Bylaws vs Operating Agreement: Everything You Need to Know
Bylaws are internal governing documents for corporations, while an operating agreement lays out internal operating procedures for an LLC.3 min read
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.
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 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.
If you need help with corporate bylaws or operating agreements, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.