Do You Have the Right Critical Documents? Operating Agreements and Bylaws (Part One)

There are so many documents with legal implications. My hope, with this series, that I can focus on the more complex documents that are generally drafted or at the very least reviewed by an attorney. I say this because the list is truly exhaustive. I also understand that templates of the documents we are about to discuss are available online. However, please understand the limits of online templates. Templates don’t take into account the risk factors for your industry or business. They are generic. In recent days, many business owners have experienced the downfalls of generic forms, contracts and documents. They just don’t have the protection factor you are looking for. If you are seeking to reduce your legal risks, do it the right way.

Proper legal documentation for your business is critical in ensuring its overall success.

Having the right legal documentation is not only key to establishing a business legally, but it serves a vital role in safeguarding the interests of the business and business owner. It can also protect you from various legal concerns such as lawsuits and fines. Operating Agreements are needed when a Limited Liability Corporation is formed or an LLC. Bylaws are necessary if a corporation is formed and a Board of Directors is required.

Bylaws

When a corporation is formed, a Board of Directors is required to oversee the business and agree on the bylaws of the corporation. The bylaws help direct the operations of the board of directors and how the board will operate to run the company. Bylaws will cover the general information about the corporation such as, shareholders and meetings, the board of directors, and other provisions for the running of the corporation. Once the bylaws have been drafted, they will require the approval of the board directors. Following their approval, the bylaws will then become part of the business’s corporate records and must be in a place where they can be viewed by the IRS or any government office that may want to audit your records, however, they do not need to be filed with any government office. These bylaws will be vitally important in the running of your business as they will detail how to resolve any conflicts or disagreements, as well as provide a way for the business to ensure that there are limits on who is involved with the management, ownership, and control of the business.

LLC’s

However, when forming an LLC, the document that will help govern the business is called the operating agreement. The operating agreement of an LLC will be used to manage the day-to-day activities of the business and decide on each member’s percentage share of ownership of the company. The operating agreement will help you navigate the ins and outs of running your business. It will include general information about the business, member shares and interests, management of the LLC, the process for members leaving the LLC, liability clause, and miscellaneous sections detailing various policies your business could have.

An additional consideration that LLCs have to keep in mind when creating their operating agreement is the determination of whether their business will be member managed or manager managed. Member managed LLCs will have all members participating in the decision-making process of the LLC. Each member will have a vote in business decisions and will have the authority to make decisions on behalf of the company. However, items like contracts and loan agreements will require the approval of a majority of members. Manager managed LLCs designate the authority of members to a manager or managers who will then become agents of the company. An important distinction is that managers may be a member of the LLC but they are not required to be. For instance, a manager could be another LLC or a corporation. Determining whether to be member managed or manager managed is another decision that should be made based on your overall business goals, and is another good example of why an operating agreement should be drafted for your specific needs.

Both of these documents are the foundation of a good business and having a comprehensive operating agreement or bylaws makes a world of difference. These documents ensure adequate protection and compliance with relevant state laws and can often times help you avoid sticky situations with their guidelines regarding board members and managing members or managers. However, in order for these documents to adequately protect the business it is important that they are tailored specifically to your business situation. Many times, people take the easy way out and go with a premade operating agreement or bylaws that they find on the internet, but this can sometimes lead to more heartache later on.

Much like people, every business is unique and this requires an equally unique operating agreement or bylaws to suit your overall business goals and make sure you are getting the absolute best protection for your business. For this reason, it’s important to work with a qualified professional to make sure these vital starting documents are meeting the vision you have for your business.