Every business entity needs governing documents that establish how the business operates, how decisions are made, and what happens when disputes arise or ownership changes. For LLCs, this is the operating agreement; for corporations, it's the bylaws (often supplemented by shareholder agreements). These documents are essential for protecting owners, preventing disputes, and ensuring smooth business operations.
While templates exist, customized documents tailored to your specific situation provide far better protection than generic forms.
Operating Agreements for LLCs
An operating agreement is the LLC's primary governing document. It specifies member contributions, profit and loss allocation, management structure, voting rights, and procedures for major events like member departure or dissolution.
Even single-member LLCs benefit from operating agreements. They establish the LLC as a legitimate separate entity (strengthening liability protection), document management procedures, and provide instructions if the member dies or becomes incapacitated.
For multi-member LLCs, operating agreements are crucial. Without one, state default rules govern—which rarely match what members actually intended. Disagreements about unstated assumptions cause many business breakups.
Key Operating Agreement Provisions
Capital contributions specify what each member contributes—cash, property, services—and the consequences of failing to contribute. Profit and loss allocation determines how earnings are distributed, which doesn't have to match ownership percentages.
Management provisions establish who runs the business. Member-managed LLCs give all members authority; manager-managed LLCs designate specific managers (who may or may not be members). Specify what decisions require votes and what majorities are needed.
Transfer restrictions control whether members can sell or transfer their interests, and what rights other members have (like rights of first refusal). Withdrawal and dissolution provisions address what happens when members leave or the business ends.
Corporate Bylaws
Bylaws govern corporate operations—how meetings are conducted, how directors are elected, what officers exist and their duties, and internal procedures. They implement the framework established in the articles of incorporation.
Bylaws typically address shareholder meetings, board meetings, officer positions, stock transfer procedures, and amendment processes. They should comply with state corporate law while customizing procedures for your specific corporation.
Unlike operating agreements, bylaws primarily govern internal procedures rather than economic arrangements. Shareholder agreements often supplement bylaws to address ownership matters.
Shareholder Agreements
For closely held corporations, shareholder agreements add provisions that bylaws don't cover: restrictions on stock transfers, buy-sell provisions, voting agreements, and rights upon death or departure.
Buy-sell agreements are critical for closely held businesses. They establish what happens when a shareholder dies, becomes disabled, retires, or wants to sell—preventing unwanted third parties from becoming shareholders and ensuring orderly transitions.
Shareholder agreements can include drag-along rights (majority can force minority to sell), tag-along rights (minority can join majority in selling), and anti-dilution provisions protecting ownership percentages.
Dispute Resolution Provisions
Both operating agreements and shareholder agreements should address how disputes are resolved. Options include mediation requirements, binding arbitration, or specific court jurisdiction.
Deadlock provisions are essential when equal owners disagree. Without mechanisms for breaking ties, disputes can paralyze the business. Solutions include buy-sell triggers, third-party mediators, or Russian roulette provisions (one party names a price, the other chooses to buy or sell at that price).
Common Mistakes
Using generic templates without customization creates problems. Every business has unique circumstances that off-the-shelf documents don't address. Template language may not even comply with your state's laws.
Failing to update documents as circumstances change leaves outdated provisions in effect. When members join or leave, roles change, or business plans evolve, governing documents should be amended.
Not following the documents undermines their value. If your operating agreement requires annual meetings but you never hold them, you've created evidence that the LLC isn't taken seriously as a separate entity.
Amendments and Updates
Governing documents should include amendment procedures—what approval is needed to change provisions. Make amendments formal and documented, not casual oral agreements.
Review governing documents periodically—annually is ideal—to ensure they still reflect how the business actually operates and what owners intend. Life changes (marriages, divorces, children) may warrant updates.
Getting Legal Help
Governing documents are too important for generic templates. A business attorney drafts operating agreements, bylaws, and shareholder agreements tailored to your specific situation, ownership structure, and goals. They anticipate issues you haven't considered, ensure compliance with state law, and create documents that protect all parties. This investment prevents far more expensive disputes and problems later. When business relationships sour, well-drafted documents provide the framework for resolution.