LLC Operating Agreement vs Bylaws, learn why these are highly recommended for new businesses...

An LLC Operating Agreement sets guidance and helps eliminate confusion among members. A Corporation will have Bylaws, which focus on organizational structure in the context of shareholders.

LLC Operating Agreement

For New LLC Entities
$ 29
  • Member Voting Rights
  • Member Ownership Stakes
  • Member Capital Contributions
  • Profit/Loss Distribution
  • Operating Rules & Bylaws
  • Management Responsibilities
  • Assignment Rights
  • & more...
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LLC Operating Agreements and Corporation Bylaws are important documents that outline the specifics of how a company will operate, internal rules, how income is divided, and what's required from the members or shareholders.

Operating Agreements aren’t required by any state for a new formation, but they are highly recommended by legal professionals and business law experts.

There are many types of LLCs, and the value of an Operating Agreement may be different for each type – so let’s review.

Single-Member LLCs

You might wonder what the value of an Operating Agreement is when you have a simple, single-member LLC. There are actually several.

  • Solidifying Limited Liability Protection

An Operating Agreement will explicitly establish the business as a separate entity by specifying tax reporting structure, compensation rules, and the like.

It’s an added layer outlining the separation of personal assets from business liabilities. 

  • Clarifying Succession

In the event that your LLC management and/or membership will need to be succeeded in your absence, an Operating Agreement can offer a lot of clarity.

It will also help avoid complex decisions for your family.

  • Setting Your Own Default Rules

If you don’t cover critical operating, management, ownership, succession, and tax rules for your LLC in an operating agreement – in the event any conflict arises, the state’s default rules will take precedence. 

Every state adopts default rules for LLC entities, many under the Revised Uniform Limited Liability Company Act (opens in new tab).

Leaving your LLC subject to these could open a whole new set of problems down the road – such as the state laws changing to something unexpected and leaving your business, estate, or family members exposed.

Understanding LLC Operating Agreements

Benefits for Multi-Member LLCs

This is when an Operating Agreement can really pay dividends.

With multiple members (i.e. owners), it’s always best to have expectations set in an explicit manner.

It will help avoid any confusion, and could spare personal relationships should the working relationships not stand the test of time.

There are a few critical things that an Operating Agreement does for a multi-member LLC.

  • Establishes Ownership Stakes & Rights

The Operating Agreement will detail individual member contributions, and ownership percentage. 

This is critical, especially if one member is contributing more.

  • Details Management Agreements & Responsibilities

The agreement will remove any ambiguity as to how decisions are made, who has authority to do what, and what is required to make certain decisions.

It will also outline if official, recorded meetings must be called on a certain cadence and under what circumstances.

  • Sets Rules For Adding, Removing, and Replacing Members

This is where things can get really messy, so explicit rules are really valuable.

You will want clarity should one of the members want to exit the LLC, and even more so should a member need to be succeeded after death or incapacity.

  • Sets Rules For Resolving Conflicts

If there is a conflict between members, then it will be invaluable to have a document that specifies what avenues are available for a resolution.

The Operating Agreement will set out the possible options, including what laws the LLC is subject to, whether there can be mediation or arbitration, and similar. 

  • Establishes Your LLC’s Default Rules

Again, this is an important and often overlooked value of an LLC Operating Agreement.

By setting your own guidance, you can avoid potentially unfavorable default rules adopted by each State – and, frankly, subject to change without your consent. 

For example, some states specify that all LLC members share equally in profits, as a default rule. 

That could be a big problem for a multi-member LLC, especially if membership changes over time as do the member’s contributions.

Ultimately, an LLC Operating Agreement is going to offer a lot of clarity and an important reference point for many of the important decisions that will confront the business, its members, and its managers.

15 minutes is all it takes, are you ready?

Launch your new business today for just $129 + state fees.

Common LLC Operating Agreement Questions

An Operating Agreement is most commonly referred to in the context of a Limited Liability Company, while Bylaws usually refer to Corporations.

This is mainly a factor of how the two entity types operate. Since LLC’s are member owned, the operating agreement establishes terms between the members – and the agreement is enforceable in court. For the most part, an operating agreement can be as complex or as simple as the members want.

Corporations, on the other hand, are shareholder owned and managed by a Board of Directors. There may be statutory requirements for what a corporation’s bylaws are required to cover, and these can vary from state to state.

Another key difference is that the corporate bylaws govern the corporation, not the individual directors. 

Corporate bylaws can be changed, usually by a majority vote of the board or shareholders. The rules of that shareholder meeting would be set by the bylaws themselves. With an LLC operating agreement, changes are more simple – if the members agree they can change and execute the new agreement without any voting requirements.

No, it’s absolutely not and don’t listen to aggressive sales tactics that claim otherwise.

It is, however, highly recommended. If nothing else, it creates additional evidence of the separation of personal assets from the business and helps solidify limited liability protection.

If you have a multi-member LLC, it’s going to save you time in the beginning because it will force you to think through and debate management responsibilities, ownership stakes, and profit sharing.

Lastly, it will help you mitigate negative consequences of unfavorable “default rules” set by each state for all LLCs. 

It’s still recommended that you draft and execute an Operating Agreement, even for single-member LLC’s.

The reason is simple, if you don’t then you leave it up to the courts, family members, estate trustee, or another third-party to make decisions about your business.

By executing an Operating Agreement, you can stay in control of your business now and in the future. It will shield you from certain “default rules”, and protect your family from any complicated decisions.

No, you can draft and execute an Operating Agreement at anytime. If you’re a single-member LLC then really you can both create and change the agreement at will.

If you’re part of a multi-member LLC, then doing it at the time of formation is highly recommended. Otherwise, executing an agreement after formation could get messy as you work through nuances with other members.

It depends on how the rules are outlined in your Operating Agreement.

You may be able to, and you may not. For example, if you have multiple members and you are not a majority voting member, then you may need consensus from other members first.

This is exactly why an Operating Agreement at the time of formation is so valuable – it gets everyone on the same page from day one.

Free Business Name Search

This is a complimentary free name search, we’ll respond via email with any findings. This doesn’t initiate or replace a corporate filing order. 

15 minutes is all it takes, are you ready?

Launch your new business today for just $129 + state fees.