Corporate Bylaws vs Operating Agreement

What Are Corporate Bylaws?

Corporate Bylaws, usually called bylaws, are a legal document. It’s core to set up rules and regulations which govern the corporation’s day-to-day operations.

Purpose of Bylaws in a Corp

To be an efficient company, one does need such a doc, meaning that all described procedures will be followed by management. As a result, it runs effectively.

What It Typically Includes

There is no unique requirement or approach for the content of one. Typically, requirements may vary from state to state. It typically governs matters such as meetings, elections of directors, officer responsibilities, and procedures for dissolution.

Who Is Required to Adopt Bylaws

In most cases, this is a responsibility of the board of directors to adopt bylaws at the time of founding the corporation, or at the first organizational meeting.

What Is an Operating Agreement?

As I mentioned regarding bylaws, the Operating Agreement, also called OA, or LLC OA, is also a legal doc. It aims to outline financial and functional decisions, including rules, regulations and provisions.

Purpose of OAs for LLCs

A Limited Liability Company (LLC) is a business structure in which members come together to generate profit. The main purpose of the OA is to create an official contract between them to govern internal operations in a way that suits their specific needs.

Core Provisions Included

Core provisions of the OA usually include terms regarding:

organization of meetings

Powers and duties of members and managers

voting rights and responsibilities

profits and losses distributions

clauses regarding transferring interest

Buyout and buy-sell rules in the event of the death of one

Percentage of members' ownership

tax considerations other

Are OAs Legally Required?

There are no legal requirements to have it in most states. However, some of them require LLCs to have a written version (for example, Delaware). Despite that, we still recommend having one.

Key Differences Between Two

You may ask yourself a reasonable question: “Are bylaws the same as an operating agreement?” Let’s break it down together. While they both are legal documents and they serve a similar purpose to help organise the internal operations inside, they are destined for different business organization types: corporations and LLCs. Both have different unique features, meaning the content of both these legal contracts will vary drastically.

Corporation vs. LLC Governance Structures

How about looking at the structures of these business organization types? The structure may show us the difference between bylaws and operating agreements, as well. LLCs are usually chosen by people seeking flexibility and are structured to be member-managed as part of the activity.

Corp has a three-tiered hierarchy of shareholders, a board of directors, and officers. Where each tier has its rights and responsibilities, regulating stable growth and clear profit distribution. Shares of stock represent ownership in corporations, allowing shareholders to stay away from day-to-day operations and delegating such activities to directors and officers, while still receiving profits.

Decision-Making and Voting Rules

Can you forecast how your business partner may vote or what decisions they may tend to make in the long run? I doubt you can. No matter how good you are in psychology, or how long you have known your co-members, people may surprise you. To mitigate the negative output of such surprises, the “Decision-Making and Voting Rules clauses” must be a core element of your LLC OA or Bylaws. A clear procedure helps everyone to plan, organise, and avoid following the impulsive actions of others, relying on a strict procedure.

Management Roles and Rights

Both better have sections defining management roles. In the first place, they are aimed at people and operations where those people work. As almost every business is formed to generate profits, sections regarding member/shareholder rights open doors to a clear understanding of each of them, what is their slice of the pie?

Amendments and Updates

Amendments are necessary in the event of a change in ownership, management structure, capital contributions, or legal requirements. The process typically involves proposing changes, following specific voting and approval procedures outlined in the original one, and creating a formal doc with amendments to record the new terms.

Bylaws vs. Operating Agreement: Which One Do You Need?

If you are wondering which one to choose, operating agreement or bylaws, one simple rule may sweep your concerns. If you want to register a corp, you'd better have conducted a Bylaws. And, if you want to register an LLC, the OA is right for you.

Rules for Corps

Don’t underestimate the importance of developing the set of provisions crucial for day-to-day management and long-term strategic planning. As the corporation is more about the structured, tiered way to conduct business, it is highly recommended that you be meticulous about writing these sections.

Rules for LLCs

Although most other states do not insist on its inclusion, it is always considered prudent to draw up an LLC OA, as it protects the company's status, is useful in the event of misunderstandings, and helps to organize the process in accordance with the rules established by the participants.

Can a Corp Use an Operating Agreement?

No, a corporation cannot use it, but needs to use bylaws instead.

Do LLCs Need Bylaws?

No, LLCs do not need it, but they need an Operating Agreement.

Operating Agreement vs. Articles of Organization

The main difference between these two is the nature of disclosure. Articles of Organization (also Articles) are a public, state-filed doc, meaning they appear in the official public record, proving the LLC is legally formed in accordance with the rules of a particular state. On the other hand, the OA is a private doc, shown, in most cases, only to LLC members and managers.

Purpose of Articles

The main purpose of Articles is to legally form the LLC and establish its existence with the state.

Difference in Legal Effect

Articles contain only the data required by the state to establish the existence of the LLC with the state. Operating Agreement, on the other hand, has more details and more about the internal workings, which it does not always want to disclose to the state without good reason.

When Each on it Is Filed or Kept Internally

Articles are filed with the state to legally form the business, so you must form it before organization is officially registered. As the OA is an internal doc, LLC members can develop it at every stage of the company's existence; however, we recommend that it be in place as soon as the LLC is formed.

Practical Examples

The more topics you have agreed on with shareholders/members, the better. As almost no one wants to discuss hard issues at the beginning of a journey, I, as a lawyer, can assure you that it will not be like this all the time. That’s why having a well-conducted legal agmt, covering all possible scenarios, will save you and your partners time, money and relationships.

Example Provisions From Corporate Bylaws

Bylaws usually contain information that determines, for example, the number of the board of directors, the importance of specifying this number, the procedure for their election, qualification requirements and term of office. It may also specify when, where and how the board of directors may convene and hold meetings, as well as voting requirements.

Example Provisions From an LLC OA

This contract should define the specific duties and responsibilities of each member with regard to the LLC's ongoing operations. Suppose that some participants will provide services on a full-time or part-time basis. In this case, the limited company should also consider entering into a separate MSA with active participants who provide ongoing services to it.

How These Protect Owners

It minimizes the unpredictability of actions when anything may go wrong. And, as our legal experience shows, it will surely happen sooner or later. It’s just a matter of time. So, a properly conducted legal contract (bylaws vs operating agreement) helps face the reality and results in fewer problems.

FAQ About Bylaws and Operating Agreements

Finally, you are here. Let's go through the most common questions about the battle between corporate bylaws vs operating agreement, where I will give short answers, without beating around the bush.

Are bylaws the same as an OA?

No, they are not. The only thing they have in common is that they are both legal docs.

Do corporations have an OA?

No, it does not have it. The main one for setting up rules and regulations to navigate day-to-day operations is the Bylaws.

Which one prevails if there is a dispute?

I am not recommending having both together. Please, depending on the organization type, choose either the Bylaws or the Operating Agreement to be developed and implemented.

Is an OA required in every state?

No, most states do not legally require an LLC to have a written version. However, Delaware, for example, requires one.

Do startups need bylaws immediately after incorporation?

We recommend developing one immediately after, regardless of which state your corp is formed in, or the steps you need to take further.