Discover how these documents compare and how they influence internal operations and external interactions.
- Bylaws apply purely to corporations
- Operating agreements are solely for limited liability companies (LLCs)
- These documents share core similarities but also significant differences
- Not all states require these documents, but it’s always a good idea to create them
What’s the difference in bylaws vs. operating agreements? This is an excellent question to start with if you’re planning to start a Florida LLC or founding a corporation. As with many states, neither of these documents is mandatory for Florida companies; however, their many benefits make them crucial to any organization’s successful operation.
Both bylaws and operating agreements are legally binding internal documents that aren’t available to the general public. They share other similarities but also some important distinctions, so let’s spotlight both to learn more.
The basics of bylaws
Bylaws are one of the two governing documents essential to forming corporations (the other being the Articles of Incorporation). Corporate bylaws are not required documents in every state, but this doesn’t remove their “essential” status in purely practical terms for three important reasons.
- Bylaws are key to a smoothly run company. They solidify internal operating procedures and are drafted to make these rules accessible to staff and shareholders while detailing specific duties and expected performance standards for all corporate employees.
- Non-profit corporations cannot successfully file for 501(c)(3) tax exemption without bylaws.
- The submission of bylaws will very probably be requested if the corporation is audited or otherwise externally examined. Bylaws are also likely to be sought by other institutions to verify a corporation’s legitimacy toward receiving finances or credit.
Are bylaws fixed documents?
Bylaws are essentially the book by which a board of directors steers the ship, but this doesn’t mean they’re set in stone. Bylaws can be altered through majority voting by the board and/or the shareholders. Nor are bylaws entirely at the discretion of the corporation and its shareholders in every case – some states dictate specific rules that must be included in these documents.
State law may also require that certain default bylaw rules be modified to apply specifically to the individual corporation. Here are some examples of items usually included in standard corporate bylaws:
- How to conduct director meetings and shareholder meetings
- Record-keeping practices
- Election and removal procedures for officers
- The corporation’s name, statement of purpose, and contact details
- How bylaws may be altered
- How many directors and officers the corporation has
- The available share types (this is essential information since different share classes can determine the level of voting influence shareholders have).
Drafting bylaws can sometimes be contested as there’s no guarantee that enough people will share a point of view toward making it a rule. Therefore, seeking legal counsel in the best interests of the corporation is often the first move toward an agreement.
Explaining operating agreements
This agreement details the internal operating procedures of the LLC and represents one of two governing documents essential for its founding (the other being alternately termed a Certificate of Organization, Certificate of Formation, or Articles of Organization).
Like bylaws for corporations, operating agreements aren’t required to be filed in every state. Still, they are a commonsense and practical move to codify and clarify operating procedures, prevent internal conflicts and legal disputes, and supply external organizations with the LLC’s internal operating information.
Having an operating agreement is not contingent on having multiple members. Individuals looking to avoid legal designation as a sole proprietorship may draft a one-person operating agreement to qualify for LLC status. Agreements vary in complexity but generally include information on the following:
- Names, contact details, and duties of each manager and member
- Management methods and manager responsibilities
- Profit distribution and loss allocation
- Tax return preparation
- Capital account management
- Voting procedures and individual member powers
- Membership rights, ownership percentages, and financial obligations.
You can learn even more about drafting an LLC operating agreement from our earlier blog. Some core similarities should now be visible between operating agreements and bylaws, but it’s from here that important distinctions must be clarified.
So, what’s the difference in bylaws vs. operating agreements?
Other than the obvious distinctions of bylaws being purely for corporations and operating agreements being only for LLCs, bylaws don’t require the board of directors to be listed by name, unlike LLCs, where both members and managers are listed. Another significant difference is that operating agreements legally bind all owners and members, while corporate bylaws do not bind individual directors.
Unlike operating agreements, bylaws usually lack any mention of tax treatments, capital contributions, and matters of profit and loss. Each type of document further differs in terms of which states require them, so contact a business attorney in your area to be sure.
There are other differences in how each type of document is signed. Bylaws require the signature of an authorized officer or director, whereas operating agreements require that all initial members of an LLC sign. Future members of an LLC must also sign an addendum as proof that they approve of the articles of the agreement.
Do I require legal assistance to create either of these documents?
Legal help isn’t mandatory in drafting bylaws or operating agreements. However, the experience, insight, and impartiality of legal professionals can be invaluable in creating a comprehensive document that will stand up to external scrutiny and encourage company unity by keeping everyone aligned.
Furthermore, state legal requirements are a dynamic matter that can change significantly, with relatively few professionals keeping pace. Legal teams are in that rare group who always have their finger on the pulse and can ensure that any documents you create comply with current rules and regulations.
Contact the professionals with any questions
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