LLC Bylaws: Everything You Need to Know
LLC bylaws or an operating agreement are required in many states in order for businesses to function legally. These documents are for internal purposes only.3 min read
LLC bylaws or an operating agreement are required in many states in order for businesses to function legally. These documents are for internal purposes only and aren't kept by the state, but they are helpful in solidifying the structure and management of an LCC or corporation.
State offices don't collect operating agreements or bylaws. However, these documents should still be maintained by the company and be accessible to shareholders, investors, or board members to review at any given time. Internal documents can and will be requested by a number of groups or individuals, including:
- Banks for verification when opening a business checking account.
- Lenders who are helping the corporation or LLC secure financing.
- Lawyers and accountants.
- Potential investors or business partners.
LLC Operating Agreements
Most people refer to the document as an LLC operating agreement, but it can also go by a number of other names, including:
- Limited Liability Company Operating Agreement.
- LLC Bylaws.
- LLC Setup Agreement.
- LLC Operations Agreement.
The operating agreement should be created at the same time the LLC is formed. This powerful document protects the company's legal rights and outlines the operating terms of the company. The operating agreement also ensures that all members are in agreement of the internal workings of the company.
Each state has its own rules about LLC operating agreements, but there tends to be more flexibility with these documents than there is with documents for other corporations. Other kinds of organizational structures, including S Corps, C Corps, and non-profits, have tighter rules because they are either sold as stocks or have more government control. Other types of organizations have similar documents to an LLC operating agreement; for a corporation, it is bylaws for the board of directors, while partnerships use a partnership agreement.
One of the biggest differences between an LLC operating agreement and other types of documents is that a corporation is required to have bylaws, but partnerships don't have to have a partnership agreement. Partnerships and LLCs actually function very similarly, which means that a partnership agreement and an operating agreement have a lot in common.
One of the requirements of an LLC operating agreement is that it must contain clauses to establish the name of the company, who is in charge, and where it is located. These clauses don't need to be wordy and can simply follow the formula of “The name of the LLC is …”, “The address of the registered office is …”, and so forth. If the company doesn't have an office in that state, bylaws can list the address of a registered agent instead.
Additional Items to Include
Before creating the operating agreement, LLC members must determine if the company will exist for only a set period of time or if it will last for the foreseeable future and include procedures to dissolve the company at a certain time. These clauses should state how long the company will continue and include a specific date or say that the company will continue in perpetuity.
Another important clause in the operating agreement dictates who will manage the LLC if any of the listed members are no longer able to. Without this clause, the company could face a legal dispute over who is in charge.
Other clauses should indicate the process members would need to take to dissolve the company, such as by a vote of members with a majority share of the LLC. There should also be a clause that clearly states the purpose of the company.
Another clause should state the process the owner needs to follow to get funds distributed from the company. Including this clause ensures that the owner keeps the right records and follows the correct procedure to take out money without negative consequences.
Without a firm operating agreement and set procedures, business owners run the risk of not separating their business and personal accounts, which can lead to complications with taxes. Owners who don't have operating agreements could face obstacles when they try to show that the business is an independent entity from their personal accounts. Not being able to define the business as separate from the owner could lead to liability problems.
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