S Corporation Operating Agreement: Everything You Need to Know
An S corporation operating agreement is a crucial component when it comes to creating your business. 3 min read updated on February 01, 2023
What Is an S Corporation Operating Agreement?
An S corporation operating agreement is a crucial component when it comes to creating your business. It helps you register your company with state authorities if you are interested in one of the following entities:
After you get an S corp entity, you need to register it with state authorities, and you would need to file an articles of incorporation document and establish bylaws, which would be similar to an operating agreement filed with LLCs. Such documentation establishes the operating parameters of a newly-created business.
Far too many professionals, including attorneys and CPAs, fail to understand when they note that an entity should be an S corp. First, the entity created under a state’s law is a legal entity, while an S corp tax strictly falls under IRS tax codes. It’s only after satisfying state registration requirements that you will then decide if you want to classify your business as an S corp. You would use Form 2553 to apply for S corp status and submit it to the IRS.
All states mandate an articles of incorporation, but bylaws are not a requirement in every state. However, the importance of bylaws should not be overlooked because it is an imperative document that organizes your business. In the same manner as an articles of incorporation, bylaws should note essential information, such as:
- Name of the corporation
- Office locations
- Business purpose (ex. selling toys)
Federal and State Rules
Whether it is a small or large business, you need to adhere to regulations and laws under federal and state guidelines. Conforming to corporate guidelines is a continuous process, and you need to be aware of the set rules to keep your corporation in good-standing. Compliance includes such matters as recording meetings and knowing about IRS tax codes. Moreover, you may amass fines in the form of tax penalties or fees if you fail to follow guidelines and laws.
You should be aware of certain key rules in the form of:
- Bylaws: Operating procedures in which your business operates.
- Meeting Minutes: Recording meeting minutes help you keep track matters discussed and important decisions.
- Business Records: Keeping records such as tax returns and financial statements is a necessary part of maintaining a corporation.
Operating Agreement and Bylaw Similarities
In essence, LLC operating agreements and bylaws for corporations are the same because they establish the internal management structure of a business. Both are crucial because they will help you manage your business affairs more smoothly. Also, bylaws ensure that executives, shareholders, and employees know the rules and operating procedures of the business.
In addition, operating agreements or bylaws should contain enough details to answer legal or general questions that may arise. For instance, agreements need to mention how shareholders would sell his or her shares. Moreover, S corps mandate that shareholders get first claims on the purchasing of outstanding shares.
LLC Operating Agreement Inclusions
LLC operating agreements must including the following:
- Address, phone number, and company
- Roles and responsibilities of each member, including names
- Business shares owned by all members
- Rules to manage the LLC, including procedures in the holding of meetings, accounting, and voting parameters
- Procedures pertaining to ownership changes (ex. If members wish to withdraw from the business and want to dissolve the company
Bylaw complexities depend on the business size. With that, a typical bylaw should cover the following:
- Corporate address, name, and headquarters
- Share types and stock classes
- Corporate officer and direct numbers
- Director and shareholder meeting procedures
- Amendment procedures to articles of incorporation and bylaws
- Inspecting and preparing corporate records
For newer S corps that are smaller, you can create an operating agreement or a set of bylaws from a pre-existing template that’s available online. For larger corporations, assistance from an attorney who is familiar with corporate law is necessary. If you have not incorporated your business, you are not required to establish operating procedures, but you should do so to ensure that your business remains organized.
To learn more about an S corporation operating agreement, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers have graduated from the top law schools in the nation and will be there to help you determine if an LLC or corporate structure would be suitable for your business endeavors. In addition, they will help you establish bylaws or operating agreements that safeguard your interests and ensure that your business runs efficiently.