When starting a business, protection of your company and its owners is paramount, and legal documents can ensure smooth operations. Operating agreements and bylaws are two such documents and this article seeks to explain the purposes each serves and their importance.
The operating agreement is a legal document that sets rules for the relationships between the owners of a limited liability company (LLC), while bylaws provide regulations and rules that govern the operation of the corporation and internal management.
These two documents are vital, as they establish the legal framework that enables the business to operate. They ensure that the owners and stakeholders operate on the same page and that there is clarity in important matters, providing protection for the owners.
What is an Operating Agreement?
An operating agreement is a contract entered into between its owners (or members). It defines the responsibilities of each and how they would contribute to the running of the organization. The document includes such things as member contributions, accounting principles, management structure, and the ranking of members.
Types of Business Entities That Require Operating Agreements
LLCs are required by law to have operating agreements. However, other entities, such as S-corporations, sole proprietorships, and partnerships, can also benefit from having operating agreements.
Key Provisions of Operating Agreements
Some of the provisions included in operating agreements may include:
- Ownership structure and percentage of ownership
- Capital contributions and profit sharing
- Management structure and decision-making process
- Voting rights and procedures
- Allocation of losses and liabilities
- Dissolution procedures
Operating Agreement Example
A real estate firm with multiple partners would benefit from having operating agreements. It not only stipulates the percentage of ownership of the company for each partner, but also how decisions will be made and the management structure to prevent conflicts.
What are Bylaws?
Bylaws, legally required for corporations, are regulations that define the internal management of an organization and its operating procedures. It is created to define the roles of the board of directors, other officers, and shareholders.
Key Provisions of Bylaws
Provisions of the bylaws can include:
- The duties of the board of directors and any other officers
- The number of directors and their term limits
- Procedures for holding meetings and voting
- Procedures defining the removal of directors or officers
- Rules that cover the issuance and transfer of shares
- Procedures for amending the bylaws
Your Local, Expert Business Law Attorneys
Both bylaws and operating agreements are legal documents that give clarity to vital business matters and establish legal protection for both the owners and the organization itself. If you need assistance drafting one or both legal documents, our firm can help. Our attorneys in Richmond, VA are experienced in business legal matters and can help draft these regulations for your organization. Contact us to schedule a consultation.