Key Takeaways

  • S corporations don't technically use an "operating agreement," but corporate bylaws serve a similar purpose and are often referred to that way informally.
  • An S corp operating agreement (bylaws) should address governance structure, stock ownership, distributions, meetings, and dispute resolution.
  • Including IRS eligibility requirements and compliance language is critical for maintaining S corp status.
  • Corporate bylaws are essential even in states that don’t legally require them—they help prevent internal disputes.
  • Template agreements should be customized with the help of an attorney to reflect unique shareholder arrangements.

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

What to Include in an S Corp Operating Agreement

Although S corporations typically use corporate bylaws instead of operating agreements, many business owners refer to these internal documents as “S corp operating agreements.” These documents outline rules for corporate governance and protect against disputes. Key elements to include are:

  • Shareholder Information: List of shareholders, ownership percentages, and capital contributions.
  • Stock Restrictions: S corps can only issue one class of stock. Include language that prohibits the issuance of preferred stock to preserve eligibility.
  • Distribution Rules: Clarify how and when profits are distributed, ensuring allocations match ownership percentages.
  • Board of Directors: Define director roles, terms, voting procedures, and removal conditions.
  • Meeting Procedures: Specify how shareholder and board meetings will be held, including notice and quorum rules.
  • Succession Planning: Outline procedures for share transfers, death of a shareholder, or voluntary exit.
  • Dispute Resolution: Include mediation or arbitration clauses to resolve shareholder disagreements efficiently.
  • Compliance Clause: Confirm adherence to all IRS requirements for maintaining S corp status.

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. 

Avoiding Common S Corp Operating Agreement Mistakes

When drafting an S corp operating agreement (bylaws), business owners often overlook key compliance and governance details. Common pitfalls include:

  • Violating IRS Rules: Allowing different dividend or liquidation rights can jeopardize S corp status.
  • Ambiguous Language: Vague terms around share transfers or dispute resolution can lead to costly conflicts.
  • Lack of Amendment Procedures: Failing to outline how bylaws can be modified creates governance gridlock.
  • No Buy-Sell Agreement: Omitting rules for what happens when a shareholder exits can destabilize the company.
  • Overreliance on Generic Templates: Failing to tailor the document to your corporation's specific needs may result in gaps in coverage.

Consulting an experienced business attorney to review or help draft the document ensures it aligns with your business goals and legal obligations.

Why S Corporations Should Still Use an Operating Agreement Template

While LLCs are legally required in many states to have operating agreements, S corporations benefit from a similar document—typically referred to as corporate bylaws. However, using an "S corp operating agreement template" can provide a more structured approach to documenting internal governance. Such templates are particularly helpful for small corporations that:

  • Want to clearly define roles and responsibilities among founders.
  • Need to document capital contributions and stock ownership.
  • Require rules for how to handle business decisions and disagreements.
  • Plan to raise capital and must outline voting and control provisions in advance.

Frequently Asked Questions

1. What is an S corp operating agreement? It’s a document similar to an LLC operating agreement but refers to the bylaws that govern how an S corporation operates internally.

2. Does an S corporation need an operating agreement? While not legally required in every state, it’s strongly recommended to have corporate bylaws or an equivalent internal governance document.

3. Can an S corp have multiple classes of stock? No. S corps must only have one class of stock to maintain their tax status under IRS rules.

4. How do I customize an S corp operating agreement? Start with a template but consult an attorney to ensure it includes IRS compliance language and reflects your business structure accurately.

5. What happens if an S corp doesn’t follow its bylaws? Disputes may arise among shareholders, and the corporation risks piercing the corporate veil or losing S corp tax status if IRS rules are violated.

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