S Corp Operating Agreement Template: Essential Guide & Legal Tips

Key Takeaways:

• An S corp operating agreement template is essential for managing the structure and operations of an S corporation, though corporate bylaws and articles of incorporation primarily govern an S corp.
• The operating agreement outlines roles, voting rights, stock ownership, and conflict resolution among shareholders.
• S corp bylaws specify operational rules, shareholder rights, and procedures for dispute resolution.
• Articles of incorporation must be filed with the state and include company name, officers, business purpose, and stock details.
• Eligibility for S corp status requires meeting IRS conditions, including shareholder limits and single-class stock issuance.
• Customizing an S corp operating agreement template ensures compliance with state laws and business-specific needs.
• Legal assistance is recommended for drafting to ensure alignment with state regulations and tax benefits.

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.

The Role of an S Corp Operating Agreement

An S corp operating agreement template serves as a foundational document that defines how an S corporation will be structured and operated. While S corporations primarily rely on corporate bylaws and articles of incorporation, an operating agreement can help clarify shareholder expectations, governance procedures, and financial obligations.

Key aspects covered in an S corp operating agreement include:

• Ownership structure – Defining shareholder roles, responsibilities, and percentage ownership.
• Voting rights – Establishing how decisions are made and voting procedures.
• Share transfers and restrictions – Rules on how shares can be sold or transferred.
• Profit distribution – How and when shareholders receive distributions.
• Dissolution process – Outlining procedures in case of company closure or major structural changes.

While not legally required in all states, an S corp operating agreement template provides an additional layer of protection for owners and prevents disputes.

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.

Customizing Your S Corp Operating Agreement Template

A well-drafted S corp operating agreement template should be tailored to meet the needs of the business. Since S corporations follow IRS regulations for taxation, customization ensures compliance while addressing company-specific concerns.

Essential Clauses to Include:

1. Business Information: Name, address, and purpose of the corporation.
2. Ownership and Shares: How shares are allocated and any restrictions on stock transfers.
3. Management Structure: The roles of directors, officers, and shareholders in decision-making.
4. Profit and Loss Allocation: How and when distributions are made to shareholders.
5. Meeting and Voting Procedures: Frequency of meetings, quorum requirements, and voting rules.
6. Shareholder Buyout Provisions: Guidelines on how an owner can sell or exit their stake.
7. Dissolution Clauses: Conditions under which the corporation can be dissolved.
8. Dispute Resolution: Legal steps for resolving shareholder disagreements.

By incorporating these provisions, businesses ensure clarity in operations and mitigate potential conflicts.

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 Corp Operating Agreement vs. Corporate Bylaws

While an S corp operating agreement template and corporate bylaws share similarities, they serve different functions.

Understanding these differences helps corporations decide which documents to prioritize for their business structure.

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

Legal Considerations for S Corp Agreements

Creating a legally sound S corp operating agreement template involves adherence to federal and state laws. Key legal considerations include:

• State-Specific Requirements: Each state has different rules regarding corporate governance.
• IRS Regulations: The agreement must align with S corp tax structures, including pass-through taxation rules.
• Shareholder Agreements: These must comply with federal securities laws if applicable.
• Contract Enforcement: Ensuring the agreement is legally enforceable to prevent shareholder disputes.

Since legal requirements vary, consulting with an attorney can help ensure compliance and protect shareholder interests.

Frequently Asked Questions

1. Is an S corp operating agreement required by law?
   No, but having one can prevent conflicts among shareholders and clarify company policies.
2. How does an S corp operating agreement differ from corporate bylaws?
   An operating agreement is more customizable, while bylaws focus on corporate governance and structure.
3. Can I use a free S corp operating agreement template?
   Yes, but it’s advisable to tailor it to your business needs and state laws.
4. What happens if an S corp doesn’t follow its operating agreement?
   Shareholder disputes or tax issues may arise, potentially leading to legal consequences.
5. Who should draft an S corp operating agreement?
   A business attorney or legal expert should draft or review the document for compliance and accuracy.

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