Negotiation and Drafting of Operating Agreements, Corporate Regulations and Bylaws

A common question that arises for startup companies is what corporate governance documents must be obtained as the company is formed. Whether you are starting a limited liability company (LLC) or a corporation, you will need to understand and create the initial governance documents that are required for each entity type. This will help ensure the entity is protected and remains in compliance with the entity-specific laws of each state.

Two documents are of the utmost importance for the formation of an LLC. A corporation is required to file Articles of Incorporation, while an LLC files Articles of Organization. Corporations are then required to have initial documents formally opening the company. These include a “Record of Proceedings of the Incorporator,” an initial “Meeting of the Incorporator,” “Order Opening the Books of Subscription,” “Subscription Agreement,” a “Code of Regulations” or “Bylaws” in some states, and a “Resolution Appointing Officers.” LLC’s on the other hand, should, but are not obligated, to have an Operating Agreement, which is an agreement between the Members (owners) of the LLC. The Operating Agreement sets forth the parameters of how the Company will operate.

Understanding The Articles of Incorporation and Articles of Organization.

Some form of a charter document will need to be created for your company, no matter what type of entity you are creating. Known as the Articles of Incorporation for a corporation and the Articles of Organization for an LLC, these documents will be the first filing for the business. Each set of Articles is filed with the secretary of state within the state you are forming the company.

LLC Operating Agreement

With an LLC, the operating agreement is a contract signed between the members, (owners) of the company. Members are usually given leeway as to how they wish the company to function. With an operating agreement for an LLC, it can be simple or complex, depending on how the members agree to set it up. Information in the framework will include how the company will be run, creating member contribution amounts as well as responsibilities for management, accounting etc.

With an LLC operating agreement, the document is flexible and can be amended from time to time, as long as the Members all agree, to reflect current membership and changes in operations.

Corporation Bylaws

With a corporation, the Code of Regulations (or Bylaws in some states) are similar to an operating agreement for an LLC. The Code/Bylaws will discuss such matters as shares, officers, meetings, Directors, etc. Certain statutory requirements, such as the minimum number of directors, are generally included in the Code/Bylaws. Like the Operating Agreement, the Code of Regulations is the governing document for how the corporation will operate. In some jurisdictions, such as Ohio, an additional document “Bylaws of the Board of Directors” will be created after the first meeting of the Board of Directors. The easiest way to think of it is that the Board Bylaws govern how the Board will operate while the Code of Regulations will govern how the corporation operates.

Governance Documents Importance

The main problem with companies as they start up and begin to start operating is they all-too-often fail to execute governance documents or they try to create these without the assistance of qualified legal counsel. Mistakes are common which can lead to unintended problems in both the short and long term.

It is beneficial to hire a business attorney to draft the documents for you and who can walk you through the process. This can ensure that the various agreements are correctly drafted to work within the parameters of the business. Hiring an attorney from the very beginning will allow the business to be set up for success.