Starting a business is a classic part of the American Dream. When you own your own business, you become free from superiors and their expectations.
However, owning your own business doesn’t free you from the government. The federal government still expects you to supply the appropriate legal documents for your company.
Your business must have bylaws or an operating agreement drafted. But, you may wonder, “What’s the difference between bylaws vs. operating agreement?”
The primary difference between these documents is the type of business they govern. One governs an LLC, while the other oversees a corporation.
If you’re unclear about these differences, don’t worry! We’ll explore these documents and their requirements in the guide below.
Bylaws vs. Operating Agreement
As mentioned before, the biggest difference between these two documents is the type of business they govern. An LLC uses an operating agreement as its governing document. Corporations, however, use bylaws to run their affairs.
These documents must meet varying requirements. LLCs often have looser rules and regulations due to the nature of these businesses. Bylaws tend to remain fixed for longer periods.
What is an Operating Agreement?
All members of an LLC enter into a contract by creating an operating agreement, since this document governs the company’s internal affairs. Members typically have significant flexibility in deciding how to run the LLC.
Since LLCs can be more flexible, operating agreements vary in complexity. Some have rudimentary guidelines agreed upon by the members. Others outline the business’s requirements in greater detail.
Generally, a signed operating agreement includes some of the following:
- The ownership percentage of each member
- Members’ responsibilities and rights
- Distribution of profits
- Allocation of losses
- Management responsibilities
- Financial obligations
Single-member LLCs also sign operating agreements most of the time. This way, the government can distinguish them from a sole proprietorship.
What Are Corporate Bylaws?
Corporate bylaws serve a similar function as operating agreements. They decide how the corporation’s board of directors will govern the business. Likewise, these documents can be simple or incredibly intricate.
When a corporation forms, its original board of directors implements the bylaws for the business. The document is not immune to change, though. Later board members and shareholders can vote to make changes to the documents if they feel it’s necessary.
Corporate bylaws have some critical distinctions from operational agreements, though. For example, corporate bylaws will not name individual board members. This way, the rights of board members remain the same, regardless of who holds the board membership.
Likewise, most bylaws require an authorized officer or director to sign them. Businesses should keep this document in the minute book, making it accessible for any meeting.
Bylaws generally include the following information:
- Name of corporation
- Contact information
- Board meeting procedures
- Shareholder meeting procedures
- Types of shares issued by the corporation
- Recordkeeping procedures
- Procedures for amending bylaws
Some corporations may choose to include other information in these documents. State laws may also vary in what they require from bylaws.
Draft the Documents You Need!
We hope you now understand the difference between bylaws vs. operating agreements. These two documents govern different business models. As such, they often include varying information in their body.
So, consider what type of business you want to start. Then, begin drafting the necessary documents for that company.
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