 28 makes sense too?
Carter DJ, Esq.
Yes, it makes sense. One minor thing which you might not care about: the Romantic-Relationship Buyout in Section 28 has an automatic 50%-of-capital pricing and “zero-dollar” forfeiture for non-cooperation. This may look punitive and may be invalidated as unconscionable or a penalty.
Suggestion: Pennsylvania’s fair-value rules (§ 8878) point to an FMV (Fair Market Value) standard instead.
But again, it's up to you.
How can I amend the non-cooperation piece so that it is more likely to be valid?
Carter DJ, Esq.
Failure to Cooperate: Consider replacing automatic forfeiture with a fair market value buyout mechanism—valued by an independent appraiser, for example, or a formula tied to recent contributions or revenue. That would likely make it enforceable under § 8878.
OK, I will change that. I am merging the capital contributions.
Carter DJ, Esq.
Thank you so much for letting me discuss this with you today. Please come back to AskaLawyer if you have questions. Good luck to you!
Carter DJ, Esq.
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