Operating Agreement for S Corp: Everything You Need to Know
An operating agreement for S Corp must outline and include all corporate bylaws and articles of incorporation. 3 min read
2. Articles of Incorporation
3. Corporate Bylaw Basics
Updated July 7, 2020:
Writing an S Corp Operating Agreement
An operating agreement for S Corp must outline and include all corporate bylaws and articles of incorporation. Before drafting corporate bylaws, it's important to do some searches on the laws in the state in which the corporation will operate to get more familiar with the potential legal issues that are at stake. S corporations, also called S Corps, represent a specific tax classification under the IRS, which provides tax advantages to the shareholders of the company.
Owners of an S Corp will typically need to file the corporate bylaws and articles of incorporation in order to register the business within the state. The corporate bylaws are quite a bit like the register an LLC in a state. An operating agreement or corporate bylaws will outline the operating procedures, structure, and financing plans for the corporation.
An S Corp has opted for taxation based on the regulations outlined in the IRS subchapter S code. These corporate bylaws will cover the details of how the corporation will be managed and governed. Corporate bylaws are specific to corporations, including both C and S corporations, while an operating agreement serves nearly the same purpose in an LLC. The operating agreement of an LLC will outline the conditions and management of the business.
An operating agreement will typically include:
- Name(s) and role(s) of all member(s)
- Name, address, and phone number of the business
- What percentage of the business is owned by each member
- How the LLC will handle ownership changes, such as if the company is sold or dissolved or if a member wishes to withdraw from the business
- How the LLC will be managed, including how to take votes, account for business profits and losses, and the planned meeting schedule
Articles of Incorporation
When registering an S corporation, the first step is filing the articles of incorporation. This step does not create the business, but it does provide basic information about the company to the Secretary of State. Along with the basic information outlined in the articles of incorporation, this document will include more complex details, such as the amount of stock it plans to issue to shareholders and what rights are included with each share. An S corporation can issue a single class of stock, which grants the same value and rights to each share.
Corporate Bylaw Basics
Instead of using an operating agreement, which is specific to an LLC, an S corporation will rely on its corporate bylaws and articles of incorporation. All states require S corporations to use articles of incorporation. However, corporate bylaws are not required in every state. This document is critical to managing and organizing the corporation, so it's worth using it even if the state in which you operate doesn't require the corporate bylaws.
Similar to articles of incorporation, corporate bylaws will outline basic information, including the name of the business, its address, and its purpose. A business purpose might be something like selling automotive parts or investing in real estate. When you have a written document in place to manage how the day-to-day operations will be handled, you can prevent some of the common issues, such as disagreements between shareholders. Preventing these issues can help the shareholders save time and focus on other aspects of running the business.
The corporate bylaws should include any decisions that require approval from the shareholders, as well as those that can be handled by the corporation's board of directors. These bylaws should also outline the procedure for holding a meeting, along with any quorum and minimum attendance requirements. Include how minutes will be recorded in meetings and other major documents. The bylaws should include a way to amend the articles of incorporation and bylaws in the future.
Certain cases require that the corporation have members, such as cooperatives and credit unions. The role of these members should be clearly outlined in the bylaws. The corporate bylaws serve as the internal rules for a corporation. They should outline the company's structure and address anything that could disrupt the flow of normal business activities.
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