Operating agreements and bylaws form the backbone of a company’s legal structure. Here’s how they work and how they differ from each other.
Operating Agreements and Bylaws
The operating agreement is a contract entered by owners of a limited liability company (LLC). It defines responsibilities of each owner and how they contribute to running the organization. Bylaws provide regulations and rules governing a corporation’s operations and management. These documents establish legal frameworks enabling businesses to operate and ensure owners and stakeholders are on the same page with clarity in vital matters, offering owner protection.
Operating agreements can detail capital contributions, profit-loss distribution, and tax treatment of the LLC, which are usually absent from bylaws. While only 5 states require LLCs to have operating agreements, 36 states require corporations to have bylaws. Operating agreements offer flexibility not mandated for corporations, allowing members to establish customized internal rules and procedures, providing a tailored framework for efficient operations. This flexibility is particularly valuable for small businesses seeking more control.
Legal Binding and Requirements
Bylaws do not require listing directors by name and do not bind individual directors, whereas operating agreements legally bind all owners and members. Because the requirements can vary significantly by state, it is advisable to contact a local business attorney to understand the specific obligations for your business.
Flexibility and Control
A key advantage of an operating agreement is the flexibility it provides. It allows members to establish their own procedures and rules, offering a framework for running the business efficiently and suitably for small businesses that desire greater internal control.
Frequently Asked Questions
What is the difference between bylaws and standard operating procedures?
Bylaws are official documents that provide regulations and rules governing a corporation’s operations, while standard operating procedures are detailed written instructions to achieve uniformity of the performance of a specific function.
What is the difference between bylaws and shareholder agreements?
Bylaws govern the internal management of a corporation, while shareholder agreements are contracts among shareholders that outline additional rights and obligations.