Starting a new business is exciting, and you’re thinking about everything you need to do, such as building a website, marketing, and maybe hiring a team. But it’s also important to ensure you complete everything necessary to start your new LLC, including meeting the required legal obligations and preparing the necessary internal documents.
An LLC operating agreement and corporate bylaws are internal documents that serve as a rulebook and quietly manage your business operations. Without them, you’ll automatically fall back on generic state default rules that may not match your business and long-term goals. In short, these vital documents clarify relationships and show investors and banks that your company is more than just a registered business.
What is an LLC Operating Agreement?
The Small Business Administration (SBA) defines an operating agreement as a document LLCs use to outline their financial and operational decisions, including rules, regulations, and provisions. The purpose of the document is to govern the business’s internal operations to meet the specific needs of the business owners. Once the document is signed by the members of the limited liability company, it acts as an official contract binding them to its terms.
Operating agreements are generally between five and 15 pages long and often include the following:
- Percentage of members’ ownership
- Voting rights and responsibilities
- Powers and duties of members and managers
- Distribution of profits and losses
- Holding meetings
- Buyout and buy-sell rules (procedures for transferring interest or in the event of a death)
Please note: It is a good practice to consult with your attorney regarding the use and purpose of an operating agreement. Using AI or random templates from the internet may not cover important state-specific legal nuances or requirements.
Why Do You Need an Operating Agreement?
Operating agreements provide members with additional protection from personal liability to the LLC. Without a written operating agreement, it may be harder to demonstrate the separation between the business and its owners, which can increase liability risks in certain circumstances. Many small businesses are started through casual conversations and verbal agreements. An operating agreement formalizes these agreements in writing and helps prevent misunderstandings and miscommunication among owners. Without one, your business is governed by the default rules set by your state of formation. In most cases, these default rules are very broad and do not address the specific details of your small business partnership. (PA SBDC)
What are Corporate Bylaws?
Corporate bylaws address topics such as the roles and responsibilities of directors, officers, and shareholders, as well as procedures for meetings, voting, and other corporate activities. They generally specify the frequency of board meetings, the voting and decision-making processes, rules for issuing stock, and conflict-of-interest policies.
Bylaws are vital for consistent, transparent corporate governance and offer a clear framework for decision-making and business operations. They are internal documents and typically do not need to be filed with the state, unlike the articles of incorporation, but they must still comply with state laws and regulations. (Stripe.com)
It is mandatory, in most states, for corporations to have bylaws, including Delaware and New York. Requirements vary depending on the state or county where the corporation is formed, and the bylaws must comply with the laws of the jurisdiction. Failure to do so may lead to legal challenges.
What Information is Included in Corporate Bylaws?
While corporate bylaws are required, the details and contents vary by entity and state.
- Company name and primary address
- Types of stock and associated rights and transferable options
- List of the Board of Directors
- Key officers
- Frequency of shareholder meetings
- Rules regarding conflict of interest and procedures for amending bylaws
Why these Internal Documents Matter More Than You May Think
Corporate bylaws and operating agreements are important for establishing rules, defining ownership and management roles, and, most importantly, providing limited liability protection by defining the company as a separate entity from personal responsibility.
These documents remove doubt or uncertainty in how the entity will operate structurally and financially. Banks and lenders often require these documents to verify who has the authority to act on behalf of the entity for leases, loans, or other financial matters.
When to Update Your Documents and Who Should Help You
As a rule of thumb, it is a good habit to review your LLC operating agreement or corporate bylaws once a year. It is easy to add this to the document compilation process and checklist at tax time. Significant events should trigger updates to your documents, including adding or removing an owner, changing ownership percentages, shifting from member-managed to manager-managed, changing your business model, taking on debt or investors, or planning for a sale or succession.
Contact your attorney when making structural changes, bringing in investors, or rewriting significant terms. Your tax professional or CPA is essential when updates impact how profits, losses, and distributions are allocated, to prevent unintended tax consequences or inequities among owners. For minor housekeeping updates, such as correcting addresses, updating officer titles, or refreshing contact details, you can manage these small edits yourself and follow the amendment process outlined in your current operating agreement or bylaws. Always keep signed copies in your records or corporate kit.
Ready When You Are: Help with Formations and Housekeeping
At Accumera, we make forming an LLC or corporation easy and will guide you through the initial formation steps and corporate housekeeping to keep your entity in good standing. Contact us to schedule a time to discuss your new business formation or get help maintaining your company’s internal records.
Resources: SBA.gov, The Duquesne University Small Business Development Center (SBDC), Stripe.com,
