Operating Agreement for Corporation: Everything You Need to Know
An operating agreement for corporation is a document similar to bylaws that limited liability companies (LLCs) use. 3 min read
An operating agreement for corporation is a document similar to bylaws that limited liability companies (LLCs) use.
Corporation Bylaws and LLC Operating Agreements
When you own a corporation, you should have bylaws to explain the regulations and rules that direct your operation. Each state dictates the terms you must include. Corporation bylaws typically include the following:
- Organization structure
- Corporation members' responsibilities
- Information about the board of directors
- List of committees
- Details about shareholders' and directors' meetings
In addition, most states require limited liability companies (LLCs) to establish an LLC operating agreement. This document acts similar to bylaws and usually includes the following:
- Information about member's voting powers, rights, and ownership percentages
- Profit and loss allocation
- Details about management
- Fiduciary responsibilities of managers and members
Corporations and LLCs do not need to file their documents with the secretary of state's office. Often, lenders, banks, attorneys, and potential investors request these pieces of information.
How to Design a C-Corporation Agreement
As the standard form used by a corporation, a C corporation serves as the basis for all other forms. Drafting the bylaws should be one of the first items you take care of when you form a corporation. This process makes sure the business remains managed consistently right from the beginning.
The first step you need to take is determining the number of directors on your board. Then, these members oversee and hire the corporation's officers. Make sure you have an odd number on the board to prevent tie votes. Determine the corporate officer roles, such as chief financial officer and chief executive officer.
Include a buyout provision if your company does not have public trading capabilities. Departing shareholders in a buyout agreement can sell the shares back to the corporation or other shareholders. If neither group wants the shares, they become available for non-shareholders to purchase.
Determine when the annual shareholders' meeting occurs. Most states make shareholders meet at least once each year to address specific corporate business. Figure out how to call special shareholders' meetings. You might need to vote on certain issues that can't wait a year.
How to Write an S Corp Operating Agreement
Also known as an S corp, an S corporation is a special Internal Revenue Service (IRS) tax classification that lets a company's shareholders receive tax advantages. When you register the S corp with the state, you must file articles of incorporation. The articles are similar to an LLC's operating agreement.
The first step to register the S corp is filing the Articles of Incorporation, which act like bylaws. This document includes the company's name, address, and purpose as well as how much stock you will issue. S corps can only issue one class of stock. If the business has members, you must explain their roles, needs, and term lengths.
If you have an LLC, you might use operating agreements, which act like corporate bylaws. These agreements provide details on ownership, profit and loss distribution, and voting responsibilities. There is no board of directors or stock found in an LLC.
Operating Agreement vs. Articles of Incorporation
Articles of Incorporation dictate the basic operation of a company and explain how the company will operate. On the other hand, an operating agreement is also a document but is only for an LLC. There also several key aspects to remember.
- Function. The Articles of Incorporation state that a business becomes a corporation in the state it operates from. It also defines the business activities, names of owners, and information about stocks. The operating agreement describes how an LLC operates and the responsibilities of owners.
- Significance. Both documents are legally binding. Articles of Incorporation become public record, while you can use operating agreements for legal issues.
- Similarities. Both documents have similar information about their business, including name and purpose. They also both define ownership and represent the business structure.
- Differences. To register your corporation as a separate entity, you must file Articles of Incorporation with the secretary of state's office. LLCs do not need to have an operating agreement or file one. Each state has its own requirements for filing forms.
- Effects. If you forget or inaccurately report information in either document, you can put your operations at risk for legal issues. Filing the articles incorrectly can result in rejection or delays in forming the corporation. Incorrectly filling out the operating agreement can lead to conflict between the owners.
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