S Corp Operating Agreement: Everything You Need to Know
An S corp operating agreement is a business entity managing document it is a document that defines how a limited liability company will be managed.3 min read
An S corp operating agreement is a business entity managing document. Typically, an operating agreement is a document that defines how a limited liability company will be managed. An S corp actually uses corporate bylaws and articles of incorporation for the purpose of organizing the business operation.
Organizing a New Corporation
Starting a new organization is a tough undertaking. If you have no idea where to start, it’s a good idea to get some professional help. Generally, when forming a new business entity, you need to check out the state law for the state in which you are forming it. If you plan to form a corporation, some states have a registration requirement or a minimum number of directors. In the formation of an S corp, the corporate bylaws provide the details and definitions on how the corporation will conduct and manage its business. The bylaws do not need to be filed with the state, but it is still a legally required document. The bylaws are also the final word on how legal conflicts or issues that come up.
An example of an issue that should be addressed in the bylaws is the way a shareholder can sell his or her shares. Often the bylaws of an S corp require that the company is given the first opportunity to buy the shares from a shareholder. There are templates available online for bylaws and operating agreements. Obviously, it would be better to consult with an attorney who is experienced with corporate law.
In order to qualify for S corporation status, a company must meet specific criteria set forth by the Internal Revenue Service. For example:
- The company can only issue one class of stock.
- The company is limited to 100 shareholders.
- All company shareholders must be citizens of the U.S.
- Corporations and partnerships cannot purchase shares of the company stock.
If during a tax year the company fails to meet all of these conditions, it will be treated as a C corporation for tax purposes. This takes away many of the advantages that S corps provide to shareholders, so it’s best to stay within the guidelines.
LLCs have Operating Agreements
Limited liability companies utilize documents called operating agreements to set the conditions of how the individual company will be managed. The operating agreement for a limited liability company should include:
- Name, phone number, and address of the company
- Member’s roles and responsibilities and their names
- Member number of shares owned
- Guidelines for accounting, holding meetings, and taking votes
- Procedures for dissolving the company, selling the company, or how a member may legally withdrawal
In order to ensure that you’ve covered all of these necessary aspects of an operating agreement, you should seek legal counsel or an experienced accountant. While it’s not complex to write these operating agreements, there are things that should be included that experience professionals know.
S Corp Articles of Incorporation
In every state, there are requirements for S corps. Usually, there are articles of incorporation that must be filed with either the Secretary of State or a division under the Secretary of State. These articles of incorporation include an outline of the corporation's structure and basic information like:
- Legal company name, address, and contact information
- Name of officers
- Purpose of the business
- Number of stock shares issued
- Voting rights for each share
S Corps and Corporate Bylaws
While not all states require corporate bylaws, they are a good idea (in every state) when setting up a new S corp. This written (legal) document lays out the company’s operational procedures and, when well-written, can limit disputes between shareholders and give procedures for day-to-day activities
(i.e., holding meetings, quorum requirements, and minimum attendance requirements). These bylaws also give guidance on how to amend bylaws, articles of incorporation, and things that cannot be amended.
These bylaws should include:
- Corporation name, headquarters, and contact information
- Shares and stock classes issued by the corporation
- Corporate directors, officers, and their number
- Procedures for meetings
- How to amend bylaws and articles of incorporation
- Record keeping procedures
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