Key Takeaways

  • Bylaws vs Operating Agreement: Bylaws are for corporations; operating agreements are for LLCs. Both define internal governance but serve different entity types.
  • Legal Requirement: Most states require corporations to adopt bylaws, while LLCs are usually not legally required to have an operating agreement but benefit from having one.
  • Parties Involved: Operating agreements typically involve all LLC members directly. Bylaws are adopted by a corporation’s board and don’t list individual board members as parties.
  • Flexibility: Operating agreements offer more flexibility in governance structures and profit allocation, while bylaws follow more formal corporate structures.
  • Use Cases: A well-drafted operating agreement or bylaws can help resolve internal disputes, demonstrate legitimacy to courts or banks, and comply with state-specific governance rules.

What's the difference in bylaws vs operating agreement? Bylaws are internal governing documents for corporations, while an operating agreement lays out internal operating procedures for an LLC.

Differences Between Bylaws and Operating Agreements

When someone starts a company, he or she may wonder which governing documents are required. Upon formation, there are two sets of important documents for LLC and corporations.

The first is the charter document. For an LLC, this is the certificate of formation, also called the Articles of Organization or certificate of organization. For a corporation, it's the articles of incorporation.

The second concerns the internal operating procedures of the company. For corporations, these are bylaws, and for LLCs, this is an operating agreement.

Corporate bylaws give a clear structure to a business, helping it run smoothly. Fundamental rules outline operating procedures for everyone from employees and executives to the shareholders.

Many states don't require an LLC to file an operating agreement with a state agency, but it still has to conform to state laws. It's recommended that owners — or members — create an operating agreement because it helps prevent management misunderstandings and adds to the company's limited liability protection.

Legal Standing and State Requirements

While both documents serve as foundational internal agreements, their legal treatment varies by state. Corporate bylaws are often mandatory under state corporate statutes and must be consistent with a corporation’s articles of incorporation. In contrast, most states do not mandate LLCs to adopt operating agreements, but having one is highly recommended to establish clear rules and demonstrate separation between personal and business affairs, which is crucial for maintaining limited liability protections.

LLC Operating Agreement

All members of an LLC enter into a contract when they create an operating agreement, which governs the company's internal affairs. Members usually have a great deal of flexibility in how they manage the LLC.

An operating agreement can be simple or complex, depending on what the members want. It acts as a framework for the business and can set forth initial member contributions and other core operations.

A typical operating agreement may contain the following information:

  • Each member's ownership percentage
  • Members' obligations and rights
  • Voting power
  • Distribution of profits
  • Allocation of losses
  • Management details
  • Management responsibilities
  • Members' financial obligations

If members need a more complex document, it can also include the following:

  • Details on managing members' capital accounts
  • Who prepares business tax returns
  • How to prepare tax returns
  • How to handle member interest sales

Even a single-member LLC can have an operating agreement. This ensures the company is treated as an LLC and not a sole proprietorship in the eyes of the law.

Corporate Bylaws

Corporate bylaws are similar to an operating agreement as they determine how the corporation's board of directors will govern the business. Depending on how many shareholders the corporation anticipates having and the complexity of the business, bylaws may be simple and straightforward or very complex.

The original board of directors executes the bylaws for the corporation. The documents can be modified or amended if enough directors or shareholders vote to make the changes.

A key distinction between an operating agreement and corporate bylaws is that individual members of the board of directors aren't named parties in the bylaws.

Bylaws are internal documents, but each state may have required items that must go into them. In addition, some states make it a requirement for a corporation to expressly modify specific default rules, such as the scope of director and officer indemnification.

In most cases, an authorized officer or director signs the bylaws. Corporations should keep the bylaws in the corporate minute book alongside minutes and resolutions from directors' and shareholders' meetings.

While each corporation has specific rules and regulations outlined in its bylaws, typical bylaws include the following information:

  • Name and contact information of the corporation
  • The procedures for director meetings
  • The procedures for shareholder meetings
  • The number of officers and directors in the corporation
  • The types of shares the corporation issues
  • The procedures for keeping corporate records
  • The procedures for making changes to the bylaws

The types of documents you'll need to start a new business depend on the type of company you wish to form. Although bylaws and operating agreements are internal, you should make them as detailed as possible. This helps prevent conflicts in the future since all rules and regulations are clearly outlined.

You may want to consult with a legal professional when creating your internal documents to make sure all owners or members are on the same page. Well-crafted operating agreements and bylaws can ensure smoother daily operations for any business.

Structural and Functional Differences

Although bylaws and operating agreements perform similar functions, their structures differ significantly:

  • Formality: Bylaws often adopt more rigid, formalized procedures, including board meeting protocols, officer roles, and voting thresholds. Operating agreements tend to offer broader flexibility, allowing LLCs to tailor management styles, profit distributions, and dispute resolution methods.
  • Modification Procedures: Corporate bylaws typically require a board or shareholder vote for amendments, while operating agreements may define any process the members choose — from unanimous consent to majority rule.
  • Default Rules: States often impose default rules for LLCs that apply in the absence of an operating agreement. Bylaws, however, are often used to override or clarify statutory requirements that would otherwise govern corporate procedures.

Why These Documents Matter

Having well-drafted bylaws or an operating agreement is essential for more than just internal clarity. These documents:

  • Help demonstrate proper entity formation to courts and third parties.
  • Are often required by banks when opening business accounts.
  • Serve as evidence of corporate or LLC legitimacy in lawsuits or audits.
  • Provide conflict resolution mechanisms to avoid litigation.
  • Clarify succession plans and ownership changes.

Failing to adopt these documents can leave a business subject to unfavorable default state laws or expose members to unnecessary liability.

Practical Scenarios Where These Documents Apply

Certain business scenarios highlight the critical role these documents play:

  • Onboarding a New Member or Shareholder: Operating agreements can dictate buy-in procedures and valuation methods, while bylaws can specify voting rights and meeting notice requirements.
  • Disputes Among Stakeholders: If members or shareholders disagree, the agreement or bylaws act as the rulebook to resolve issues.
  • Selling the Business: These documents define transfer procedures, member consent requirements, or shareholder approval thresholds.
  • Passing the Business to Heirs: Both agreements can include succession planning provisions, avoiding probate or unnecessary disputes.

Frequently Asked Questions

1. Are bylaws legally required for corporations? Yes, most states require corporations to adopt bylaws, though they are typically not filed with the state.

2. Is an operating agreement mandatory for LLCs? Not always. While most states don’t require it, having one is highly recommended to maintain limited liability protection and define internal operations.

3. Can a single-member LLC have an operating agreement? Yes. A single-member LLC should still create an operating agreement to reinforce its limited liability status and outline procedures for continuity.

4. Can bylaws be changed after incorporation? Yes, they can typically be amended by a vote of the board of directors or shareholders, depending on the corporation’s rules.

5. What happens if a business doesn’t have these documents? In the absence of bylaws or an operating agreement, state default laws apply, which may not align with the owners’ intentions or provide adequate protection.

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